Indian Railway Finance Corporation Ltd Q4 FY2022 Concall Summary

Key Takeaways

• Disbursements fell sharply, but for a healthy reason: Q4 disbursements were proportionately low and full-year disbursements dropped below ₹60,000 crores vs ₹1 lakh crore in FY21, because improved government fiscal position meant higher Government Budgetary Support funded more of Indian Railways’ CAPEX, reducing the need for IRFC funding.
• Cost of funds improved despite rising yields: Weighted average cost of borrowing decreased ~9 bps to 6.42% in FY22, even as the 10-year G-sec yield rose 66 bps, because IRFC shifted its borrowing mix toward structured bank loans at economical rates and away from bonds.
• A formal margin increase request is with the Ministry: IRFC has asked the Ministry of Railways to increase its spread, but management concedes it will be a tough call given the present state of fiscals; no timeline is committed.
• The balance sheet has headroom: Leverage ratio stood at 9.47x, below the 10x industry average, and management is comfortable going beyond 10x if required, citing 440% CRAR and the sovereign nature of its loan book.
• What to watch next quarter: Whether the FY23 initial mandate of ₹66,500 crore translates into actual disbursements, any movement on the margin increase request, and progress on the MOA expansion to allow financing of any infrastructure sector.

Disbursement Dynamics & the Government Funding Shift

• Q4 disbursement drop explained: Disbursements were proportionately low compared to Q4 FY21 because the government’s fiscal position was much better (GST collections, revenue position), leading to higher Government Budgetary Support (GBS) funding a major part of Indian Railways’ CAPEX, reducing the need for IRFC funding. Management stated this was not due to any systemic change or policy shift.
• Full-year FY22 vs FY21: FY21 was a one-off COVID year with fiscal constraints, so Indian Railways’ recourse to IRFC funding was much higher. FY22 disbursements closed at less than ₹60,000 crores vs ₹1 lakh crore in FY21.
• FY23 mandate set higher: The initial mandate for FY23 has been increased to ₹66,500 crore.
• Funding share can swing back: IRFC’s share of Indian Railways CAPEX can go up again; FY21’s initial mandate was ₹50,000 crores but ended at ₹1,04,000 crores. Management noted these things are volatile and depend on how the year pans out.

Banerjee: “Again I mean these things are very volatile and especially, I mean, you never know... it all depends, you know how the how it pans out in course of the year.”

Borrowing Strategy & Cost of Funds

• Cost of funds declined: Despite the 10-year G-sec yield rising 66 bps (from 6.18% to 6.84%), weighted average cost of borrowing decreased ~9 bps from 6.51% to 6.42% in FY22.
• Mix shift toward bank loans: In FY22, because bond yields went up quite a bit, IRFC took recourse to more structured loans from banks at very economical rates and did not use bonds to the same extent as in 2021; bond issuance was only about ₹20,000 crores.
• Incremental borrowing exceeded disbursement: Incremental borrowing (₹63,908 cr) exceeded disbursement (₹59,899 cr) by ~₹4,000 cr because the extra amount was used to retire short-term bridge loans and substitute high-cost borrowings with lower-cost rupee term loans at year-end.
• No pre-planned borrowing mix: Future borrowing mix between bonds and structured bank loans will depend on the market scenario; management does not pre-plan how much to take through each channel.

Banerjee: “...we do not pre-plan anything as far as the how much to be taken through bonds and how much to be taken through loans.”

Margin, Profitability & the Spread Increase Request

• Q4 expenditure increase explained: Q4 interest expenditure increase (49% QoQ per an analyst’s math) was attributed by management to CSR expenditure booked in Q4 and an establishment expenditure increase of ₹50 crores, not to cost of funds. Profit remained at the same level as Q3 (~₹1,500 crore).
• Q4 NII decline despite operating income growth: Net interest income fell QoQ even as operating income grew 18% because pre-disbursement interest income on project assets (which have a 5-year moratorium) was reclassified to lease income after lease agreements were signed for certain project assets (IRFC 15-16 and National Project 18-19), shifting the income head.
• AUM growth lagged disbursement: AUM growth (₹55,159 cr) was lower than disbursement (₹59,899 cr) because lease rentals received from Ministry of Railways contain a capital recovery portion that is deducted from lease receivables/AUM.
• Margin increase request submitted: IRFC has placed a formal request with Ministry of Railways to increase the margin spread; it is under active consideration by the Ministry. Management expects it will be a tough call given the present state of fiscals, but the request is in process.
• Zero-tax status continues: IRFC continues to pay zero tax because of the availability of unabsorbed depreciation balance, which is expected to increase with acquisition of more assets, keeping taxable income at or below zero. This is expected to continue for quite a few years.

Banerjee: “We have placed our request with Ministry of Railways for increasing the margin. They are considering that request. ... keeping in view the present state of the fiscals it will be a tough call from the Ministry of Railways but bigger as it may we have already placed our request for infusion margin from the present level and it is under consideration of the Ministry.”

Capital Position, Leverage & Dividend Policy

• Leverage ratio at 9.47x: Leverage ratio stood at 9.47x at end of FY22, below the 10x industry average, because management deliberately balances dividend payout with accretion to reserves to maintain borrowing capacity without diluting equity.
• Comfortable going beyond 10x: Management is open to going beyond the 10x leverage ratio if the occasion demands and if requirements from Indian Railways force it, given the 440% CRAR and sovereign nature of loans.
• No equity infusion planned: Management does not want to infuse additional equity at this point of time unless reserves and surplus are inadequate to raise net worth to required levels. Any decision on OFS or fresh issuance of shares would be taken by DIPAM/Government of India; IRFC has no current plans but will comply if government issues instructions for the remaining 11% stake.
• Dividend kept at DIPAM minimum: Dividend is kept at 30% of PAT because management needs to retain reserves to augment net worth for future borrowing capacity, given the NBFC leverage constraint. Management noted that historically, dividend increases have not led to perceptible share price changes.

Banerjee: “We are absolutely okay with going beyond 10 with our capital adequacy ratio up to 440%. We are comfortably placed because most of the loans are sovereign. So, we do not face any kind of that kind of risk of our net gearing ratio going beyond it.”

Strategic Initiatives & Scope Expansion

• Green financing milestones: IRFC raised a first-of-its-kind green loan of USD 1.1 billion in Yen terms from Syndicate Banks and issued a USD 50 crore green bond exclusively listed on GIFT City stock exchanges and SGX.
• Project assets lease agreement finalized: IRFC finalized lease agreements for funding of railway projects (EBRIF loans given in 2015-2016 and National Projects loans given in 2018-2019). Previously, lease agreements were only for rolling stock; from this year onwards, lease agreements cover project assets also.
• MOA scope expansion proposed: The board of directors has approved widening the object clause of the Memorandum of Association to allow financing of any infrastructure sector in the country (beyond only entities with backward/forward linkage to Indian Railways); the proposal is under active consideration of Ministry of Railways.
• Securitization plans: IRFC is in the process of floating an RFP for securitization of receivables and plans to securitize a considerable chunk in tranches during this financial year (FY23).
• Fortune 500 ranking: IRFC ranked 96th in Fortune 500 Indian Companies based on 2021 results; management expects a higher rank based on FY22 results.

Banerjee: “We wanted to have differently we have placed this proposal for widening the object clause from this to any infra sector. Infra sector means any infrastructure sector in the country we can finance to and this has already been approved by our board of directors and it is presently under active consideration of Ministry of Railways.”

Long-Term CAPEX Opportunity

• National Rail Plan visibility: Indian Railways has a huge CAPEX plan under the National Rail Plan (part of NIP) up to 2030 and even up to 2050; the CAPEX plan is about north of ₹10 lakh crore to end of 2030 starting from 2020. IRFC would definitely be contributing at least 1/3rd of the total as it has been doing over the years (from 1986 to end of 2022, funded about 33% to 34% of total CAPEX requirements on average). Depending on government requirements, IRFC can contribute more.
• Funding scope broadening: IRFC sees huge scope to fund CAPEX requirements of Indian Railways going forward, covering rolling stock augmentation and project assets (gauge conversion, multi-tracking, station redevelopment, signaling, IT, etc.).

Guidance & Commitments

Key Metrics