Indian Railway Finance Corporation Ltd Q4 FY2023 Concall Summary

Key Takeaways

• Disbursement collapsed, profit barely grew: FY23 disbursement came in at INR 32,378 crores, less than half the initial INR 66,500 crore target, as record-high gross budgetary support to Indian Railways crowded out extra-budgetary borrowing. Profit rose only ~4% to INR 6,337 crores.
• A one-time WACC adjustment depressed the quarter: A methodology correction in the weighted average cost of capital calculation, approved by the Ministry of Railways, hit both revenue and NIM in Q4. Management says the impact will not recur from Q1 FY24.
• Margins are structurally protected, not growing: The Ministry of Railways consistently passes through all interest rate and currency risk, keeping the lease margin at 40 bps and 35 bps. Management sees no risk of margins declining, but also no path to expansion in the core business.
• Diversification is real but will be slow: The board approved a lending framework, an MoU with IIFCL is signed, and two non-railway projects (NTPC wagons, Haryana Orbital Rail Corridor) are advancing. Management is explicit that it will not hurry and risk the credit profile.
• What to watch next quarter: Whether the Ministry of Railways provides any written EBR mandate for FY24, the pace of sanctioning for the Haryana and NTPC projects, and any concrete timeline for the alternate lending vertical.

The Core Business: Disbursement, AUM & the Budgetary Squeeze

• Disbursement missed by half: FY23 actual disbursement was INR 32,378 crores against an initial target of INR 66,500 crores. The sole reason cited is rising gross budgetary support to Indian Railways, which hit an all-time high of INR 2.4 lakh crores for FY23-24, reducing the need for extra-budgetary resources from IRFC.
• AUM grew faster than disbursement: AUM increased by roughly INR 37,000 crores while disbursement was INR 32,000 crores. The gap reflects capitalization of interest on project assets where lease agreements are yet to be signed.
• No written EBR mandate for FY24: As of the call date, the Ministry of Railways had not provided any written communication on the EBR target for the current financial year. Management attributed this directly to the unprecedented level of gross budgetary support.
• Clarity only in H2: Management expects more visibility on Indian Railways' borrowing requirement only in the second half of the financial year, once projects are sanctioned and documented.
• Vande Bharat is a possible pipeline: IRFC has already funded certain Vande Bharat trains. If Indian Railways resorts to EBR for further procurement, that business will come to IRFC. For new entities winning Vande Bharat contracts, IRFC will explore business requirements.

Management: "No, no. The reason is basically a very high gross budgetary support. So this is, this 23-24, the support is to the level of INR 2.4 lakh crores, which is unprecedented and extremely high. So that is the reason for not taking, giving us initial guidance on the EBR."

The One-Time WACC Adjustment

• What happened: A correction was needed in the WACC calculation methodology for project asset disbursements made since FY16. When the first lease agreement was executed with the Ministry of Railways last year, clarity emerged on the correct calculation basis. The revised methodology was approved by the Ministry and applied retrospectively.
• Where it hit: The adjustment was absorbed in finance cost, not shown as an exceptional item. It reduced both revenue (lease rental is WACC plus margin) and NIM for the quarter.
• Why it is a one-off: Management stated explicitly that the impact will not recur from Q1 FY24 onwards. The methodologies are now set up and the ambiguity that existed since 2015-16 is resolved.
• NIM trajectory intact: Despite the Q4 dip, management expects to maintain the same NIM trajectory going forward, around 1.4% to 1.5%.

Management: "Basically it is the change in the estimate and initially we have started this disbursement for against the project assets since 15-16. And initially whenever we have done this disbursement, we have raised the resources from many sources. And there was some ambiguity on what basis this WACC needs to be calculated."

Margin Structure & Risk Pass-Through

• All risks passed to the Ministry: The leasing model passes currency rate risk and interest rate risk entirely to the Ministry of Railways. The margin IRFC earns, 40 bps on one arrangement and 35 bps on another, is effectively a net spread after all costs.
• Margins are stable, not expanding: Management stated margins are more likely to remain consistently at current levels. When asked directly whether there is any risk of the 40 bps margin being reduced, the answer was an unambiguous no.
• Spread finalization mechanics: The spread for a given financial year is finalized only at year-end along with WACC. During the year, income is accounted assuming the same spread as the previous year. Any revision due to a margin change is treated as a change in estimate and accounted in the next financial year.
• Moratorium period accounting: For project assets, a five-year moratorium applies. During this period, only IRFC's margin portion is reflected in the P&L while the WACC (cost of borrowing) is capitalized. Once lease agreements are signed, lease rental consists of both principal disbursed and margin.

Shelly Verma: "I think that all the risks are priced in. We are passing on all the risks to them, whether it is currency rate, interest rate... I feel that margin are more likely to remain consistently at this level."

Diversification: The Non-Railway Vertical

• Strategy is deliberate and slow: Management is actively looking at projects within the mandate of backward and forward linkage to Indian Railways, aiming to reduce business concentration. The stated approach is to begin with joint ventures with state sector or government companies, then gradually move to the private sector after gaining sufficient experience.
• Two projects in advanced discussion: The board gave in-principle approval for a finance lease of rolling stock to NTPC under the general purpose wagon investment scheme (INR 500 crores sanctioned). The Haryana Orbital Rail Corridor connectivity project (INR 1,500 crores sanctioned) is in advanced stages of discussion to finalize terms.
• Infrastructure being built: IRFC hired an independent agency to create a lending framework, which the board has approved. The company is now in the process of setting up infrastructure for funding. An MoU with IIFCL has been signed, and more collaborative arrangements are being explored.
• Non-railway margins will be higher: Margins for non-railway business, including state government JVs, will be higher than the central railway model. The board will decide margins based on the risk profile of each project, with no cap from the central side.
• Credit profile is the constraint: Management is explicit that it is not in a hurry to disrupt the credit profile of the company. Diversification will be strategic and paced to preserve the current credit standing.

Shelly Verma: "We are not in a hurry to disrupt the credit profile of our company as of now."

Shelly Verma: "Definitely, the margins would be different. And we'll fix the margins looking at the risk profile of that particular project. But this model is totally different. So, there, our margins will definitely be higher than this."

Asset Book, Borrowing & Securitization

• Asset tenure is long: The weighted average tenure of assets is about eight to nine years. Assets are generally replaced after about 15 years, which covers the primary lease period.
• Diesel-to-electric transition is not a risk: IRFC has received requests for return of assets only in the secondary lease period, by which time all investments have been recovered and rent is nominal. No major risk is seen from the shift from diesel to electric in total lease assets.
• Borrowing programme is an enabling resolution: The board approval for INR 50,000 crores of borrowing covers both term loans and capital market issuance from any source. It is based on an internal assessment of disbursement, debt servicing requirements, and refinancing of certain high-cost loans. Funds are raised from whichever source offers the most competitive rate at the time.
• Securitization explored, not pursued: IRFC explored a securitization option in October of the previous year. Results were not favorable, and the company is constantly monitoring the option without a specific timeline for the next attempt.
• Lease rental timing: Lease rentals from the Ministry of Railways come in two installments, in April and October.

Guidance & Commitments

Key Metrics