Indian Railway Finance Corporation Limited Ratings Reaffirmed Rating Action
@Total short-term bank borrowings and borrowings under the rated short-term debt programme not to exceed Rs 15000 crore at any point in time. 1 crore = 10 million Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the debt instruments of Indian Railway Finance Corporation Limited (IRFC).
CRISIL has also withdrawn its rating on Bonds aggregating Rs 4564 crore (See Annexure 'Details of Rating Withdrawn' for details) in line with its withdrawal policy. CRISIL has received independent verification that these instruments are fully redeemed.
In January 2021, IRFC raised ~Rs 4,633 crore via initial public offering (IPO) comprising of Offer for Sale of Rs. 1,544 crore by dilution of ~13.6% of the paid up capital of Government of India (GoI) and a primary issuance of ~Rs 3,089 crore. Net IPO proceeds are proposed to be utilised to augment company's equity capital base to meet business growth requirements. Post the IPO, GOI will continue to hold majority stake (~86.4%) in the company. CRISIL Ratings believes that GoI will continue to hold majority stake over the medium term and will continue to provide strong support to IRFC.
The ratings reflect IRFC's strategic importance to its parent, the GoI, because of the company's status as the financing arm of Indian Railways (IR). The ratings also factor in IRFC's strong capitalisation and asset quality and adequate resource profile. These rating strengths are partially offset by IRFC's average earnings profile. |
Analytical Approach For arriving at the ratings, CRISIL Ratings has considered the standalone business and financial risk profiles of IRFC, and has factored in support from GoI. This is given the majority ownership of IRFC by GoI, and the significant role it plays in supporting the expansion of the Indian Railways as the dedicated financing arm. |
Key Rating Drivers & Detailed Description Strengths: * Strategic importance to and support from GoI IRFC, IR's financing arm, functions under the Ministry of Railways (MoR) and constitutes a crucial part of India's infrastructure. Hence, IRFC derives substantial business and financial support from GoI. The support is reflected in IRFC's majority ownership (~86.4%) by GoI. Moreover, IRFC has a close working relationship with IR and has MoR's officials as directors on it's board.
Favourable lease agreements between IRFC and IR protect the former's net interest margin, as interest and foreign exchange risks on its borrowings are transferred to IR. IRFC also plans to diversify its business profile by lending outside IR; however this will form a small part of the total portfolio and advances will be to entities having linkages with IR.
* Strong capitalisation and asset quality Capitalisation is strong, marked by continued support from the GoI. As on September 30, 2020, networth was Rs 31,687 crore and capital adequacy ratio was 433.92%. GoI has been infusing equity capital at regular intervals to support the capital structure (Rs 2854 crore and Rs 2500 crore infused in fiscal 2019 and fiscal 2020, respectively). Gearing was high at 7.74 times as on September 30, 2020 (7.74 times as on March 31, 2020), but may remain below 10 times over the near to medium term.
Asset quality is strong, with zero non-performing assets as on date, as IRFC mainly lends to IR, which is a sovereign entity.
* Adequate resource profile Ability to raise long-term funds at competitive rates is underpinned by IRFC’s access to a diversified pool of wholesale investors, including banks, mutual funds, pension and gratuity funds, insurance companies, as well as external commercial borrowings (ECBs). The weighted average cost of borrowing was around 4.5% for six months ended September 30, 2020 (4.9% for fiscal 2020) and compares well with that of its peers.
Weakness: *Average Earnings Profile Earnings profile remains average as IRFC is a funding vehicle, and enhancing profitability is not the primary objective. The margin remains stable, by way of a mark-up over the borrowing cost. CRISIL Ratings, therefore, believes that IRFC will continue to generate adequate return on its assets of 1.33% (annualized) for half year ended September 30, 2020 (1.53% in fiscal 2020). |
Liquidity: Superior IRFC had total borrowings of ~Rs 245349 crore (including Rs 2548 crore of commercial paper) as on September 30, 2020. As on February 01, 2021, total debt maturing over next 3 months till April 30, 2021 is ~Rs 6,200 crore. Against this, IRFC had unutilised long term bank lines of ~Rs 7,000 crore as on December 31, 2020 and expected lease rental collections of ~Rs 13,000 crore during April’21. |
Outlook: Stable CRISIL Ratings believes IRFC will continue to derive business and financial support from the GoI because of its strategic role in channelling finance to IR. Support from GoI should help IRFC maintain a strong credit risk profile. |
Rating Sensitivity Factors Downward Factors
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About the Company IRFC was set up as a dedicated funding arm of MoR, specifically to raise resources from the capital market to finance rolling stock (wagons and coaches). IRFC leases rolling stock to IR and collects lease rentals from IR in advance, at half-yearly intervals. An annual lease agreement, structured to ensure that IRFC's expenses (mainly cost of borrowing) are covered, backs this arrangement and allows IRFC to earn adequate margin.
For fiscal 2020, IRFC reported profit after tax (PAT) of Rs 3192 crore on total income (net of interest expenditure) of Rs 3258 crore, as against Rs 2140 crore and Rs 2804 crore, respectively, for the previous fiscal. |
Key Financial Indicators
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
^Not yet issued # According to the company, currently ISIN not assigned @Total short-term bank borrowings and borrowings under the rated short-term debt programme not to exceed Rs 15000 crore at any point in time
Annexure: Details of Rating Withdrawn
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