IRFC business model is to bring in equity and use it to leverage to 10X (current ceiling). And then do lease financing to MoR at cost of borrowing (CoB) plus margin of 30-50bps.
So say equity of 10 and leverage of 100 at CoB of 8%. Assuming entire fund 110 has been used for lease financing at 50bps margin; 110 would fetch a return of 8.5%. Earnings = 8.5% of 110 - 8.0% of 100 = 9.35 - 8 = 1.35. Again assuming no opex. RoE = 1.35/10 = 13.5% which is equivalent of CoB+(10+1)*50bps.
In Q1 21-22 IRFC has reported of RoE of 15.78% which seems very high. Even if CoB of all borrowings is 8%, RoE can not exceed 13.5%. How is the company able to get the 15.78%?
One reason I can think of is when the company borrows during a year say at 8.0% and enter into lease agreements for next 15 years at 8.50%. Funds borrowed would have different tenures. Say some borrowings matured in next 7 years and the company is able to refinance it at 7.0% while lease income remains fixed at 8.5%. This would result in extra income for the company. In the falling interest rate environment this can be a positive surprise but in case of increasing interest environment it can result in negative surprises.
What can be other reason for such a high RoE for the company in Q1 21-22?