Growth only comes relevant if you are paying a huge multiple on earnings or on book. At current levels, even if growth does not happen and stays flattish, it only means that higher percentage of PAT will be given out as dividends.
Ideally, there is immense scope to create an excellent machine of compounding from a low capital base if IRFC sells down its book by securitization and reducing the Equity requirement.
If equity requirement goes down, more dividend can be paid out without affecting earnings. Ideally the management should be thinking of converting it into an investment bank for MoR as opposed to NBFC
No, there is no question regarding growing dividends. I am just saying IRFC won’t even have to dilute their equity at such cheap prices, because they can easily increase leverage ceiling by small extent and their ROE would manage the other part of the growth. So, this entire discussion related to equity dilution vs leverage increase is a bit pointless considering hard chances of such growth to even exist.
@Rushil_Shah project assets are under moratorium, they are not getting any lease rentals so far and these are getting added in asset side. When these are lease payment starts there will be reduction in AUM
hello, Rs. 100,000 per wagon/coach charged in secondary lease period of 15 years is mentioned in the prospectus under section our business third paragraph (page 105) of the RHP. As of 2007 there were 100,000 coaches/wagons financed by IRFC so these would be now generating minimum Rs. 1000 crores per year (100,000 * 100,000). At equity base of 40,000 crores this translates into 2.5% of excess ROE. May be this is what is resulting in little bit high ROE for the company. You kind of touched on this earlier.
“A nominal amount of ₹ 100,000 per annum shall be payable for the
second 15 year period or until the Rolling Stock Assets are sold out to the MoR or any other buyer before the
completion of the lease period.”
Looks like Next year’s funding requirements of IR from IRFC is around 40% less than this year’s requirements. We can also expect profits also in the same lines this year.
@naman.kumar When you look into loan book for other PSUs and also loan book for rolling stocks, revenue and expenses are matching, ROE goes for a toss when you look into project assets, the amount of borrowing cost capitalization they are doing are not proportionalty matching with the loan book size and also they are booking “Pre commencement lease - Interest Income” as part of Interest Income. If they are capitalizing the entire borrowing cost of project asset, they should not get this lease.
If you see the results of recent few quaters, its not the lease receivables increasing, it is the interest income.
Project assets deal structure are is the only reason for higher ROE, stil not getting enough clarity over this area
Raise in interest rate, Since lending is based on cost plus model, whatever interest rate hike, they will get same margin. But a raise in interest rate will have positive yield in equity side of lending. Simply put raise in 1% of borrowing cost will improve ROE by 1%, assuming MoR maintains the margin rate.
Even though Haryana project does not move a needle in IRFC balance sheet, this is positive sign that new avenues are getting open for IRFC to lend
Negative:
As and when lease agreements are signed for project assets, which are in moratorium (currently 90%), AUM growth will stop, balance sheet will stagnate.
Has the management clarified that an interest rate increase benefit accrues to them? I did not find any such comments.
Also, since IR is experimenting with InVIT model for projects, will this eat into IRFC’s share?
Another point that needs to be considered is that the Government might ask IRFC to bankroll projects ancillary to IR and whether IRFC will follow the cost plus model.
That’s how cost plus model works. Currently IRFC has 4,00,000 crore AUM, Their yield is calculated based on borrowing cost + margin. Assume their cost of borrowing is 6% and margin as 0.40%, so their yield is 6.40%. Irrespective of increase in rate or decrease in rate, they do get same margin.
But we have to keep in mind that they earn 6.40% on 4 lakh crore AUM, but they do pay 6% interest on borrowing of 3,60,000 crore. Remaining 40000 crore AUM is funded by Equity. So currently they equity part is earning 6.4% and borrowing part is earning 0.4%. If interest rate raised by 1%, Yield will go to 7.4% and borrowing cost will be 7%. Here margin remains same, but your equity part is earning additional 1%, which will improve ROE by 1%
Currently almost half of book is in moratorium. Consider this example, you borrow 10 lakh from bank and assume you are only borrower, so AUM is 10 lakh, you start paying emi from month 1, so after 1 year that AUM might have reduced to 9 lakh, but if bank lends a same loan with 2 year moratorium, then you no need to pay emi for 2 year, but interest will accrue on that loan, say for example, 1 lakh interest is accred on year 1, bank will add this 1 lakh interest to original loan of 10 lakh and will show AUM as 11 lakh, but actually bank haven’t lent any money at all.
This is what happening in IRFC, nearly 50% of AUM is under moratorium and so in these loans Indian railway not paying any lease, they simply add back expected lease to AUM. This is the reason why Project assets AUM grows very rapidly than rolling stock AUM.
You might have heard this in concall for some past quaters “we
are in the process of signing the agreement for our project funding assets also.”. This is the trigger where moratorium ends and will stop the current AUM growth. Trust me, we have huge negative surprise on PnL statement, AUM degrowth and ROE once this moratorium ends. But my personal view even considering this negative trigger, valuation is still cheap.
Equity dilution might add pressure to stock price, but considering this dividend payout ratio, FII and insurance companies will buy as much as they could. We can refer REC and PFC’s institutional holdings.
Thanks for simple explanation, Dont you think the company will be able to replace that aum with newer loans to MOR? As the gearing currently is above 9 and with moratorium ending and payment being made new loans can be given as will ease out the gearing ratio.
And where do you see the book value going forward once the negative AUM growth kicks in as currently the book value is 32ish which gives a div Yeild of close to 7.5% irrespective of profits(at 5% of book value) .
Only reason i have invested is because of this as 70% of the earnings are reatianed inreasing book value so dividend currently at close to 7% will keep on increasing going forward.
Thats the tricky part, say by tomorrow if lease agreements are signed for infra projects with 15 lease period(I am not sure of lease period in case of project assets, assuming it will be same as rolling stocks), the lease amount is decided by Straight-line methods which is little different how our personal or home loans are calculated. It is calculated by total amount divided by repayment term plus interest. So 4lakh crore/15 year= 26,666 crore.
So by next year IRFC AUM will be reduced 26666 crores. If we wish IRFC to grow its AUM by 10% which is 440000 crores, they have to lend 66,666 crores. If 20% growth expected, they have to lend atleast 106666 crore.
if you see yearly disbursement for past few year they are disbursing similar amount only(Excluding COVID year, which is one time) but they have shown their AUM growth at 20%+, but hereafter this growth will slowdown. Gearing ratio will not be a issue even it crosses 10.
I also have similar hope in IRFC, considering 7% dividend yield and 8% of profit growth on YoY, on total i am looking for 15% ROI. As long as price remains in similar range, I will reinvested dividend amount. Will see how things pan out
