IRFC share price : Exactly why has IRFC’s share been falling for the past two and a half years? About two and a half years ago, IRFC’s share was listed at an issue price of around INR 24.80 with a discount rate of INR 26 in the stock market. After that, even if the share showed some upward movement, it was almost negligible, meaning it didn’t even reach INR 27.
Two and a half years later, today, IRFC’s share still hasn’t surpassed its listing price of INR 24.80. You might be wondering who would want to invest in such a share. But let me tell you, this is not just any company; it is a government company that assists Indian Railways in financing.
So why is IRFC’s share showing recent gains?
In recent days, IRFC’s share has been showing some upward movement. In just one month, it has already provided investors with a 6% return. A share that used to hardly move upwards has now started to rise. A month ago, the IRFC share price was INR 19.50, and now it has increased to INR 20.75, consistently rising.
So, what is the reason behind this share’s recent gains, and is it likely to continue rising in the future? Should you consider investing in this share, and what kind of returns can IRFC shares potentially offer in the long term? Today, we will discuss these topics.
What does the IRFC company do?
The full name of IRFC is the Indian Railway Finance Corporation. As the name suggests, this company assists Indian Railways in financing many of their projects. In other words, it is a company that provides loans to Indian Railways.
For example, imagine you are running a business that sometimes requires more capital than you have on hand. In such cases, you often borrow money from friends who have connections with wealthy individuals willing to lend you funds at an interest rate. Your friend acts as an intermediary, taking a commission for facilitating the loan.
In a similar fashion, IRFC has been helping Indian Railways by connecting with major financial institutions to provide financing for their critical projects.
How is IRFC helping Indian Railways?
Before the establishment of IRFC, whenever Indian Railways needed funds, they had to rely on the government for financing. Given that Indian Railways is one of the world’s largest rail networks and the largest employer in India, it constantly requires substantial funds. Therefore, there was a need for an organization like IRFC dedicated solely to providing financial assistance to Indian Railways.
Initially, IRFC primarily financed the frontline necessities of Indian Railways, such as rolling stock, coaches, locomotives, etc., from 1984 to 2014. However, since 2015, IRFC has expanded its role to finance various foundational projects of the railways, including gauge conversion and renovation or reconstruction of railway stations, as well as other projects like warehousing, metro, multi-mode logistic parks, and more.
These construction projects involve substantial costs, which is why IRFC has been actively establishing connections with major global groups to gather funds.
IRFC’s benefit from the PM Gati Shakti Yojana
Following the introduction of the Prime Minister’s Gati Shakti Yojana, IRFC had to make changes to its Memorandum of Article (MOA). IRFC took advantage of this opportunity and added a clause to encourage global-level fund gathering in its MOA.
Why is IRFC’s share not showing a strong uptrend?
If you look at the quarterly figures for March 2022 compared to December 2021, you’ll see that while revenue has increased by 16-17%, there has been a decline of 6-7% in all metrics, including EBITDA, Profit Before Tax, Net Income, and EPS, which has led to the continuous fall in IRFC’s share price.
Now, you might be wondering why, despite the increase in revenue, there has been a decline in all other matrices. Let’s find out—”
Despite revenue growth, why did IRFC shares fall?
You know that IRFC lends to the railway and adopts a strategy to reduce borrowing costs. According to this strategy, IRFC assesses the future needs of the railways at its level and manages the funds for it in advance by obtaining loans from different banks. Additionally, if the company anticipates an increase in railway requirements, it uses other sources of funds such as bonds, among others.
The main challenge for IRFC is that they secure loans from banks in advance, but the railway will only provide funds on the day they are required, and IRFC starts earning interest on that money from the same day.
However, when IRFC borrowed from a bank or an external source, the interest on that loan started accruing from day one.
Despite revenue growth, why doesn’t IRFC’s profit increase?
In government projects, administrative delays often lead to delays in obtaining loans from IRFC. However, these delays result in IRFC receiving orders from the railway late, which increases their revenue. But IRFC bears the brunt of the delay by repaying loans to banks from their own pocket.
For instance, suppose IRFC issued a bond and told external investors that if they invest in their bond, they would receive a minimum return on their investment. Investors agreed and invested their money. IRFC then received the project on time, and the railway made timely payments.
However, now that the Indian Rupee has weakened against the US Dollar in foreign markets, IRFC has to make larger payments, affecting their profit margins.
This is the main reason that when IRFC shares report quarterly results, their revenue increases, but other parameters do not. I hope you understand why this happens.
So, what is the solution to this problem?
The solution is what we mentioned at the beginning: IRFC is establishing contacts with large international institutions for its global expansion.
During the current financial year, IRFC is in talks with institutions such as the World Bank, the New Development Bank, the National Bank for Financial Infrastructure and Development (NBFID), and European banks to secure resources. IRFC also assesses their credit ratings when large institutions lend to them. Therefore, IRFC has received a splendid rating of ‘AA’ from major domestic rating agencies such as CRISIL, ICRA, and CARE.
Seeing this excellent decision by the company, many retail investors are investing in IRFC shares, which has led to a continuous increase in the price of IRFC shares over the past month.
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