Indian Railway Finance Corporation (IRFC) is a company owned and run by Government of India that raises money using the capital markets for aiding the Indian Railways.
IRFC has also been lending to various entities in the railway sector, like Rail Vikas Nigam Limited (RVNL), Railtel, Konkan Railway Corporation Limited (KRCL), Pipavav Railway Corporation Limited (PRCL) etc. (Link)
The company’s cumulative funding to the rail sector has crossed Rs. 5.04 lakh crore as of March 31, 2022, as per its official website. (Link)
The stock like many other Public Sector Stocks has given exceptional returns in the past 1-year
Despite this, we saw a huge correction (~20%) in the last one month. The reasons for the correction are as follows:
- Decline in the Profits by 2% year-on-year (YoY) from Rs 1,633 crore to Rs 1,604 crore
- Nominal increase in Revenue increased by 8.4% from Rs 6,218 crore to Rs 6,742 crore
- Finance costs rose by 12% year-on-year (YoY) from Rs 4,554 crore to Rs 5,104 crore
The last point is most important as Finance Costs is linked to the borrowed money that is being used for infrastructure funding. If the company is borrowing at higher costs, its profits start to dip.
Also, for a company an important metric to understand is Debt to Equity Ratio or the company’s leverage.
DE Ratio= Total Liabilities / Shareholder’s Equity
For IRFC, the leverage ratio is above 9 (approx)
In simple terms,
IRFC’s debt(borrowing) is approximately 9times of the equity of the company.
With such a high debt and rising finance costs, reporting high profits is going to be tricky!
Veteran investors like Warren Buffet prefer to invest in stocks with DE ratio between 0.5 to 2.
Hope this helps
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