India has an undeniable need to create physical infrastructure to be able to once again clock the GDP growth of 9%-10%. However, infrastructure projects are always capital intensive in nature and therefore require huge investments. Since the gestation period on these projects is usually longer; raising financial resources becomes difficult for many of the companies engaged in creating infrastructure facilities. However, there have been many state-run as well as private Non-Banking Finance Companies focusing on infrastructure funding. Such companies generally have expertise to identify commercially viable projects. In the Union Budget of 2013-14, the government had proposed to raise a total limit of Rs 50,000 crore via issuance of tax free bonds by institutions.

Indian Railway Finance Corporation (IRFC) is a Government owned enterprise and a financing arm of Ministry of Railways devoted exclusively to raise money from the market. The money raised by IRFC is utilised to meet developmental needs of Indian Railway and also to acquire rolling stock assets such as locomotives, coaches and wagons. As a part of its business activity, the company has planned to raise Rs 1,500 crore with an option to retain oversubscriptions upto Rs 7,163 crore, thereby aggregating to 8,663 crores by issuing secured redeemable non-convertible tax free bonds of Rs 1,000 each.
 

Highlight of the Issue

Issuer	Indian Railway Finance Corporation
Issue Size	Rs. 1500 Cr with an option to retain oversubscription upto Rs 7,163 crores up to aggregating Rs 8,663 crores
Nature of the issue	Public issue of the tax free secured redeemable non-convertible bonds
Credit Rating	“CRISIL AAA/Stable” by CRISIL, “[ICRA] AAA” by ICRA & “CARE AAA” by CARE
Issue Opens	January 6, 2014
Issue Closes	January 20, 2014
Face Value	Rs 1,000 each bond
Issue Price	Rs 1, 000 each bond
Tenor	Series I - 10 years and Series II - 15 years
Coupon Rate	(For Categories I, II, III)Tranche I: Series IA- 8.23% p.a. and Series IIA- 8.40%p.a. (For Category IV) Tranche I: Series IB- 8.48% p.a. and Series IIB- 8.65%p.a.
Min. Application	5 Bonds (i.e. Rs 5,000) and in multiples of 1 bond thereafter
Mode of Holding	Physical and Dematerialised Both, but trading in Bonds shall be in Dematerialised form only
Listing	Proposed to be listed in BSE and NSE
Depositories	NSDL and CDSL
Bond Trustee	SBICAP Trustee Company Limited
Registrar	Karvy Computershare Private Limited
Quota	Category III - Upto 20% of Overall Issue Size* and Category IV - Upto 40% of Overall Issue Size*
Category III (Individuals & HUF applying more than Rs. 10 Lakh)	The following Investors applying for an amount aggregating to above Rs 10 lakhs across all Series of Bonds in each Tranche Issue:   Resident Indian individuals; Eligible NRIs on a repatriation or non – repatriation Hindu Undivided Families through the Karta; Eligible QFIs, being individuals.
Category IV (Individuals & HUF applying upto Rs. 10 Lakh)	The following Investors applying for an amount aggregating to up to and including Rs 10 lakhs across all Series of Bonds in each Tranche Issue:   Resident Indian individuals; Eligible NRIs on a repatriation or non – repatriation basis; Hindu Undivided Families through the Karta; and Eligible QFIs, being individuals.

*(Allotments of Bonds will be on a first come-first serve basis, determined on the basis of the date of upload of the Applications on the electronic application platform of the relevant Stock Exchanges)
(Source: Issue Prospectus, PersonalFN Research)  

Business Profile

The company is engaged in funding infrastructure activities of Indian Railways. IRFC’s contribution to the infrastructure build-up in Indian Railways is significant. Share of IRFC in funding high capacity wagons and high horse power locomotives is substantial. About 50% of the rolling stock assets that still earn revenue and have been operational in Indian Railways network are funded by IRFC (as on August 2013). Till 31st March, 2013, Rolling Stock assets valued at Rs. 97,482 crore have been added to the asset base of the Indian Railways with funding assistance from IRFC.

A single client exposure of the company, which otherwise would be construed as a threat, works in its favour. Since the Indian Railways, another government enterprise is the only borrower; default risk that IRFC is exposed to is significantly low.
 

OUR VIEW:

PersonalFN is of the view that IRFC tax-free bonds provide a good investment opportunity as the rates offered are quite decent. Moreover, there’s no restriction on a bondholder to hold bonds mandatorily for a particular period of time. Investors may sell or buy these bonds anytime on the exchanges, provided that in such a case they are held in a dematerialized mode. Hence investors need not worry much about liquidity in case of immediate need for funds.

The ticket size has been purposefully kept lower for greater retail participation and thus it is well within the reach of retail investors. Further, the quota of 20% and 40% reserved for HNI and retail investors respectively enhances the chances of getting allotment. For category IV investors, i.e. those who invest less than or equal to Rs 10,00,000; incentive of 0.25% is being offered over and above the coupon rate. For a person who invests as a category IV investor and falls in the maximum tax bracket, the gross pre-tax yield comes in the range of 12.27% and 12.52% for bonds with maturity profile of 10 and 15 years respectively. Likewise for HNIs placed in the highest tax bracket the pre-tax yields are 11.91% and 12.16% for bonds with maturity profile of 10 and 15 years respectively.

Considering the present interest rate scenario, it would be prudent to invest in the bond option with a maturity profile of 10 years. However investors, who have a longer investment horizon and seek a higher interest rate, may consider investing in bond options with maturity profile of 15 years depending upon their liquidity needs.


In case you wish to invest in the above instrument, you can email us at info@personalfn.com or contact us on 022-6136 1200.

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