Indian Railway Finance Corporation Limited analyst Q&A

Thank you very much. We will now begin the question-and-answer session. The first question is from the line of Kaustubh Datta individual investor. Please go ahead.

Excellent. Thank you. My question is regarding the extra budgetary resources and I am a recent investor and I am understanding it in this way that without that EBR the growth will be kind of restricted and I'm sure you would be -- you mentioned about linkages, forward and backward linkages with railway that is an option before you. And I think you have adjusted your charter to that extent and you are permitted to do that. Earlier, it was kind of restricted. So is that all or you are thinking of other avenues to fund growth. You mentioned about INR50,000 crores as market borrowing plan for FY '25, but I'm trying to understand a bit more about this EB at the relationship of growth with EBR because I think this is directly linked. So how can you derisk yourself from that?

Well, to begin with the trends will continue in the next couple of years, because if we are talking about the Indian Railways then we have lent them a lot of money in the past. And right now, we are still executing the lease agreements with them with regard to the project assets. So for the next couple of years there should be no problem at all whatsoever even though the EBR component will reduce. Secondly, right now, it has to also be understood that there is an on-account budget. There is a huge investment being made by the railway sector as a huge infrastructure push is being govern even by the Indian government and therefore we will have to wait until the budget is passed properly and right now as I said we are still in the interim budget stage. So let's see, the path will be clearer once the budget is passed. The point is that, yes, since there is the extra budgetary resources are seeming to be coming down. We are looking at the forward and backward linkages and are actively in discussion and talks in trying to see where we can lend further. And in addition, we are using this interim period. As I said, for the next two years, there should be absolutely no hiccups along the way. And we are using this time productively to make sure that we get further businesses and also strengthen our own internal mechanism so that we do a proper appraisal of the businesses that do come away or the opportunities that we do see -- the opportunities that we do want to take on. So that is the preparation and way forward.

So what, as per your initial estimate, would be the opportunity through the forward and backward linkages? And can you share some ballpark number?

Right now, we are still in the middle of -- we are still at a preparatory stage. So it would be difficult to share any kind of ballpark numbers, but the forward and backward linkages are many. There are several areas that we can look into. So that is right now ongoing.

All right. And you mentioned about the lease agreement, the two years, we are safe, but does that mean there would be some kind of growth as well, which -- those are incremental ones coming for FY '25 and '26?

No, no, that is exactly what we are working on, because we have a period of about two years to get that thing in place. As I said, for right now, our financials are very robust and will continue like this for the next two years. And this is the time and the opportunity for us to make sure that we diversify our businesses so that we can sustain it beyond that period as well, which is actively going on.

All right. Thanks. I'll get back to the queue. Thank you.

Thank you. Next question is from the line of Prakriti Banka from HSBC. Please go ahead.

Yes. Hi. Thank you. I just wanted to know what was your disbursement as of the end of this year?

Prakriti, sorry, your voice is coming muffled. Can you speak for the handset?

Yes. I just wanted to know what was the disbursement for the full year?

In previous, I mean, the year '23-'24, there was a miss disbursement because, as you know, the extra -- the funding was done entirely by budgetary support.

Right. When you say that you have these leases, which you are yet to execute...

I'm sorry. That was not very clear. Can you just repeat?

Sorry. Yes. So I said, when you say that you have these leases...

Just one moment, please. Yes. Is it any better?

Yes. It's better now.

Yes. So I was saying that when you said that you have leases which are left to be executed going ahead, will this entail disbursement? I don't quite understand when you said that, for the next couple of years, we do not. Even if there is no EBR that is required, you won't really have trouble. So can you just explain that a little, please?

Yes. Basically, IRFC has a leasing financial model and what happens is when we lease out the rolling stock or whatever it is to the Indian Railways, there is a moratorium period before which Indian Railways starts paying us back. And since we've been lending enormous sums of money over the past so many years to the Indian Railways, some of those moratorium periods are coming to an end and we are signing those lease agreements now. So as I said, that inflow continues to be robust and will continue to come in and we are okay in this manner for the next two to three years at least. It is, therefore, imperative and that is the aim of this company that we use this period to build our own internal structures and mechanisms so that we can properly assess other business opportunities and go in for those business opportunities in a possible scenario where the lending to the Indian Railways may dry up. We are fully aware and seized of this and we are using this period to strengthen our own mechanism so that we can diversify in a safe and profitable manner.

Understood. So basically, what you mean is that now you will start receiving -- or there will be a payback that is happening and you are now sort of looking for opportunities where you could be deploying this money.

Absolutely. At this point, we are looking to diversify and we are able to do that in a proper manner because we have the -- a period of two years in which to properly plan and to properly implement and to properly increase our own mechanisms so that we can do a proper -- so that we can -- business goes on, it's business as usual after the next couple of years.

Right. In terms of -- I mean, if you are then looking to diversify into, say, other infrastructure areas that you did mention that you will probably tie up with other infrastructure finance companies, I mean have you sort of onboarded some kind of team already for that or is this still at the growing board?

No, we have brought a team in place, but it does have to be strengthened. And certainly, we are in talks with certain companies so that we can take this forward. And as I said, in any case, the company already has a charter that we can fund. We can fund entities with any backward or forward linkages with the Indian Railways. And there are several sectors over there, including other than the leasing of rolling stock to MoR, we can lease rolling stock to other people. We can fund railway infrastructure, which is being developed through state JVs. Then there are all kinds of other multi-modal logistics parks that are coming up. Non- conventional sources of energy are there, including renewable energy for the rail network. So the business opportunities are diverse and large, especially in the background of a tremendous infrastructure trust by the Government of India, all which are being pursued by us.

Right. But like you mentioned that the size of the opportunity is not something that you could outline right now, ballpark maybe?

No, I would not like to give a ballpark right now because we're using this time to get everything together. But as I said, we do have enough time and enough opportunity to make sure that our revenues continue to be robust.

Right. And just in terms of when sort of -- you did mention you have two years to execute this. But when we can start seeing some sort of sanctions in these various opportunities? Do you have some sort of a timeline for that?

I think the timeline essentially is that we have to have something in place over the next two years. And going forward, probably within this year, we might be able to get some progress, but we will have to wait and see because, as I said, it is also contingent to a very large portion on the final budget being passed. Because at this point, as I said, it's still an interim budget. And the kind of infrastructure development that is going on in the railways and the kind of capex expenditure that is there, the capability of the Indian Railways to absorb capex is tremendous. So even at this point to rule out the possibility of lending to Indian Railways, we cannot rule that out at this point either.

Sure. Just one last question for me. Just with respect to spreads, they've been quite stable now, but do you see any scope for them to move either way?

I'll just hand that over to D of Finance. If you can repeat the question, please?

Right. So I'm seeing the spreads that you charge over your cost of funds. They've been quite stable for a few years now. Is there any possibility of this moving either way in the next year or so?

See, our spreads for the -- as I mentioned, for the rolling stock and projects have been consistent. So we don't see any -- one thing which we have to appreciate that apart from these spreads, our risk with respect to currency or interest rates are also passed on. In this background, I don't see any requirement of change in spreads. So this will continue. They are the same for the past four or five years. So I don't see any requirement of changing the spreads.

Got it. Okay. Thank you very much.

Yes, ma'am. Thank you for the opportunity. Just some follow-ups. So the previous question, like in how you alluded at the start that you have two years to firm up the plan on the future growth. When you say two years, are you largely referring to this because of the disbursements that you did in FY'20 and '21, which were quite healthy and which would now start? Are these two the years which will now start, the moratorium would be over, and that's how the -- you have two more years to plan, because the earnings from these would start flowing now more into the P&L? Is that the right understanding?

Yes. The understanding is that because of the moratorium period, the Indian Railways only starts the payments to us after five-year period. So in fact, the lending that we have done in '17-'18, that is now going to start and bear fruit. And therefore, when we see that the lending to the Indian Railways in the year '23-'24 had dried up, that effect will not be perceived immediately, because we've already got a lot of our investments in the pipeline, which are now going to start yielding fruit. And as you know, prior to '21-'22, we had extremely healthy lendings to the Indian Railways. So this -- as I said, that is the reason why we have this time to plan and make sure that we strategically broaden our financing portfolio.

Sure, ma'am. So just to follow up on this, ma'am, so when I actually just look at, like, just the annual numbers here, when I actually see the NII, the net interest income, for '22, '23, '24 were pretty much similar on an absolute basis. A very similar trend was seen in '18, '19, '20. So can we just assume that once '25-'26, and you are able to bear the fruit of the lending done from '17 onwards, would absolute, in the -- in '25, '26 show a considerable jump?

I do think...

The absolute NII growth, can it be very sharper? Or I mean, at least can it be -- at least, can there be a growth, because it's been pretty flattish in '22, '23, '24, now that you would, the moratorium is over?

Well, there may not be a very sharp jump, but certainly, there is not going to be any kind of sharp decline either. And to a very large extent, as I said, we are also exploring other opportunities, but I'll also ask my DF to add to this.

See, if you see the -- our accounting model, see, what happens when we are -- during the moratorium period, when we make a disbursement, we just take the margin in our bottom line. We directly take that, consider the margin. But when the -- and during this moratorium period, we keep on capitalizing the interest, which adds. That's the reason you must have seen that, although there has been no incremental disbursement during '23, '24, but there has been hardly any impact on my AUM. It has gone down only by 2,000 crores because we have capitalized our interest on the previous disbursement for a project asset for which the agreements are not yet signed and there is a capital recovery which is coming. So it in a way balances off. So what we are saying till the time we sign all the agreements, there is a interest capitalization amount, which adds to my AUM.

So actually, what will happen in the -- maybe after '24, your leasing would start converting into the advances. And so that's why I was just trying to understand would the NII accretion coming '25-'26, could we see a growth in the NII? Is what I'm trying to understand. On an absolute basis, this INR6,400 crores number roughly, which has been in a ballpark of INR6,200 crores to INR6,400 crores for the last three years in FY '25-'26 now that you would start booking them as advances. Would the NII see a growth? Or we can at best expect another INR6,400 crores ballpark kind of NII in '25-'26 basis, the...

We are following a leasing model. We have two kind of assets. One is the rolling stock asset and another is the project asset. And in case of a project assets, we are executing the lease agreement after a moratorium period of around five years. And once the lease agreement gets signed, we are accounting these assets as per the Ind AS 116. And before signing up the agreement, we actually -- whatever disbursement happen to the railway -- Indian Railway will recognize income only for our margin portion. That is cost of lending and borrowing. And after execution of the lease agreement, we will account for the lease rental, which includes margin as well as my cost of lending. So after that -- after execution of the lease agreement, there will be a increase in the top line as well as in the finance cost. But the net accretion to the NNI would remain same. As long as my AUM is not increasing, I think our net accretion would be at the same level, which I had in the '23-'24. I think over the next few years, as madam has explained, that we have -- approximately, as of now, we have a balance of around INR2 trillion funding for this project asset. And over the few years, we will be executing the lease agreement for these assets. Till the time we will execute the lease agreement, whatever debt servicing will do, that will be -- will add to my future years' AUM. And whatever capital recovery I am getting against agreement, which I have already signed, so that will be a compensating kind of a thing and my AUM would be at the same level. Accordingly, net accretion to the NII would be to the extent only whatever fund I am redeploying into the business. That will be limited to that extent. I think I have...

Thank you so much, sir. Very clear, sir. Thank you so much. If I could maybe just ask two more questions. One is that on the new, new ventures that ma'am was sharing at the start. So is the understanding correct that even the new ventures would be more aligned to the railway sector? So even if you're talking renewables, you're talking about renewables as a source only to be deployed in the railway sector. You're not talking about renewables in general. So that's one clarification I just wanted to check on.

Yes. Actually, my current projects permits me only to fund projects which have a backward and forward linkage with railways. So, when we talk about these renewable projects, as of now, we are talking only about projects which have a linkage with the railways. We are not talking about entire other renewable projects.

And ma'am, any views around that we discussing with the ministry to actually expand our scope of the funding in terms of maybe sign -- getting a new MoU signed or something like that? Can that be a possibility, looking at how the other PSU NBFCs have been expanding into other infra opportunities?

Yes. That would be one of the possibilities that we will be pursuing to expand our charter. But the point is that even -- that, as I said, we will be pursuing, but even without that, the forward and backward linkages with the railways itself throws up so much opportunity in the infrastructure sector. So I don't think there should be any really big issue on trying to even expand that further because we have a lot of opportunities within the backward and forward linkages itself.

Sure. And then just one last question, just linked to this one. So since you -- on the new ventures that you are alluding to, what we have seen earlier that your spreads have been pretty much stable and sort of maybe capped, if that is the right way to put it. But in the newer ventures, could there be a scope of actually doing it at a better spread or do you think that the spread would the same?

For the new venture, it is not linked to the -- our funding to MoR. Those spreads will be purely dependent upon the credit profile of the project and the numbers that is shown on the -- based on the due diligence. There will not be any regulated framework or any linkage with the MoR funding. Those will be purely based on the industry standards.

So fair to say, could be higher actually.

It could be higher. Yes, definitely, it could be higher.

But ma'am, any ballpark there that like what are really like when you are evaluating today, what are the spreads when -- if you look to maybe to...

I think it will be too premature to give any spreads at this stage unless we have started funding the project and we can give you the numbers on the process to give the numbers on the project.

Thank you, ma'am. Thank you. so much. Thank you. Those are my questions.

Next follow up question is from line of Kaustubh Datta, Individual Investor. Please go ahead.

See, as we mentioned that this is only based on the interim budget and final budget is yet to be approved. So based on our internal assessment, we have taken this approval from Board for INR50,000 crores. We'll take care of any disbursement which may come up during the year, my committed liabilities and we are also exploring lot of refinancing opportunities. So whatever funds would be required for refinancing, this borrowing will be used for the refinancing as well.

Got it. Got it. Thanks.

Thank you very much. Participants, as there are no further questions, I now hand the conference over to the management for closing comments.

Thank you so much. We want to thank all the participants for attending this call. We hope that we were able to answer your queries. But still if you need some more information or details or data points, you can always get in touch with our Investors cell and any of us. And we'll be more than happy to answer your queries. Thank you so much.

Thank you very much. On behalf of DAM Capital Advisors that concludes this conference. Thank you for joining us. And you may now disconnect your lines. Thank you.