IRFC grey market premium still weak; hope of blockbuster listing dashed?

IRFC’s total income grew 27% on-year basis in the financial year 2020.

Indian Railway Finance Corporation’s initial public offering has been subscribed 89% so far on the second day of the issue, with retail investors and employees, each of the firm having oversubscribed their portion. The already lacklustre grey market premium of IRFC has now faded to just Rs 1.3 per share on Rs 26 upper price band of the issue. This begs the question, are hopes of investors who have been aiming for blockbuster listing day gains completely dashed?

Weak grey market premium

“Currently the grey market premium is at Rs 1.3 per share,” said Manan Doshi, Cofounder of UnlistedArena, who watches grey market premiums told Financial Express Online. “IRFC is a low-risk company and we see it as a positive in the medium term. However, in terms of listing day gains the stock could see somewhere around 10-12% gains,” he added. Since the launch of the IPO, shares of IRFC have been trading with a premium of not more than Rs 2 per share. 

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The firm, a dedicated borrowing arm of the Indian Railway is a state-owned NBFC. “At the upper price band of Rs 26, the issue is priced at an 8.18x P/E ratio and 0.97x P/BV ratio,” Aditya Kondawar of JST Investments told Financial Express Online. Kondawar is advising investors to give IRFC’s IPO a pass if considering IRFC as a portfolio stock for the long term. However, even in the immediate term, the prospects don’t seem too tempting. “For the short term, it seems that the company may list at a small premium judging by the Grey market premium of 4.2%,” Kondawar said. 

Where’s the upside?

Although, IRFC commands low risk when compared to other PSUs and to add to that has no NPAs, profitability is low. “Given profitability not being primary objective of both IR and IRFC, sustained margin improvement looks unlikely. Government intent to privatize IR could expose IRFC to higher risk assets,” brokerage firm Ambit said in its IPO note. “Any meaningful upside beyond 1x P/B looks unlikely. Sustained expansion in margins is a key risk,” they added.

IRFC’s total income grew 27% on-year basis in the financial year 2020. Meanwhile, net profit in the same time frame gained 64%. “The biggest risk for the company is the cost-plus based Standard Lease Agreement with the MoR that has historically provided them with a margin over the weighted average cost of incremental borrowing determined by the MoR in consultation with IRFC at the end of each Fiscal,” Aditya Kondawar said.

Where to look for listing day gains?

For investors looking for listing day gains, IRFC does not seem to be the perfect bet. The small premium it enjoys dashes the hopes of massive listing day gains like IRCTC. While Manan Doshi of UnlistedArena does believe that the possibility of listing day gains are more realistic for Indigo Paints but he warns about the small issue size of the same. 

“The GMP on IRFC is very less, it can evaporate easily, however for Indigo Paints, the GMP is quite heavy 56-60%, so short term investors are better placed to apply in this for listing gains,” said Kondawar while cautioning investors to keep in mind that Indigo Paints lists just a day after the Union Budget.