Why are IRFC shares an attractive investment?

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IRFC

Indian Railway Finance Corporation (IRFC) is a financial arm of the Indian Railways. The Company’s primary business is to borrow funds from the financial markets to finance the acquisition and creation of assets which are then leased out to the Indian Railways as a finance lease.

IRFC is also registered as a systemically important non-deposit-taking Non-Banking Financial Company and Infrastructure Finance Company with the Reserve Bank of India. 

It is unlike other NBFCs in many ways, one of them being all its customers are backed by the government, hence, there is no fear of defaults.

Exposure to sovereign has led to zero non-performing assets or bad loans and excessively high capital adequacy, which refers to the measurement of a bank or NBFC’s available capital that it can loan. Investment-wise, there are voices in support and against the IRFC share

Given its unique position as an NBFC and track record of growth, the Company is a safe investment option. However, critics highlight how the stock has underperformed since its listing and a low margin business of the Company.

As of November 2022, the stock is down 6% against a 2% drop in the benchmark S&P BSE Financial Services index. Lately, though, the stock has seen some buying. In the last six months, it has been up 8%. 

The ICICIdirect finds more reasons to invest in the IRFC share price than not invest. Its SWOT analysis lists nine points of strengths and five points under options against two weaknesses, natural for an NBFC to have, and no threats. 

According to the broker, strengths include:

  • High revenue and profit growth with high Return on Capital Deployed (RoCE) 
  • Quarter on quarter (QoQ), it is also improving its profit margins
  • Return on equity (RoE) improving for the last two years, which means the Company is effectively using shareholders’ fund
  • Book value, which is the worth of a company if liquidated today, has been improving for the last two years
  • Foreign institutional investors have been increasing their shareholding, which means smart money is moving into the stock
  • The company has zero promoter pledge

Pointers listed under opportunities are primarily short-term in nature:

  • A positive breakout above the third resistance placed on technical charts 
  • Decrease in provision in recent results
  • Stock with a low price-to-earnings (P/E) ratio with a ratio of five
  • The stock has been witnessing bigger daily gains with higher volumes, meaning investors have been lapping up shares.

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