Fitch Ratings has affirmed Indian Railway Finance Corporation Limited's (IRFC) Long-Term Foreign- and Local- Currency Issuer Default Ratings (IDRs) at 'BBB-'. The Outlook is Stable. A full list of rating actions is at the end of this commentary.
KEY RATING DRIVERS
IRFC's ratings are linked to the ratings of India (BBB-/Stable) due to IRFC's legal and funding ties with the Ministry of Railways (MoR). Fitch has classified IRFC as a dependent public sector entity. The company's strategy is dictated by the government of India, which tightly monitors and controls it. IRFC plays an important strategic role in India's railway sector because it is the sole financing arm of the MoR.
The ratings derive strength from the MoR's ongoing support, as evidenced by regular equity injections into IRFC since its formation. IRFC's debt/equity ratio has been largely inside the 10x limit during the past three years. Fitch expects further capital injections from the MoR if the ratio exceeds the limit. The MoR injected INR6.0bn and INR6.3bn into IRFC in the financial year ending March 2013 (FY13) and FY14, respectively.
IRFC is mainly involved in providing finance leasing to rolling stock such as locomotives, passenger coaches, and freight wagons. It financed around 25% of total funding to the MoR in FY13. Fitch expects IRFC to continue its collaboration with the government. Due to the large capital expenditure budgeted by the government, Fitch expects IRFC's debts to grow at 15%-20% per annum in the next two-three years.
IRFC is wholly owned by the sovereign and its board of directors is appointed by the government. The MoR signs a memorandum of understanding with IRFC annually to set its operational and financial performance targets, which it reviews quarterly. The Comptroller and Auditor General of India appoints auditors to IRFC annually, enhancing government control.
Under the lease agreement between IRFC and the MoR, the MoR will cover any financial shortfalls by making advance payments for leases if IRFC does not have sufficient resources to redeem maturing bonds and/or repay loans. Fitch expects that future standard lease agreements will continue to contain a similar assurance, and that the MoR will provide funding to prevent liquidity mismatches that could lead to an IRFC default.
IRFC's profitability is resilient and highly visible since its interest income is charged on a cost mark-up basis, and the capital investment pipeline of the Indian railway sector is strong. Fitch expects the company's net profit to increase by around 10% per annum in the next two years, mainly due to the rise of outstanding lease receivables. Its assets and liabilities are closely matched. Its solid reputation in capital markets means the IRFC can easily access domestic capital markets and banks for low-cost long-term funding.
A positive rating action would stem from a similar change in the ratings of the sovereign in conjunction with continued strong support from the state. Significant changes to IRFC's legal status which would lead to a dilution of control or likelihood/timeliness of support by the sovereign may result in the ratings being notched down from the sovereign ratings.
The full list of rating actions follows:
Long-Term Foreign Currency IDR affirmed at 'BBB-'; Outlook Stable
Long-Term Local Currency IDR affirmed at 'BBB-'; Outlook Stable
JPY12bn 2.85% term-loan due 2026 affirmed at 'BBB-'
JPY3bn 2.9% term-loan due on 2026 affirmed at 'BBB-'
USD200m 4.406% senior unsecured notes due 2016 affirmed at 'BBB-'
USD300m 3.417% senior unsecured notes due 2017 affirmed at 'BBB-'
USD500m 3.917% senior unsecured notes due 2019 affirmed at 'BBB-'