Indian Railway Finance Corporation Ltd Management Discussions

Indian Economic Overview

According to estimates by the National Statistical Office, the real GDP growth for the Indian economy stood at 7.6% during FY 2023-24¹. This surge in economic growth can be attributed to Indias sound macroeconomic fundamentals, burgeoning domestic demand and prudent fiscal policies implemented by the Reserve Bank of India.

Other contributors to this growth have been the remarkable performances of key sectors such as construction and manufacturing. The construction sector has been a standout performer, registering a double-digit growth rate of 10.7% in the fiscal year 2023-24. This robust growth can be attributed to the governments sustained focus on infrastructure development, urban renewal projects and the implementation of flagship schemes such as the Pradhan Mantri Awas Yojana (PMAY) and the Smart Cities Mission.

The manufacturing sector has recorded an impressive 8.5% growth rate during the reporting year. Governments initiatives to promote the ‘Make in India‘ campaign, the implementation of the Production-Linked Incentive (PLI) schemes and the sustained recovery in domestic and global demand for Indian manufactured goods have fuelled this growth.

Outlook

India is expected to emerge as the third-largest economy by the end of this decade.² The countrys growth will be driven by its unprecedented infrastructure expansion, policies directed to emerge as the factory of the world, increasing incomes and growing aspirations. Also, a Viksit Bharat will have enhanced connectivity as is evidenced in the governments efforts towards building a road network and expanding rail and air networks at a record pace.

While the economic outlook for India remains broadly positive, there are certain challenges that need to be addressed. Inflationary pressures, driven by global supply chain disruptions and rising commodity prices, have been a cause for concern. However, the governments proactive measures, such as maintaining a watchful eye on food prices and implementing targeted interventions, are expected to help mitigate these risks.

Additionally, the global economic uncertainties arising from geopolitical tensions and tightening monetary policies in major economies pose potential risks to Indias export performance. However, a diversified export basket and a growing integration into global value chains, is expected to provide a cushion to the domestic economy against these external shocks.

Overall, the Indian economy is well-positioned to sustain its growth momentum in the coming years. The combination of robust domestic demand, a conducive policy environment, and the ongoing structural reforms is expected to drive economic growth, attract investments, and create employment opportunities. However, continued vigilance and proactive policy measures will be crucial in addressing emerging challenges and ensuring that the benefits of economic growth are shared equally across all sections of society.

Industry Scenario

Indian Railways (IR) with its 4^th largest network in the world, has been the backbone of the transportation sector in India, carrying millions of passengers and cargo from one part of the country to the other. Indian Railways is targeting high benchmarks in its aim to provide easy and comfortable mobility for passengers and a fast and eco-friendly freight network.

Indian Railways is challenging its limits and the focus on transformation is about forging a sustainable path for Indias future. Trains and stations are being revolutionized, transformed into gleaming symbols of efficiency. Freight movement, the back bone of commerce, is becoming faster and more dependable than ever before. Indian Railways aspires to be the catalyst for an environmental friendly transport system, one that prioritizes fuel efficiency and cost-effectiveness. This transformation isnt a mere change, Its a monumental leap towards a greener, more efficient tomorrow for the whole of India.

IR aims to create a world class infrastructure at a sustainable cost, built with the latest technologies. Marching further ahead in nations Amrit Kal period IR vision towards 2047 entails development of 7000 km of High speed Rail Network by 2047 carrying a multitude of 10 billion passengers, expansion of Freight Corridors to 7800 km, Elevated Corridors (with speed 200+ kmph) of 10,000 km, Vande Bharat trains connecting all major cities, 1500+ Gati Shakti Cargo Terminals, Reduction in Operating Ratio to less than 70%, 100% Electrification of network, enhancing electric traction capacity (2 & 25 kVA) over 30,000 RKm, Elimination of all remaining level Crossings, Hyperloop transportation on 2200 km, Station Development of more than 1200 stations, revamp of Ease of handling and divisibility of cargo units capturing the growing container segment, Manufacturing/ deployment of freight EMU for parcel/ e-commerce, coverage of entire network with Kavach and enhanced usage of solar technology for energy needs. The Indian Railways has set ambitious targets to contribute approximately 1.5% to the countrys GDP by developing infrastructure that can support 45% of the modal freight share of the economy.

The resumption of normalcy in passenger movement in the wake of COVID pandemic, as reflected by the increase in Passenger Kilometres (PKM) index, signals a renewed confidence in rail travel. Passenger revenue soared to a new high by crossing H 70,000 crore mark witnessing a significant uptick. At present, 102 world class, semi-high-speed Vande Bharat train services are operational across the nation. Indian Railways plans to induct more Vande Bharat Trains which will significantly improve travel options for passengers, increase connectivity and enhance comfort and convenience to travellers across the nation. Passenger Kilometres crossed the 1 trillion mark by recording approximately 1.07 trillion passenger kilometres, a growth of around 12% from the last year.

In the fiscal year 2023-24, Indian Railways continued its relentless march in the freight sector, underscoring Its pivotal role as the prime mover of Indias logistics sector. With a freight loading of 1591 Million Tonnes, witnessing a commendable 5.2%. increase over the previous fiscal year, Indian Railways reaffirmed its position as a formidable force in freight transportation. This total increase in loading translated into freight revenue of H 1.72 lakh crore (provisional) which was 4.5% higher than that in the previous year. Indian Railways is thus moving steadily towards the 1 trillion mark for NTKMs carried which will mark a milestone for an energy efficient mode of transportation in India.

Indian Railways initiative to establish more than 75 Gati Shakti Cargo terminals highlights its dedication to transforming freight operations. These terminals serve as crucial nodes in facilitating the seamless transportation of goods, ultimately enhancing trade and commercial activities across the nation. Through the strategic placement of these cargo hubs, the Indian Railways seeks to maximize the efficiency of freight movement, thereby making a substantial contribution to Indias economic growth and development.

Indian Railways expects to achieve its objective of electrifying its entire Broad Gauge (BG) rail network in fast pace with a view to reduce the Nations dependence on imported petroleum-based energy and to enhance the countrys energy security, with a vision of providing eco-friendly, faster and energy efficient mode of transportation. A lot of emphasis has been given to Railway Electrification in recent years and IR has made remarkable strides over the past decade, under the Mission 100% Electrification programme. Major highlights of achievements of recent past are as follow:

Electrified Network of IR has been extended to 63,456 km (96.35%).

41655 Rkm have been electrified during past ten years period of 2014-24 against electrification of 4,698 Rkm

Indian Railways about to complete electrification of entire Broad-Gauge network.

One Station One Product (OSOP) Scheme : With 1630 0SOP outlets dedicated nationwide, this scheme epitomizes the Vocal for Local vision. By showcasing indigenous product at railway stations, OSOP creates markets for local artisans, potters, weavers, and craftsmen, empowering them economically while preserving traditional craftsmanship and heritage. These initiatives not only promote tourism but also contribute to the socio-economic development of local communities, fostering cultural pride and creating sustainable livelihoods.

Indian Railways has been focusing on effectively channelling its resources to meet the goal of making lndia Viksit Bharat by 2047.It is slowly inching up in its modal share in the logistics sector, with the goal of loading 3000 MT by the year 2030, which is just a few years away. This goal is being met by making targeted expenditure in both capacity augmentation bottleneck removal and paying attention to last mile connectivity. Marking the confidence in the Railways, the Governments budgetary support to the Railways has been growing steadily. It touched the highest ever figures at H 2.40 lakh crore in FY 2023-24. This has been ploughed back in entirety by the Railways into various projects of network expansion, capacity building, safety works and improvement of facilities.

Company Overview

Indian Railway Finance Corporation (IRFC) was set up on 12^th December 1986 as the dedicated funding arm of the Indian Railways for mobilizing funds from domestic as well as overseas Capital Markets. IRFC is a Miniratna I and Schedule ‘A Public Sector Enterprise under the administrative control of the Ministry of Railways, Govt. of India. It is also registered as Systemically Important Non–Deposit taking Non-Banking Financial Company (NBFC – ND-SI) and Infrastructure Finance Company (NBFC- IFC) with Reserve Bank of India (RBI).

IRFC has played a significant role in its more than 35 years of existence in supporting the expansion of the Indian Railways and related entities by financing a significant proportion of its annual plan outlay.

The main objective of the company is to meet the predominant portion of ‘Extra Budgetary Resources (EBR) requirement of the Indian Railways through market borrowings at the most competitive rates and terms. The Companys principal business therefore is to borrow funds from the financial markets to finance the acquisition / creation of assets which are then leased out to the Indian Railways. IRFCs constant endeavour has been to diversify its borrowing portfolio in terms of instruments, markets and investors which has led to the Company meeting the targeted borrowings year after year, through issue of both taxable and tax- free bonds, term loan from banks/financial institutions besides offshore borrowings, at competitive market rate. Its aim is to be one of the leading Financial Service Companies in the country, for raising funds from the capital market at competitive cost for Railway infrastructure augmentation, duly ensuring that the Corporation makes optimum profits from its operations.

Operational Highlights

The Board of Directors had approved borrowing limit of H 50,000 crores for FY 2023-24 for meeting the funding requirement of Indian Railways, if any, new business activities, refinancing of existing loans and for other general corporate purposes.

For leasing of Project Assets, there is an initial Moratorium period of 5 years and MoR is not required to pay the lease rent in moratorium period. Further, during the moratorium period company recognises on annual basis the finance cost as disbursement which gets added to the AUM of the company.

During the year 2023-24, the company has accordingly considered H 16,705.20 crores as disbursement.

Borrowings during the year include Taxable Bonds worth H 22,940 crores (Previous year 21,558.70 crores), Rupee Term Loans of H 5,980crores (previous year H 22,274.46 crores) and 54EC bonds of H 2,064.34 crores (previous year H 1,729.61 crores).

The company had refinanced Higher rate long term loan of H 18,200.00 Cr. with lower rate long Term loan and Bonds. The average cost of borrowing made during the year was approximately 7.27% p.a.

Revenue from operations of Company has increased by H 2,923.16 crores from H 23,721.42 crores in 2022- 23 to H 26,644.58 crores in 2023-24, showing a growth of 12.32 %.Profit before Tax (PBT) of Company for the year ended 31^st March 2024 was H 6,412.10 crores as compared to H 6,167.16 crores for the previous year, registering a growth of 3.97 %.Company has not made any provision for tax in its books pursuant to its decision to exercise the option of lower tax rate permitted u/s 115BAA of the Income Tax Act, 1961, as introduced by the Taxation Laws (Amendment) Ordinance, 2019 dated 20^th September, 2019. The Companys taxable income was nil and it did not have to pay Minimum Alternate Tax (MAT) with reference to its Book Profit as MAT payable u/s 115 JB was outside the ambit of the Section 115

BAA. Thus, on adoption of Section 115 BAA of the Income Tax Act, 1961, the Company was outside the scope and applicability of MAT provisions and there was a zero-tax liability in the financial year 2023-24. Profit After Tax for the year ending 31^st March 2024 was H 6,412.10 crores as compared to 6,167.16 crores for the previous year, registering a growth of 3.97 %.

Financial Highlights

( H in crores)

	FY	FY	YoY
Particulars	2023-24	2022-23	Change
(in %)
Revenue from Operations	26,644.58	23,721.42	12.32%
EBITDA	26,519.08	23,625.52	12.24%
PBT	6,412.10	6,167.16	3.97%
PAT	6,412.10	6,167.16	3.97%
Net Worth	49,178.57	44,680.18	10.07%

Key Ratios

The details of key financial ratios applicable and specific to the Company are given below:

Particulars	FY 2023-24	FY 2022-23
Debt Equity Ratio (in times)	8.38	9.38
Operating Profit (in %)	24.02%	25.82%
PAT (in %)	24.06%	25.95%
Return on Net Worth (in %)	13.04%	13.80%

Human Resources

At IRFC we believe in a strong value system and best HR practices to enhance and improve our capabilities and achieve organizational objectives.

As on 31^st March 2024 total Manpower of the Company stood at 42. To infuse fresh Manpower in the existing Manpower pool of the Company, 4 Executives were inducted in the Company during FY-2023-24 through Campus Recruitment.

Effective grievance redressal processes are also structured to keep the trust, respect and confidence of our team intact. Company has put in place effective Human Resource acquisition and maintenance function, which is benchmarked with best corporate practices to meet the organizational need.

Company implements all directives and guidelines with regard to reservation policy issued by Govt. of India. Liaison Officer has been appointed to look into the matter of reservations and also the welfare and safeguard of SCs/STs/OBCs/ PwBD/ EWS employees. Liaison Officer also ensures that there is no discrimination on the basis of Cast, Religion and disabilities amongst the employees. IRFC being a Lean Organization has adopted "Open Door Policy" and every employee has been given sufficient opportunity to meet and discuss his/her problem or grievance with the Management. SC/ST constituted 21.43% of its total workforce as on 31^st March, 2024. In order to enhance the skills, capabilities and knowledge of employees, a well-defined Training and Development Policy for below board level executives and non-executives is in place. Employee training and development is an essential element of the Companys strategy. During the year 2023-24, the Company imparted training to 41 of its employees to various training programmes and workshops including inhouse trainings. Companys Board of Directors consist of professionals with vast experience and high level of expertise in their respective field and industry. It will be endeavour of the Company that the whole time Directors and Non-Executive Directors attend training programmes in order to keep themselves abreast with the latest development in the area of finance, accounts etc. During the FY 2023-24 Non-Executive Directors have been imparted training for 18 Hrs. cumulatively. IRFC is an equal opportunity employer. Company provides equal growth opportunities for the women in line with Govt. of India philosophy on the subject. Being a lean organization, where Company has 42 employees, women representation has gone across hierarchical levels. Women constituted 21.43% of its total workforce as on 31^st March, 2024. As per Govt. of India directives and guidelines from time-to-time, IRFC ensures the welfare of women employees.

Risk Management

Effective risk management is central to ensuring robust and healthy finance for the Company. The company has a Board approved Comprehensive Risk Management Policy covering Liquidity Risk, Credit Risk, IT & Operational Risk, Forex Risk etc. In compliance with the RBI Guidelines, the Company has constituted Risk Management Committee. As on date Committee comprises of Chairman & Managing Director, Director (Finance) and two Independent Directors. As per the extant RBI guidelines the Company has a Chief Risk Officer (CRO) for overlooking the functions of risk management in the Company.

As per the approved policy, the Company has constituted subcommittees to Risk Management Committee: -

For effective monitoring, control and mitigation of financial risk arising due to mismatch in the Asset Liability position, Asset Liability Management Committee (ALCO) is in place. ALCO is responsible for monitoring liquidity and market risks.

To assess and mitigate the foreign exchange fluctuation risk and interest rate risk in External Commercial Borrowings, Forex Risk Management Committee is in place.

To assess and mitigate operational and IT risks of the Corporation, IT & Operational Risk Management Committee is in place.

Minutes of the meetings of the above Sub-committee(s) along with the action taken are placed before the Risk Management Committee and the proceedings of the Risk Management Committee meetings are placed before the Board of Directors.

As our company is mostly funding for augmenting rail infra structure by way of a leasing approach to fund rolling stocks and project assets to Ministry of Railways, it being sovereign entity, the credit risk is minimal. The Companys selective forays into other areas in the form of loans to Rail Vikas Nigam Limited and IRCON International Limited are suitably ringfenced, as the same has either the cash flows originating from the Ministry of Railways or there is a repayment assurance by Ministry of Railways.

As per Lease Agreement signed by IRFC with MOR every year, interest rate fluctuations are passed on to MoR and the exposure of the Company to Interest Rate Risk is low. The cash inflow of the Company is mostly predictable, shielding it substantially against liquidity related issues.

Although the foreign exchange fluctuation risk is also passed through to MOR, still Company has consistently been adopting prudent, efficient, and cost-effective risk management strategies to cover Exchange Rate Variation risk on its overseas borrowings.

Internal control systems and their adequacy

The Company has in place adequate internal control systems commensurate with the nature and volume of its business to ensure statutory and regulatory compliances. The Company has in place Accounts Manual, Manual for Procurement of Goods, Services and Works and HR Manual. The Company has also implemented a policy for temporary placement of surplus funds with the Banks in order to strengthen its cash management system.

In line with the RBI notification dated Feb 3, 2021, Risk Based Internal Audit (RBIA) policy has been formulated and approved by the Board of Directors. The scope of RBIA is well defined and is very exhaustive to take care of all functions and business of the Company depending upon the risk assessment and control environment. Based on RBIA report, efforts are made to further strengthen the existing systems and procedures. The significant observations are discussed in the Audit Committee Meetings regularly.

IRFC has developed Comprehensive Risk Management Policy, Credit Policy, Information Technology Policy and Information Security Policy.

The Statutory Auditors of the Company are appointed by Comptroller and Auditor General (C&AG) of India, and the appointment is rotated periodically. Besides, the accounts of the Company are subject to supplementary audit by the office of C&AG, as required under the Companies Act. The C&AG also conducts propriety audit of the Company.

Besides, as mandated under Companies Act, 2013, the Statutory Auditors have certified as part of their Audit Report, the effectiveness of Internal Financial Control over financial reporting.

Management Outlook

The outlook for IRFC in FY 2024-25 is centred around strengthening its robust business model and fostering a strong relationship with the Ministry of Railways (MoR). Assets Under Management stood H 4.64 lakh crores at the end of March 2024.

To strengthen the business model, IRFC is taking steps towards business diversification. The company is actively exploring for funding projects linked to Railways. IRFCs mandate allows it to provide financial assistance to entities and projects with forward and backward linkages with Railways.

In this regard, company is exploring opportunities for investments in railway infrastructure projects such as Dedicated freight lines, High-speed rail corridors, Multi-modal logistics parks, Non-conventional energy sources for the railway network, etc.

Company has signed a Memorandum of Understanding (MoU) with RITES Ltd. The MoU aims for identifying mutual areas of collaboration for expanding IRFCs role in providing financial assistance to projects/ institutions that have got backward and or forward linkages with Railways and by RITES providing assistance to IRFC in ascertaining the financial & technical viability of projects, providing advisory & consultancy services.

Company has also signed a Memorandum of Understanding (MoU) with India Infrastructure Finance Company Ltd. (IIFCL), a Public Sector Enterprise under the Ministry of Finance, to strengthen cooperation in financing railway infrastructure projects with forward and backward linkages to Railways sector.

In line with Indias focus on infrastructure spending to reach its target GDP of USD 5 trillion by FY25 and to meet the goal of making India "Viksit Bharat by 2047, IRFC is committed to raising funds from the financial market at the most competitive rates and terms. The governments National Infrastructure Pipeline (NIP) and PM Gatishakti initiative lay the groundwork for comprehensive and integrated infrastructure development in the country. IRFC, as a premier financial institution with a track record of NIL NPA and capability to mobilize large funds from both domestic and offshore markets can play a significant role in supporting Indias infrastructure sector, driving economic development and growth.