Better Railway Stock: RVNL vs IRFC

India has one of the largest rail networks in the world, with a track length of 126,366 km and 7,335 stations.

To improve railway infrastructure, the Indian government has planned a massive investment of Rs 1 trillion (tn) to procure new train sets, lay new tracks, and improve rail infrastructure in the country.

While several railways stocks are direct beneficiaries of this huge opportunity, two companies that benefit the most are Rail Vikas Nigam Limited (RVNL) and Indian Railways Finance Corporation (IRFC).

IRFC is the financial muscle and acts as a banker to for the Indian railways. RVNL, on the other hand, is the execution engine of railway projects and is directly involved in building the railway infrastructure.

Although both companies are engaged in different businesses, we are comparing them using different metrics to see which railway stock is better.

Rail Vikas Nigam (RVNL)

Incorporated in 2003, Rail Vikas Nigam (RVNL) is a government entity formed to bridge the infrastructure deficit in Indian Railways.

The company undertakes a full cycle of project development from conceptualisation to commissioning of railway projects.

Some of the projects it undertakes are doubling, gauge conversion, new lines, railway electrification, and construction of major bridges. It also undertakes metro projects across various cities.

RVNL has an excellent track record of completing projects on a fast-track basis. Since its inception, it has contributed to more than 35% of railway doubling and over 25% of railway electrification.

At the end of December 2023, the company's order book stood at Rs 650 billion (bn), indicating strong revenue visibility in the medium term.

Apart from railways, RVNL is diversifying into road, irrigation, electrical transmission works, and mass rapid transport projects through joint ventures (JV) and a memorandum of understanding (MoU).

The company is also expanding internationally and has recently taken up a project in Maldives. It plans to bid for several projects in other countries as well.

Indian Railways Finance Corporation (IRFC)

Incorporated in 1986, the Indian Railways Finance Corporation (IRFC) is the financing arm of the Ministry of Railways (MoR).

It is registered as a systemically important non-deposit-taking non-banking financial company (NBFC - ND-SI) and Infrastructure Finance Company (NBFC- IFC) with the Reserve Bank of India (RBI).

The company's principal business is to borrow funds from financial markets to finance a project or acquisition, which is then leased out to the Indian Railways.

Particulars	RVNL	IRFC
Market Cap (in Rs billion)*	598.5	1,963.50

Source: Equitymaster| As of April 25, 2024

In terms of market capitalisation, IRFC is three times bigger than RVNL.

If we compare the performance of both the stocks on the bourses, then IRFC has outpaced RVNL and the benchmark index Nifty 50.

In the last year, shares of IRFC zoomed by over 400%, whereas RVNL and Nifty 50 gave a return of 179% and 26%, respectively.

# Revenue

IRFC earns revenue primarily through leasing rolling stock assets such as locomotives, passenger coaches, and freight wagons.

RVNL, on the other hand, generates revenue from the construction and infrastructure projects it undertakes.

Although the nature of revenue is different for both companies, it is important to see how the revenue for the companies has grown in the last five years.

In the last five years, the revenue of IRFC and RVNL has grown at a compound annual growth rate (CAGR) of 16.5% and 15%, respectively.

For IRFC, high asset quality has helped the company grow its interest income in the last five years. For RVNL, a strong order book and a faster project execution has aided growth.

Revenue

in Rs m	Mar-19	Mar-20	Mar-21	Mar-22	Mar-23	5-Year CAGR
RVNL	100,687	145,306	154,038	193,817	202,816	15.00%
IRFC	111,336	134,210	157,705	202,993	238,918	16.50%

Source: Equitymaster

# Profitability

In terms of EBITDA growth, RVNL and IRFC are almost equal, with a 17% CAGR growth in the last five years.

In terms of net profit growth, IRFC is slightly ahead of RVNL with a 23% CAGR growth, as against the 15.6% CAGR growth of RVNL.

Both RVNL and IRFC work on a cost-plus basis and hence have good profit growth.

Given that their nature of business is different, the gross and net profit margins are poles apart. Hence, it will be difficult to compare the two companies based on their profit margins.

However, in the last five years, RVNL has managed to expand its profit margins, whereas IRFC has maintained at similar levels.

In the last five years, RVNL's gross and net profit margins averaged 6.2%, whereas IRFC's gross and net profit margins averaged 26.8% and 25.7%, respectively.

Profitability

EBITDA (in Rs m)	Mar-19	Mar-20	Mar-21	Mar-22	Mar-23	5-Year CAGR
RVNL	6,420	7,733	9,486	12,140	14,054	17.00%
IRFC	29,020	31,925	44,202	61,018	63,103	16.80%

PAT (in Rs m)	Mar-19	Mar-20	Mar-21	Mar-22	Mar-23	5-Year CAGR
RVNL	6,877	7,567	9,916	11,101	14,206	15.60%
IRFC	22,547	31,921	44,161	60,898	63,370	23.00%

Gross Profit Margin	Mar-19	Mar-20	Mar-21	Mar-22	Mar-23
RVNL	6.40%	5.30%	6.20%	6.30%	6.90%
IRFC	26.10%	23.80%	28.00%	30.10%	26.40%

Net Profit Margin	Mar-19	Mar-20	Mar-21	Mar-22	Mar-23
RVNL	6.80%	5.20%	6.40%	5.70%	7.00%
IRFC	20.30%	23.80%	28.00%	30.00%	26.50%

Source: Equitymaster

# Debt Management

It is important to understand the debt metrics of a company to assess its fixed financial obligations.

IRFC is a debt-free company and has no fixed financial obligations, such as interest costs on its books, that will affect its profitability.

However, RVNL has a debt of Rs 60 bn on its books and a debt-to-equity ratio of 0.8x. Given the size of its operations and order book, the debt is considered very low.

Moreover, the debt is completely of a pass-through nature, and the Ministry of Railways services its debt.

RVNL also receives interest-free mobilisation advances from the Ministry of Railways, which reduces the company's dependence on external debt.

The company majorly subcontracts its projects to marquee contractors, which helps keep the debt low.

Even with the company planning to expand to new geographies and undertake projects outside the railways sector, it has enough cashflows to fund expansion plans.

IRFC, on the other hand, is a debt-free company. It paid all its debt obligations in the financial year 2022 and has remained debt-free since then.

It plans to remain debt-free in the future as well, despite expanding its funding operations to companies supplying to the Indian Railways.

Debt Management

Debt to Equity Ratio (x)	Mar-19	Mar-20	Mar-21	Mar-22	Mar-23
RVNL	0.7	0.8	1.0	1.0	0.8
IRFC	0.1	0.1	0.1	0.0	0.0

Source: Equitymaster

Return Ratios

Given that the nature of the business of RVNL and IRFC are different, the financial health metrics of both companies are also different.

For RVNL, we can measure financial health by tracking the return on equity (RoE) and return on capital employed (RoCE).

RoE and RoCE help us understand how much return the company is generating from the capital invested.

The RoE and ROCE of RVNL have consistently improved over the last five years and averaged 17% and 14.5%, respectively.

Since IRFC is mainly involved in funding, the net NPA and capital adequacy ratio will give us an idea of the company's asset health.

NPA or non-performing assets are loans that are overdue and have a high probability of turning into bad debts.

For IRFC, the net NPAs are zero, indicating that all the loans that the company gives are being paid back by its customers.

Capital adequacy ratio is a measure of the company's capital to its risk-weighted assets and current liabilities. In simple words, it measures the bank's ability to absorb losses.

A high capital adequacy ratio is considered good. For IRFC, the capital adequacy ratio has consistently improved over the last five years and currently stands at 512%.

Financial Health Metrics

RVNL	Mar-19	Mar-20	Mar-21	Mar-22	Mar-23
RoE	15.60%	14.80%	17.60%	17.60%	19.40%
RoCE	13.10%	11.30%	14.70%	15.80%	17.80%

IRFC	Mar-19	Mar-20	Mar-21	Mar-22	Mar-23
Net NPA	0	0	0	0	0
Capital Adequacy Ratio	349.40%	404.00%	420.50%	439.70%	512.00%

Source: Equitymaster

# Dividend

A company paying consistent dividends is considered to have stable financials than a company that doesn't pay consistent dividends.

In the last five years, the dividends of RVNL and IRFC have grown at a CAGR of 19.1% and 38.9%, respectively.

The dividend yield in the last three years averaged at 5.1% for both the companies, and the dividend payout is around 30%.

This shows that both companies are rewarding their shareholders well.

Dividend

PAT (in Rs m)	Mar-19	Mar-20	Mar-21	Mar-22	Mar-23	5-Year CAGR
RVNL	0.9	1.1	1.6	1.8	2.1	19.10%
IRFC	0.3	0.4	1.1	1.4	1.5	38.90%

Dividend Yield	Mar-19	Mar-20	Mar-21	Mar-22	Mar-23
RVNL	0.00%	5.70%	6.50%	5.10%	3.80%
IRFC	0.00%	0.00%	4.20%	5.90%	5.30%

Dividend Payout Ratio	Mar-19	Mar-20	Mar-21	Mar-22	Mar-23
RVNL	27.00%	31.40%	33.20%	34.40%	31.30%
IRFC	16.60%	15.60%	31.10%	30.00%	30.90%

Source: Equitymaster

# Valuation

The two important valuation ratios that help in assessing whether a company is undervalued or overvalued are price to earnings (P/E) ratio and price to book value (P/B).

The P/E ratio of RVNL is 43.5x, whereas its P/B ratio is 7.2x. For IRFC, the P/E and P/B ratio stands at 32.5x and 4x, respectively.

This means that the shares of RVNL are slightly overvalued compared to those of IRFC.

If we compare the shares to their five-year averages and the industry average, both the companies are highly overvalued.

Valuations	RVNL	5-Year Average	IRFC	5-Year Average
P/E (x)	43.5	6.7	32.5	6.1
P/B (x)	7.2	1.2	4	0.8

Source: Equitymaster

Which Railway Stock is Better: RVNL or IRFC?

Both the railway companies are on par with respect to revenue growth, profit growth, and dividend payment.

However, in terms of stock market performance, shares of IRFC have delivered a superior performance compared to RVNL.

IRFC primarily funds railway projects and earns its revenue from financing and leasing railway assets. The company is planning to expand its business to entities that have forward and backward linkages to the railways.

This will increase the scope and customer base of the business and give the company a chance to increase its interest income.

RVNL, on the other hand, primarily executes turnkey projects for the railways. It is planning to expand its scope of business to other projects such as road, irrigation, electrical transmission works, and mass rapid transport projects.

Apart from this, the company is also planning to expand its presence internationally. This will drive the revenue and profit growth of the company in the medium term.

Given the government's boost towards infrastructure, both companies are well-established to grow their businesses in their respective fields.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here.