IRCTC IPO call: Green signal

A monopoly player in the internet railway ticketing and catering businesses, Indian Railway Catering and Tourism Corporation (IRCTC), with its sound financials, healthy revenue prospects and good growth opportunity in other segments, makes for a good long-term bet.

The Centre is offering 12.6 per cent of its current holding in IRCTC for sale in the IPO, opening September 30. This could fetch the Centre ₹635-645 crore. The IPO is entirely an offer for sale.

Currently, the company derives majority of its revenues from the catering and hospitality business — 55 per cent of revenues in FY19. Travel and tourism, internet ticketing and packaged drinking water (branded as Rail Neer) constitute 23.3, 12.4 and 9.3 per cent respectively of revenues.

Given the healthy performance, good revenue visibility and strong return ratios, the asking price for the IPO is reasonable. At the price band of ₹315-320 (₹10 discount to retail investors), the company is valued at 18 times its FY19 earnings. While the risk of regulatory intervention and possible threat from private players is a key overhang, its current monopoly position deserves a scarcity premium. Investors with a long-term horizon can subscribe to the issue.

Healthy financials

IRCTC’s total revenues grew by 10.5 per cent CAGR over FY17-19 to ₹1,957 crore. The growth is healthy, given that the company’s revenues have been taking a beating since November 2016, on account of the removal of service charge by the Centre, post-demonetisation. In FY17, the company earned ₹362.25 crore as service charge prior to the Centre’s withdrawal.

This loss in revenues has impact the performance in the FY18 and FY19 fiscals. While the new convenience fee to be levied starting September is 25 per cent lower than the earlier service charge, it would help bump up IRCTC’s revenues notably this fiscal. That apart, the new convenience fee will not be shared with the Indian Railways, unlike the erstwhile service charges, and would directly flow to the company’s bottom-line.

Over the last three years, the company’s EBITDA and PAT margins have been steady at about 20 and 14 per cent respectively.

The company has no outstanding debt and has been constantly paying dividends, with payouts ranging from 37-45 per cent of net profit. The return on equity has been more than 23 per cent for each year since FY17 — 26.14 per cent in FY19.

Online ticketing segment

IRCTC is the only authorised company to sell online tickets for the Railways. Other websites like yatra.com operate as agents to IRCTC and work on a revenue-sharing model. These agents also pay annual maintenance fee to the company. As of June 30, 2019, 71.42 per cent of the Railway’s tickets are booked online, leaving more room for growth. The company’s transaction volume averaged (during April-August 2019) 25 to 28 million per month.

Despite removal of service charges, the margins in the internet ticketing segment (at the PBT level) stood at 67 per cent in FY19. This segment contributed 36 per cent to the overall PBT in FY19.

Other revenue streams

While catering segment is the biggest revenue generator for the company, it contributes 28 per cent of the overall PBT. The catering services are currently provided for about 350 trains and 530 static units at railway stations. This apart, there are also mobile catering units and other food courts.

The company has also diversified into other businesses, including non-railway catering and services such as e-catering, executive lounges (eigtht currently operational), budget hotels (six as of FY19) and retiring rooms. These lounges and budget hotels are run mostly by private developers who pay an annual licence fee to IRCTC. This revenue is then shared with the Ministry of Railways who own the land in most cases.

The company also offers travel and tour packages and runs various tourist special trains.

The company also has presence in the packaged drinking water segment, with 10 manufacturing plants with production capacity each of about 1.09 million litres per day. IRCTC’s Rail Neer caters to about 45 per cent of the current demand of packaged drinking water.

Future prospects

To attract more customers, the IRCTC also plans to launch a co-branded credit card and an e-wallet, which will reduce the lead time for booking a ticket online.

This apart, under its PPP model, the Railways has given the ownership of two trains (Tejas express) to IRCTC. With the Ministry mulling over 24 such routes to be handed over to private players, there could be more trains handed over to IRCTC. While this could also mean competition from private players, the IRCTC management has clarified that the Railways is only looking to monetise these routes through new trains, operated by private players. Hence, there would be no revenue loss for IRCTC’s existing ticketing or catering business.

Due to lack of any significant exemptions pertaining to its business model, the company’s effective tax rate in FY19 was at 44 per cent. With new tax cuts announced in September, the company is also likely to save significantly on tax outflow — at the subsidised rate of 22 per cent.

Risks

The company’s biggest risk comes from changes in the Centre’s policies that may impact its revenues, akin to the removal of service charge in 2016. Also, the company’s contingent liabilities are at about ₹623 crore spread over 118 cases — in matters of taxation and other litigations — as against an annual PAT of ₹273 crore.

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