IRCTC IPO: All You need to Know!

With the Government looking to complete its divestment target of Rs. 90,000 Cr. by the end of FY 20, the IRCTC IPO worth Rs. 645 Cr. opens up today. GOI will give up a 12.6 % share in the Entity which was conferred with the Mini – Ratna Status in 2008. Analysts believe the valuation (which is 19 times its Earnings Multiple) is justified and an attractive valuation of the stock. The issue was 81% subscribed at the end of the First Day.

The price band for the issue is Rs. 315 – Rs. 320 with Retail Investors and Employees getting a discount of Rs. 10 per share. The lot size is 40 with a ceiling of 16 lots. The Government is looking to offload 2.01 Cr. Shares. The lead managers for the issue are IDBI Capital Markets & Securities, SBI Capital Markets and YES Securities (India).

All brokerages favoured subscribing the issue, given attractive valuations from the perspective of future earnings growth, unique business model, no competition across any business segment, diversified business segment, healthy return ratio, debt free status and most importantly monopoly business.

Enjoying a monopoly, IRCTC handles over 8,00,000 bookings on its website DAILY, making it an attractive bid. What are the core revenue streams for the business and should you invest?

Business Overview

Currently, IRCTC has a unique business model and enjoys a monopoly in its business segments. IRCTC is the only entity authorised by Indian Railways to provide catering services to railways, online railway ticketing service and packaged drinking water at railway stations and trains in India. Brokerage Firm Anand Rathi points out that “IRCTC has unique business model and the company does not have any competition across any business segment.” Despite these facts, any change in the railways policy by the government will have an adverse impact on the company.

Revenue Streams

Internet Ticketing, Catering, Packaged Drinking Water (Rail – Neer) and Travel & Tourism are the main sources of Revenue for IRCTC with Catering contributing the most towards its revenue. Of late, IRCTC has been offering a slew of Value – Added Services to its customers such as Taxi and Hotel Bookings for its customers.

The internet ticketing segment contributed 12.35 percent to its FY19 revenue against 13.63 percent in the previous year. The catering business accounted for 55 percent of the revenue against 48.70 percent last year. Packaged drinking water counted for 9.28 percent revenue against previous year’s 11.13 percent, while travel and tourism 23.38 percent against 26.54 percent.

Recently, IRCTC has been given the project of handling the operations of Tejas Express on its Delhi – Lucknow and Mumbai – Ahmedabad Routes, as a pilot project, before the Indian Railways considers handing operations over to Private Players.

With the Service Charge back into play, it will also help IRCTC generate additional revenue. IRCTC also aims to set up 10 new water plants in 2 years which will also help generate revenue.

Risks

You cant have your cake and eat it too, right? Similarly, neither can IRCTC. Despite all its attractive buying points, there still exist a number of threats to the entity.

The very first being, its dependence on the Indian Railways. Any policy changes on part of the Indian Railways will have an adverse impact on IRCTC.

Additionally, with the growing Air Travel preference, the CAGR of Railways Industry is almost flat whereas the Air Travel Industry is growing in double digits consistently. Due to increased fares and preference given to air travel, the Railways Industry has not shown promising growth as compared to the aviation sector.

This is majorly due to a shift in the preferences of the consumer who now prefer the convenience offered by air travel as compared to Railways’. Air passengers have started booking their tickets a month or two prior to their journey date and get the Air Tickets for almost the same price as the Rail Ticket.

Conclusion

Owing to a healthy Dividend policy (45%) and strong ROE (26.1%), the valuation of the company stands modest and most brokerages have a subscribe call on it. The recent Reduction in Corporate Tax Rates, owing to a Slowdown in the GDP, coupled with its debt free status, makes IRCTC an attractive stock.

There are a number of threats looming over the stock but the positives outweigh the negatives for this one. IRCTC, with an earnings multiple of 18.8 – 19 (Lower – Upper Band), was given a subscribe option by all brokerage firms and the financials and the performance of the company tells us why.

Do not be blinded by all the pros of the IPO though and always keep a lookout for any changes in the policy of Indian Railways and the Government which might have an adverse impact on IRCTC because the entity is majorly dependent of the Railways and its policies.