Look past the near-term pain in IRCTC for its monopoly in Railways

While FY21 likely to be washout for IRCTC, the firm appears to have all the ingredients in place to see strong earnings growth over next 2-3 years, say analysts

The Indian Railway Catering and Tourism Corporation (IRCTC) stock has declined around 4 per cent in the past three months, as against a 15 per cent rise in the Sensex. Earnings pressure and the government’s stake sale plans are some near-term factors weighing on investor sentiment.

The government is planning to sell 15-20 per cent of its 87.4 per cent stake in the company through an offer for sale, to comply with Securities and Exchange Board of India’s (Sebi’s) public shareholding norms. This, it is believed, could cap the share price as new shares hit the market.

However, analysts foresee strong earnings potential over the next few years and, thus, believe investors could use corrections to accumulate IRCTC shares.

Jinesh Joshi, analyst at Prabhudas Lilladher, says, “FY21 is likely to be a washout for IRCTC and some of its segments like catering would see a delayed recovery. But, we believe IRCTC has all the ingredients in place to see strong earnings growth over next the 2-3 years, mainly given its monopoly in Indian Railways, coupled with likely tariff hikes in catering and capacity expansion of Rail Neer (drinking water).” Joshi believes things will start picking up from FY22.

 

 

IRCTC is the only company authorised by the Indian Railways to provide catering services, e-ticketing services and packaged drinking water at railway stations and on trains.

IRCTC’s June quarter (Q1) numbers, announced last Friday, show the impact of the pandemic-led disruptions. It reported a 71.4 per cent year-on-year (YoY) drop in revenue to Rs 131.3 crore. This fall along with the weak operating leverage, led to a loss before tax of Rs 29.4 crore. The pain was felt across IRCTC’s business segments. For instance, the catering segment, which accounts for over 45 per cent of revenues, was down about 67 per cent YoY.

However, IRCTC, in the notes to its Q1 results, highlighted: “The company does not foresee adverse impact on the supply chains as and when the business is resumed wherever the operations were curtailed or have remain suspended on account of present pandemic.” 

This indicates the company’s operational efficiency and implies a short turn-around time to revive operations. Thus, analysts like Joshi estimate around 20 per cent annual earnings growth for IRCTC between FY20 and FY23.

Not surprisingly then, the stock ended almost flat at Rs 1,368.85 on the BSE on Monday despite the weak results.