What makes IRCTC click in the travel sector amid the Covid-19 pandemic?

Amid the market sell-off, travel service companies such as Thomas Cook and Cox & Kings have been falling like ninepins, Indian Railway Catering & Tourism Corporation (IRCTC) has emerged as an outlier

As the economy braces itself to take a sharp knock due to the coronavirus (Covid-19) pandemic, it’s no secret that the travel and tourism sector is likely to be among the worst hits. Amid this, while stocks of companies providing travel services such as Thomas Cook and Cox & Kings have been falling like ninepins, Indian Railway Catering and Tourism Corporation (IRCTC) has emerged as an outlier.

So far in the calendar year 2020, stock prices of BLS International Services and Thomas Cook (India) have crashed 50.3 per cent and 49 per cent, respectively till Tuesday, while that of Cox & Kings, International Travel House and Crown Tours have declined in the range of 5 to 44 per cent. On the contrary, stock price of IRCTC and VMV Holidays have zoomed 56.55 per cent and 22 per cent, respectively on the BSE. In comparison, the S&P BSE Sensex has skid 26 per cent.

“With the virus seeing no declining trend, the travel and tourism sector will take a severe hit as behavioral habits of the people change. While, the first wave of the Covid-19 virus is over in China, there may be a second or a third wave as well… Therefore, I would not recommend buying travel company stocks right now as they may be affected for the next one to two years,” says AK Prabhakar, head of research at IDBI Capital.

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So what’s driving IRCTC?

“Despite the Covid-19 led lockdown, service charge (re-instated in September 2019), revenue from four new Rail Neer plants that opened in 2HFY20 coupled with four more plants that are to be commissioned in FY21, and hike in mobile/static catering tariff by nearly 70 per cent/ 61 per cent augurs well for the stock in FY21,” says Jinesh Joshi, research analyst at Prabhudas Lilladher.

As for Thomas Cook, Cox & Kings, Crown Tours and other travel services companies, Joshi says the firms are being hit at the bourses due to their leisure-travel business.

“The industry has been at a virtual standstill and with plummeting revenue, the industry is desperately looking for support. The immediate need of the industry is liquidity for the short and midterm in order to help meet their fixed costs.. We expect recovery to begin only in a staggered phase – with essential and domestic travel starting first with restrictions. International travel will be the last to open up and may take much longer to recover,” says Vipul Prakash, chief operating officer at MakeMyTrip.

The inbound and outbound travel has declined about 67 per cent and 52 per cent, respectively since January to February as compared to the same period last year. Besides, hotel and flight bookings are down nearly 90 per cent for the peak season of April-June, says a report by industry body Ficci.

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According to Indian Association of Tour Operators, the hotel, travel, and aviation sector could together incur a loss of Rs 8,500 crore due to the pandemic. The segment together forms nearly 9 per cent of the gross domestic product (GDP).

India has been under a complete lockdown since March 24, when Prime Minister Narendra Modi announced a nationwide lockdown to stem the spread of coronavirus. Railways and airline services completely shut at least till May 3.

Apart from the standstill in the business, travel services faced severe blow when the government asked airlines to refund customers who had booked tickets between for travel between April 15 and May 3.

The cash flows of these companies have begun to dry up as every time a customer asks for a refund, travel agents have to dip into their own cash reserves to pay, instead of using the wallet that they maintain with the airlines for booking tickets.

“Leveraged companies, therefore, in this segment are finding it tough. The government, groaning under a high fiscal deficit, cannot be expected to bail out the sector. Therefore, investors in stocks in the travel & tourism segment should rather to switch to segments like IT, pharma and FMCG,” says V K Vijayakumar, chief investment strategist at Geojit Financial Services.

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On the contrary, analysts peg IRCTC’s revenue to increase 21 per cent YoY in FY21.

“IRCTC, however, is debt free and has cash balance of nearly Rs 1,160 crore. Thus, it can meet its fixed cost obligations in the interim,” says Joshi of Prabhdas Lilladher. The brokerage values the stock at P/E multiple of 26x and has a target price of Rs 1,428 (earlier 1,656), with a ‘buy’ call. 

Prabhakar of IDBI Capital believes the monopoly in the ownership and government’s backing IRCTC could be driving the stock.