High valuations may cap further rally in IRCTC stock despite good revenue

At trailing PE of 65x it seems to fully discount future growth and visibility of good revenue streams

Investor interest in IRCTC (Indian Railway Catering and Tourism Corporation) has grown after the recent announcement that the PSU is expanding into non-railway catering and focusing on branding to become a premium hospitality brand.

The company has also declared good results. In the July-September quarter (Q2FY24), IRCTC delivered 30 per cent year-on-year (Y-o-Y) growth in PAT (profit after tax) with higher revenues in ticketing business and better margins in the catering business.

Ancillary revenue from payment gateway, ads, revenue share from the online travel agency also grew 7 per cent Y-o-Y, reversing a declining trend in the prior quarters.

The management attributed healthy ticketing volumes to bookings ahead of the festive season and the catering margin improvement to a higher proportion of premium trains.

Due to Indian Railways (IR) withdrawing pandemic-linked concessions granted to IRCTC on Tejas trains, train operations have become loss-making.

Ticketing volume growth was in double digits (both quarter-on-quarter (Q-o-Q) and Y-o-Y). The Earnings before interest, taxes, and depreciation (Ebitda) grew 20 per cent Y-o-Y to Rs 367 crore with Ebitda margin of 36.8 per cent.

The company had Rs 2,000 crore in cash on the balance sheet at the end of the first half of FY24. Adjusted PAT stood at Rs 295 crore aided by higher other income of Rs 47 crore, up 81 per cent Y-o-Y. The adjusted PAT margin was 29.6 per cent.

Revenues increased 23.5 per cent Y-o-Y to Rs 995 crore. On a Y-o-Y basis, segment-wise revenue from State Teertha, Catering, Rail Neer, Tourism, and Internet Ticketing was up 119 per cent, 29 per cent, 4 per cent, 39 per cent and 9 per cent to Rs 64.8 crore, Rs 431 crore, Rs 78 crore, Rs 96 crore and Rs 327 crore, respectively. All segments were EBIT-positive except for tourism. EBIT is earnings before interest and tax. The share of UPI bookings was 38 per cent in Q2FY24 with 54 million AC tickets booked in the quarter.

Management guided that new contracts (with higher menu prices) for 200 trains would be added to the current 1,284 train count on which IRCTC does catering – up to 500 new contracts may be in the pipeline. The upside from Indian Railways mandating catering services from IRCTC for FTR (full tariff rate) trains will however be limited.

Around 11 pairs of Vande Bharat trains and 18 new static catering units were opened in Q2FY24. Tejas revenue was Rs 34 crore for Q2FY24.

A deal with Zomato has been launched as a pilot from five stations and IRCTC will make Rs 40 per order as a flat fee with Rs 16 of this shared with Indian Railways and it may be expanded.

An expected one-time gain arising from increase in license fee has been pending as the matter is sub judice.

A Rail Neer plant was commissioned in Kota in Q3FY24, and 2 more plants are scheduled to be commissioned in the ongoing quarter. IRCTC produces on average 1.2 million litres per day of Rail Neer packaged water, with a total capacity of 1.6 million litres.

As a monopoly, there’s guaranteed revenue streams and the balance sheet is quite solid. The expansion into becoming a full service Online Travel Agency and seeking non-Indian Railways catering opportunities are both positives. 

But the stock, which has jumped almost 13 per cent over two days and hit a 52-week high of Rs 916.35 on Tuesday, is also very highly valued at current levels where it is running at PE 65x of the last four quarters. The stock price seems to fully discount future growth despite the visibility of good revenue streams.