IRCTC IPO: A robust growth outlook, attractive valuations are key positives

Indian Railway Catering and Tourism Corporation’s (IRCTC’s) initial public offering (IPO) is a good bet for investors. The company, which is under the railway ministry, has a monopoly over e-ticketing, catering in trains and packaged drinking water at railway stations. Reasonable valuation, a robust dividend track record, zero-debt status and a strong outlook for its three core services are the other triggers.
 
IRCTC has had healthy revenue growth of 27.4 per cent in FY19, while the same over FY17-19 averaged 11 per cent. Good growth at the top also reflects on the bottom line, which has grown by 24 per cent in FY19, even as over the last couple of financial years, growth was around 9 per cent. The withdrawal of service charge on e-ticketing (post demonetisation) had led to a dip in revenues for the company in FY18. 
 
Revenue growth, too, is expected to be steady, driven by multiple factors. According to CRISIL, domestic tourist volumes would see a cumulative annual growth rate of 9-10 per cent over 2018-2023. It also foresees India’s e-booking market growing at a 16-17 per cent CAGR over the next five years, with e-booking penetration in railways improving from 70 per cent in FY19 to 81-83 per cent in FY24. Internet usage penetration in India is also expected to be higher.

All these should support growth of the key segments of the company – internet ticketing, catering, and packaged drinking water i.e. Rail Neer. These three segments accounted for about 77 per cent of IRCTC’s FY19 revenue.
 
In FY19, while the catering and internet ticketing posted 41 per cent and 13 per cent revenue growth, respectively, IRCTC’s revenues from Rail Neer rose by 4 per cent. The catering business is expected to grow by 7.5-8.5 per cent over the next five years, according to the CRISIL study. Further, with addition of 10 new plants (six under commissioning and four planned), besides 10 existing plants, should boost IRCTC’s market share in drinking water on railway premises and trains, from 45 per cent to 80 per cent in the long term.
 
According Tejashwini Kumari, analyst at IIFL, levy of convenience fee on ticket bookings and commissioning of six new Rail Neer plants are expected to aid IRCTC’s revenue CAGR at 16 per cent over FY19-21.  Given the high margin of internet ticketing (67 per cent in FY19) and Rail Neer (17 per cent in FY19), Ebitda margin expansion is likely to be 600 basis points, along with 40 per cent net profit CAGR over the same period, according to Kumari, who has a ‘subscribe’ recommendation for the IPO.

Notably, the levy of ticket booking charges has been reinstated by the government recently after its removal in 2016. This is a key risk as any change in the government policy would have a substantial impact on the revenues of the company. In fact, the withdrawal of service charges weighed on IRCTC’s overall performance in FY18, with around Rs 200 crore ticket revenue loss, according to Mahendra Pratap Mall, chairman & managing director of IRCTC. Opening up some of the segments it operates in to private sector is another risk.
 
Besides, any sharp rise in inflation could dent the company’s profitability and earnings if the ministry of railway decides not to pass on the cost pressure to customers and the company also does not hedge market risk in this regard. However, it has a long-term contract for purchase of key raw material for catering services, which is a positive.
 
Besides above mentioned growth potential of IRCTC, attractive valuations (18-19 times FY19 price to earnings), strong dividend payout history (45 per cent in FY19), and good return on equity (27.3 per cent in FY19) augur well for the IPO. Analysts at ICICI Securities have given ‘subscribe’ recommendation, citing above mentioned factors.