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This is an interesting opportunity, but one that’s fairly risky simply because it’s moved up fast. The problem with adding stocks at new all time highs is that you just don’t feel great taking them as fundamental opportunities, even if the future seems good. This is one of them.
We’ve not added stocks to the portfolio for a while, and that will also change in the next few weeks. Remember that in the multi-cap portfolio we have 25 positions, with 4% each. We will still have 10 positions empty even after this addition. Therefore, we are only 60% invested. You will find the full portfolio here.
We’ll be adding this to the Long Term Multicap portfolio, and the stock is IRCTC. This is a government owned railways catering and ticket booking company.
This is a government company. Therefore it is (usually) unlikely to provide great long term growth. However, there’s a story here which we believe gives us a 50% return in a year or so, if things go well. So we’ll take a position based on this, even if we find the stock a little expensive right now.
IRCTC does four things:
Here’s a quick summary of what they do.
IRCTC provides food on trains, and on stations. It also allows for online booking of food through partner restaurants (that pay it 12% commissions, and deliver food straight to your seat) They are, effectively, the Swiggy of the rail network.
A new catering policy 2017 put the catering monopoly back to IRCTC (it was taken away in 2010 and given to the railways itself). This business should still grow at 8% a year for the next 5 years.
IRCTC operates the tour trains (like Maharaja’s express and Bharat Darshan) that bring in about 300 cr. roughly. Focussed mostly on foreign tourists, this and the tour plan (revenue of about 40 cr.) are expected to grow by about 8% annually.
IRCTC has a monopoly on providing drinking water on platforms and trains. Rail neer, their water brand, is what will be provided to passengers, and only if they can’t supply it will other vendors of water be used. Currently, IRCTC is constrained by capacity, and only provides water that caters to 45% of demand. To increase capacity, they will add 6 more plants in FY20 (from 10 to 16 plants) and another four by 2021.
This is the biggie. For much of the last decade, this was India’s largest e-commerce site. They book tickets for the railways – again, a monopoly. From 2014, when IRCTC saw ticket bookings of 15.8 cr. tickets, the e-booking system has grown to about 28 cr. tickets in FY2019. IRCTC’s site sees more than 70 lakh people login every day, and sees more than 2.5 cr. transactions a month. In 2016, the government had disallowed them from charging a service fee, so they saw these revenues dip – but the service fee was reintroduced (Rs. 15 for non-a/c and Rs. 30 for A/C) in September 2019.
But the basic thing is: the lower tax, the service charge addition and the increasing of capacity should nearly double their profits this next year, and the capacity expansions in catering and water will help with better margins and revenue.
We’ve built an optimistic projection but the FY20 and FY21 numbers seem achievable:
By next year, as capacity comes online, news will drive up expectations in the stock.
One big move here is that the Government stake is locked in for a year. This can change, because the government makes the rules, but it’s unlikely. After a year, we are sure to see a big stake sale again.
The government owns 87%. They can’t sell for a year. And after that, they have to bring stake down to 75% by 2022.
So we believe there will be a lot of buyers but hardly any sellers for this stock in the near term, which gives us a cushion for the valuation at least for the next year.
This is a government company. You should never expect too much from a government company.
So, the deal is this:
This is not really how you should play a long-term portfolio, but it takes all kinds. Since we are willing to take deep draw-downs on the remaining stocks, we can have a few that we don’t really intend to hold very long – but even one year is long enough in our view. We have added it at a price of 894, and will exit if the price goes to the 1400-1500 range.
(Note: it’s listed only a few days back, so this is an hourly chart)
Disclosure: Capitalmind and its authors may have positions in the stocks above, and as a portfolio manager, may have added positions in the stock for their customers. None of this should be considered investment advice.
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