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The house view on IRCTC

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In our “House view” series, we publish summaries of discussions on Capitalmind slack forum. Think of them as short crowd-sourced primers about the business, before diving deep.

The last one was on Bajaj Finance and its prospects. This one is about IRCTC & why it is the best performing stock in the Indian Railway’s universe.


About the Company

IRCTC was incorporated in 1999 as a ticketing and catering service provider for Indian railways. It is a PSU with Mini-Ratna (Category 1) status. It is the only authorised ticket booking portal for Indian Railways.

IRCTC share holding pattern

The company have 4 main revenue segments.

Catering:

This segment constitute 45.8% of the total revenue. They maintain 293 Food plazas, 24 cell kitchens & 11 base kitchens across 353 stations.

IRCTC manages on-board catering services on 417 trains (24 Rajdhanis, 2 Tejas, 1 Gatiman, 2 Vande Bharat, 23 Shatabdis,18 Durontos and 347 Mail/ Express trains).

This rail catering industry is expected to reach 15,000 Cr size from current 12,000 Cr by FY24.

three divisions of catering & hospitality segment of IRCTC

E-catering:

It is a new offering from the company. It allows passengers to book food from partner restaurants online. The food is then delivered directly to the passengers’ seat. This segment had grown 82% YoY (on low base).

The stupendous growth of e-catering segment of IRCTC

Ticketing:

Post Demonetisation, IRCTC had withdrawn its service charge to promote online ticketing. Prior to it IRCTC used to levy a service charge of Rs 20/- on every non-AC e-ticket and Rs 40/- for every AC e-ticket.

  • The withdrawal of service charge had impacted the revenue by 370 Cr in 2019-20.
  • The convenience fee has started w.e.f 01-Sep-2019. This has been the biggest trigger for PAT growth in FY20.
  • The average daily ticket booking was at 8.25L (Pre-Covid levels).
  • We expect the overall internet ticketing to reach 75-80% over the next 5 years.

Growth of online reserved rail tickets

Packaged Drinking Water – Rail Neer

It has a monopoly on packaged drinking water across railway stations. It manufactures & distribute packaged water under the brand Rail Neer.

  • Rail Neer has a capacity to manufacture 14.2L bottles per day across 14 plants.
  • As on date, it only serves 45% of the packaged water demand.
  • The company is in the final stages of setting up 5 plants which will be operational from 2021. And another 4 new plants are in tendering process.

Travel & Tourism

This segment contributes 17.1% of total revenue (including State Teertha trains). They operate 81 chartered trains (Maharaja express). They have tie-ups with hotel chains & aggregators like Oyo, Fab hotels, Ginger etc.

The company forayed into airline ticketing with IRCTC Air. It is targeting 15% growth in air ticketing portal. They are planning to launch Bus booking portal soon.

Segmental break up of IRCTC revenue

Financials

  • Revenue grew by 11.4% CAGR in the last 5Y.
  • PAT grew by 27.9% CAGR in the last 5Y.
  • Debt Free balance sheet. Holds Cash & Cash equivalents of 597 Cr.
  • Generates Free Cash Flow of ~200-250 Cr per year.
  • Consistent dividend paying with a pay out ratio of 52%.
  • Dividend Yield of 0.85%.
  • High Return ratios ROE 40% & ROCE 53.8%.
  • Introducing convenience fee had improved the margins significantly & are sustainable.

10 year financials of IRCTC*Click to enlarge

Risks:

  • Increasing capex in Tourism. Do they have plans to BUY hotels & run it?
  • Government decision to abolish / pause / reduce service charge on e-ticketing.
  • No update on resumption of all passenger trains yet.

Capitalmind View

  • It may take another 1 year to get back to its pre-covid revenues. Earnings are going to be sluggish for near future.
  • It is currently available at 55 times FY20 PAT. Once revenues are back to normal, we can expect a 2700 Cr revenue over the next 2-3 years.
  • Catering, Rail Neer will be the biggest growth drivers followed by Ticketing & tourism.
  • Stake sale overhang by promoter is out. The Government have no plans to further reduce their stake in IRCTC.

Overall a decent company to buy for a long-term perspective.


Deepak’s views

  • The dedicated freight corridor means more passenger trains on the regular lines, means more business
  • They are getting a greater share of ticket bookings partly from COVID and partly from much more tech moving to masses – now at 80% of tickets booked (versus on platform or such)
  • Unreserved compartment may go into reserved territory also, they are talking about it – means more business
  • More air conditioned cars coming, likely. Because faster trains need closed compartments. A/C has Rs 30 or so booking charge for IRCTCDeepak Shenoy of Capitalmind view on IRCTCReader BK on pricing power & margins

A basic question: are there any specific return ratios or something that are allowed to make, beyond which they will be pressured to reduce prices by the govt?

CM View: No cap as such on service charge, rail neer or catering etc. However given the pro aam admi, they keep them affordable to everyone. Hence all the margins are mostly a reason of operating efficiency & volume driven than price increase.

Also as mentioned in the write-up, once in a while there is a risk of Service charge wave off or pause for some period of time. We had seen that during Demonetisation, where Govt waved off service charge to push digital payments. That kind of risk is always there.

Reader RG on privatisation of IRCTC

What’s the long-term plan of Govt for these companies? More stake sale? Fully privatize?

CM View: From a medium-term perspective, Govt had offloaded 20% via OFS just 2 months back bringing its stake to 67.4%. So no more stake sale possible anytime soon. But from the long-term perspective, Modi just said, Government has no business to be in business – So not sure of it.

Reader AN has a strong point of why private players may not be interested in railways

The current cost structure offered by Railways to private players in privatisation doesn’t give any room to private players to make money. Railway and even Mr Goyal is not even agreeing to the most basic need of a regulator. So I think that IRCTC would be running few routes in privatisation, as almost the entire IRCTC people are railways employee on, they may be able to negotiate few other things post getting shortlisted.

Reader AG on which is the best company in Indian Railway universe?

How do irctc, irfc and railtel compare from long term holding point of view? Or do you think it will not be correct to make such a comparison?

CM View: It is surely comparable because, everything depends on the growth prospects of Indian Railways. If we consider factors like Strong balance sheet, Cash conversion cycle, Margins & other growth areas – IRCTC, IRFC & Railtel are potential names for long term investing in that order.

Our recent #StockOfTheWeek discussions include, Century Ply, Indus Towers, Suryoday SFB, Gujarat Gas etc & many more follow.


This article is for informational purposes and should not be considered a recommendation to buy or sell any stock. Stocks discussed might be part of Capitalmind Premium portfolios.

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