IRCTC entered the listed space by launching its IPO in October 2019. Its IPO was oversubscribed 112 times – the highest for an IPO of a state-owned company! Its stock price grew 5x since its IPO in a short span of 5 months (till before the corona virus crisis).
The company has shown promising growth over the last 5 years. Its revenues grew at 15% CAGR over FY14-FY19, and earnings grew at a CAGR of 28% over the same period. In FY19 it had an ROE of 27%. The company is debt-free and has a cash reserves of Rs.1100 Cr.
So why were investors so excited about the company? Let’s have a quick look at it.
Company Overview and Performance:
Indian Railway Catering and Tourism Corporation (IRCTC) is a public sector company controlling the booking of tickets and catering of food in the Indian railways. It has mainly 4 sources of revenue:
a.) Internet Ticketing
b.) Catering
c.) Travel & Tourism
d.) Packaged Drinking water
To understand how it showed such exceptional growth (that too being a government-owned entity) we need to look at its businesses segment-wise.
1. Internet ticketing
IRCTC is the only entity authorised by Indian Railways to offer online railway tickets. The company charges convenience fees in the range of Rs.15-30 per ticket. In FY19, this segment formed only 12% of the total revenue, but contributed to 42% of the total profit. This shows just how profitable can this segment be. This segment has grown to 31% of total revenue in Q3FY20.
Railway passenger volumes are rising, and around 70% of reserved seats are booked via IRCTC. On average, IRCTC sees ~9lakh ticket bookings every day via its website.
2. Catering
IRCTC is the only entity authorised to manage catering services on trains and major static units at railway stations. Its revenue share grew from 25% in FY17 to 55% in FY19 contributing only 32% of operating profit. As of Q3FY19, its revenue share was at 39%. This segment has low operating margins, and e-catering services ordering volume more than doubled in FY19 in 1 year from 5.4lacs to 13.04lacs.
3. Travel and tourism
It has been made mandatory by Indian Railways for IRCTC to provide tourism & travel-related services. It has footprints across all major tourism segments such as hotel bookings, rail, land, cruise and air tour packages & air ticket bookings. It formed 23% of revenue mix in Q3FY20. This segment grew at a CAGR of 6% between FY14-FY19.
4. Packaged Drinking Water
The company also enjoys a monopoly in packaged drinking water. It is the only entity authorised by the Ministry of Railways to manufacture and distribute packaged drinking water at all railway stations and trains under the "Rail Neer" brand. It forms only 8% of the total revenue, but has operating margins of 25%.
IRCTC operates 10 Rail Neer plants with an installed capacity of 1.1mn litres/day. It is in the process of commissioning 6 more plants and has received approval for 4 more plants. Post FY21, IRCTC would be able to cater to 80% of total packaged water drinking demand compared to just 45% currently. Demand for packaged water is expected to grow at 20% CAGR over the next 5 years.
Risks:
1. Government interference is the biggest hurdle the company is facing across all segments. Post demonetization, the government waived off e-ticket booking charges which resulted in revenue loss of Rs.220 crores in FY17. IRCTC was reimbursed later, but only partially. E-ticketing being the most important segment in terms of margins, such decisions in the future will seriously hurt its business.
2. IRCTC enjoys exclusivity across all segments (except travel & tourism). This allows it to post such strong numbers year on year. But if Ministry of Railways goes in the favour of privatization in the future, the company will suffer as private players will jump in with huge investments as these segments have great potential.
3. Currently, payment failure rate on IRCTC website is 29% which needs to come down to 5-10%. Travel and tourism segment may suffer as other players are offering smoother experience but at higher prices.
Final thoughts:
IRCTC has a huge advantage on its side which giant corporations have tried to buy by investing billions and failed – MONOPOLY. If it streamlines its services and continues improving its efficiency, it can grow manifold. The company is trading at a trailing twelve months price to earnings ratio of 40, which is in line with some of India’s best FMCG companies. Its growth and future potential can match that of the top FMCG’s, but can its P/E do the same in the future? Depends largely on one decision-maker – The Government of India.
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