IRCTC (BAAP Stock) – Monopoly business with regulatory risks and super bubble valuation

Updated: Dec 2, 2021


Company Name – Indian Railway Catering and Tourism Corporation Ltd. (IRCTC)


Current Share Price – INR 855 (Nov 1, 2021)


Market Cap – INR 68,436 cr



1. What is interesting about the stock?

Indian Railways Catering and Tourism Corporation (IRCTC), set up in 1999, is 67.4% owned by the Government of India (GoI) and is under the administrative control of the Ministry of Railways. IRCTC was 100% owned by the GoI until its IPO in October 2019, when the government sold 12.6% stake. It was subsequently followed by an OFS in December 2020, in which the government sold another 20% stake.


IRCTC is the only entity authorized (or a monopoly) by the Indian Railways (IR) to provide catering services to railways, online railway ticketing services and packaged drinking water at railway stations and inside trains. IRCTC operates in four business segments - internet ticketing, catering, packaged drinking water under the Rail Neer brand, and travel & tourism.


Business has been severely impacted by COVID19 in FY21 and FY22. FY20 was a relatively stable year so it would be a good year to understand the business. The segmental revenue and EBIT split in FY20 of the Company is:






As can be seen from the segmental EBIT, ticketing has been the key profit earner for the company.


IRCTC is the only entity authorized to provide rail e-booking facility, with other online ticketing aggregators routing their rail e-booking transactions through IRCTC’s booking engine. In FY20, ~73% of rail tickets were booked through IRCTC (the remaining through offline ticket booking counters). Almost 0.84 million tickets are booked through www.irctc.co.in and mobile app ‘Rail Connect’, on a daily basis.


The number of railway tickets booked grew at 4.4% p.a. over FY15-20. Online tickets, as a % of the total, rose to 73% from 55% during this period, CAGR of 10.5% and driven by: 1) rising smartphone and Internet penetration; and 2) proliferation of online ticket aggregators. Ticketing revenue largely depends on the service charge imposed on each booking. Service charge is regulated by Ministry of Railways and IRCTC has been allowed to fix the charges post September 1, 2019. However, Ministry has flip flopped over the policy on service charges – there was a period between November 2016 to September 2019 when the service charges were zero severely impacting IRCTC business and profitability. Recently, Ministry did another flip flop with suggesting 50% revenue share in the service charge on October 28, 2021 which was reversed on the next day after backlash from the minority shareholders.


Key positive triggers for IRCTC revenue and profits over next years could be:


  • Conversion of unreserved coaches to 2S (reserved coaches)

  • Private Trains – IRCTC leasing trains from Indian Railways leading to better monetization and improved operations of the trains

  • High monetization of the user traffic on IRCTC website – increase in ad revenue or better conversion in tourism revenue


Key risks to the business are:

  • Opening up of the booking engine for private players to compete – can lead to lower service charge and better user experience

  • New flip flop on service charge by the government (in the larger interest of the commuter/country)

  • PSU management culture – lack of ownership


On an overall basis, IRCTC is a monopolistic business with significant regulatory challenges.


2. Key Historical Financials



3. What is my view on company valuation?


Company currently trades at EV/EBITDA (TTM) ratio of c. 100x and P/E (TTM) ratio of c. 160x. FOMO by retail investors is driving the valuation..


IRCTC has lack of a comparable. So, I would have to use lot of judgement to arrive at the valuation. Company has high ROE and negative working capital which may imply high PEG ratio - say 3-4x (upper limit of my comfort level - very few business have PEG ratio above 4x). At PEG ratio of 3.5x and growth rate of 15%, the PE ratio comes to c. 50x. We should apply:


  • Margin of safety discount – 20%

  • Regulatory risk discount – 25%


The adjusted P/E multiple come to c. 30x. COVID has had one-time impact on the financials so it would be incorrect to use FY21 or TTM financials for valuation. We need to normalize earning (as there is low probability of COVID coming back after the last delta variant) – annualizing the Q3 FY20 (which was last normal period before COVID; post increase in service charges). Normalized profit comes to around INR 800 cr. Using PE ratio of 30x, the equity valuation comes to c. INR 24,000 cr or share price of c. INR 300. Fair investing price is 35% of the current share price!


4. What are the risks to the investment analysis?


With 65% differential on the stock, it will be difficult to justify anything close to the current market price. But, no harm in flying kites. Risks to the analysis (or increase in fair investing price) are:


  1. Government increases service charge (low probability)

  2. Privatization of IRCTC – sale to a global booking giant

  3. IRCTC makes killer profit in running private trains

  4. Company launches Super App (any valuation can be justified in tech domain – at least in the recent times..)



About the Author


I have over 15 years of experience in venture capital, private equity and investment banking in India and Middle East across a wide variety of sectors. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in Middle East, to look after investments, M&A and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB) and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.


I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).


I am an Insignificant Investor in the public market and co-founder of SocInvest.


Disclosure


I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.


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