IPO Snapshot:

Indian Railway Catering and Tourism Corporation (IRCTC) is entering the primary market on Monday 30^th September 2019, with an offer for sale (OFS) of up to 2.02 crore equity shares of Rs. 10 each, by the Government of India, in the price band of Rs. 315 to Rs. 320 per share, with retail and employee discount of Rs. 10 per share. Issue, aggregating Rs. 638 crore and representing 12.5% of the post issue paid-up share capital, closes on Thursday 3^rd October, with listing likely on 14^th October.

Company Background:

IRCTC, a Category 1 Mini-ratna and a wholly owned subsidiary of the Indian Railways, is the sole authorized entity to provide catering, online railway tickets and packaged drinking water for Indian Railways. Its business is divided into 4 segments:

1. Catering (56% of FY19 revenue, 32% of operating profit): Under Ministry of Railways’ Catering Policy 2017, company exclusively undertakes catering on trains (mobile catering), all stations (static units), except for some refreshment rooms of Category B or below, on railway stations and e-catering (food ordering through mobile app). This is the largest contributor to revenue, having grown at 62% CAGR between FY17-19.
2. Travel and tourism (24% of revenue, 18% of profit): Offers railway and non-railway tour packages including hotel and car bookings, air ticketing services to Central and State Government and other ancillary services through wwww.irctctourism.com.   
3. Internet ticketing (13% of revenue, 42% of profit): On 22Nov2016, as a demonetisation sop, e-ticket charges booked on its website/mobile app were waived (Rs.20/40 for non AC/AC tickets booked online) which is estimated to have cost the company about Rs. 400-500 crore in annual revenues in FY18 and FY19 each. With effect from 1 Sep 2019, these charges have been partially restored (Rs.15/30 for non AC/AC tickets booked online), which should boost revenue from H2FY20 from this sub-stream as well as profitability, as this is the most profitable segment (in % terms) with an average of a million tickets transacted daily.
4. Packaged drinking water (9% of revenue, 8% of profit): Sole entity to supply packaged drinking water on Indian Railways under the Rail Neer brand. 10 manufacturing plants across India, meet 45% of the total demand of 1.8 million litres water per day, while 6 plants are under commissioning and 4 new to be set up to meet unmet and rising demand respectively.

Future growth for the company include captive payment gateway and e-wallet, private train operations etc.

Objects of Issue and Shareholding:

The 100% OFS will not lead to any funds flowing into the company. The company does not need any funds either, as it is sitting on surplus of Rs. 1,140 crore. Govt. of India’s shareholding will contract to 87.5% post listing, from near 100% now.

Financials:

Between FY17-19, company’s revenue and PAT increased at a 10% CAGR to Rs. 1,868 crore and Rs. 273 crore respectively, which lead to an EPS of Rs. 17, on equity of Rs. 160 crore. While largest pie of the catering vertical has posted superlative growth, it has made up for the decline in travel and tourism and internet ticketing. Internet ticketing, which saw a 56% YoY drop in segmental revenue to Rs. 207 crore and 62% fall in segmental profit to Rs. 104 crore in FY18, due to waiver of charges, is likely to be a rapid contributor to both revenue and profits from September 2019 onwards. Packaged drinking water segment although small, may rise at a faster pace from here on, where new plants get commissioned to meet the existing unmet demand of ~55%, given company’s monopolistic advantage. Over the past 3 years, EBITDA margins have remained in the 23-24% range while net margins have also stabilized at ~15%.  

Company has a debt-free balance sheet, with net worth of Rs. 1,042 crore (BVPS Rs. 64) and a higher cash component of Rs. 1,140 crore (cash per share Rs. 71). Return on Equity (RoE) is healthy at 26%. 

Valuation:

At Rs. 320 per share, company’s market cap will be Rs. 5,120 crore with enterprise value (EV) of less than Rs. 4,000 crore, which discounts historic FY19 earnings by a PE multiple of 18.8x.

Ongoing organic growth in catering segment, expected surge in internet ticketing revenue, due to re-storing of charges and commissioning of packaged drinking water plants provides healthy revenue growth visibility. Internet ticketing being the most profitable segment (in % terms) can boost profitability smartly. Company will also be a beneficiary of the cut in corporate tax rates to 25%, leading to FY20E EPS of Rs. 28, a jump of nearly 65% YoY. This discounts the IPO price by a PE multiple of only 11.5x of current year expected earnings, which is very attractive. Rs. 10 retail discount is an added sweetener, translating into PE multiple of 11x, net of discount.

Since company is a cash rich PSU, it will be required to pay higher of 30% of PAT or 5% of net worth as dividend, leading to expected dividend yield of about 3%, which is just about modest. However, dividend theme can not be played upon in isolation.

In view of a steep divestment target of Rs. 1.05 lakh crore for FY20, of which, less than 12% has been mopped up so far, Government has adopted healthy pricing to kick start divestment under the second regime, on a positive note.

Conclusion:

While company’s monopoly position can be a double edged sword (social considerations making way for profitable business choices, as was seen in the past to waive internet ticketing charges), attractive issue pricing supported by healthy growth outlook make the issue a subscribe. 

Grey Market Premium (GMP) of IRCTC: Grey Market Premium of IRCTC is an unofficial figure, against guidelines of SEBI. We strongly recommend investors against following the grey market premium. To know more about grey market premium and how it operates, read our article on ‘grey market premium’ in Pathshala column.

Disclosure: No Interest.