Subscribing to the initial public offering (IPO) of government-owned Indian Railway Catering and Tourism Corp (IRCTC) can be considered by the long-term investors.
IRCTC IPO Review 2019
Reportedly, IRCTC has high cash-flow, return on capital employed (over 20 percent) and dividend pay-out (45 percent in FY19). Being dominant in the market share of the railway e-ticketing (over 70 percent in FY19), and a long and dense railway network presence provide it an advantage over any company that plans to this sector.
IRCTC is said to be a ‘mini-ratna’ company that derives revenues from four broad business segments viz. catering (selling food on rail journeys), travel & tourism (tour and destination-specific packages), e-ticketing and packaged drinking water (known for its brand Rail Neer). While catering contributes 55 percent to the company’s total revenues which are followed by travel & tourism that provides 23.3 percent, e-ticketing that contributes 12.3 percent and packaged drinking water which contributes 9.2 percent.
Apart from these, the company also provides non-railway catering and services such as e-catering (partners with local restaurants and gets fixed percentage of revenues), executive lounges and budget hotels to its customers.
IRCTC IPO Opens. Should You Invest?
The IPO is an offer-for-sale with the government divesting a 12.6 percent stake in the company.
Having distinct advantages, IRCTC, actually, is big entry barriers for any player as the Indian Railways has authorised only IRCTC to provide the catering services to railways, online railway tickets and packaged drinking water at railway stations and on trains in India, making the company a dominant player in rail travel-related products.
According to the reports, about 70 percent of the train tickets that were booked online in FY19 were done through IRCTC only. Its website has a transaction volume of more than 25 million per month giving the scope of engagement with the company’s website. According to CRISILNSE 0.45 % data, online rail bookings are expected to grow at about 8 percent CAGR to reach 425-435 million in FY24, with e-booking penetration improving to 81-83 percent in the same period.
IRCTC is also catering around 45 percent of the 1.8 million litres per day of total average daily demand for packaged drinking water at railway stations and trains in India. According to some estimates, India’s packaged drinking water market is expected to grow 16-17 percent CAGR and to reach Rs 18,000-18,500 crore by FY24. Besides this, the rail catering industry is expected to grow 7.5-8.5 percent CAGR to Rs. 1,450-1,550 crore in FY24 from Rs. 1,100-1,200 crore in FY20. These statistics show that IRCTC is likely to maintain its pace of revenue growth in the coming fiscals also.
IRCTC might face a big challenge only if the government allows private players to sell similar product offerings.
The company, which offers diverse products right from railway tickets to catering and water services, is commanding a price-to-earnings multiple of 18.8 times at the higher end of the price band. This is being quite attractive considering the factors that work in favour of its business model and its strong return ratios.
