IPO Analysis: Indian Railway Catering and Tourism Corporation

IPO Rating - 50 (Invest with limited exposure)*

About the Issue

The government owned Indian Railway Catering and Tourism Corporation (IRCTC), under the administrative control of the Ministry of Railways, is entering the capital market to raise around Rs. 645.12 crore at upper band and at lower band it will raise around Rs. 635.04 crore. The price band is fixed at Rs. 315-320. A discount of Rs. 10.0 per equity share would be offered to the retail and eligible employee bidders. The total number of shares for sale is 2.016 crore, which is entirely offer for sale by the Government of India and the entire proceed will go to the government. The company has reserved 160000 equity shares for allocation and allotment to eligible employees. The issue constitutes 12.6 per cent of company’s post-offer paid-up equity share capital.

About the company

IRCTC is a Central Public Sector Enterprise (CPSE), wholly owned by the Government of India and under the administrative control of the Ministry of Railways. IRCTC is the only entity authorized by Indian Railways to provide catering services to railways, online railway tickets and packaged drinking water at railway stations and trains in India. IRCTC was incorporated with the objective to upgrade, modernize and professionalize catering and hospitality services, managing hospitality services at railway stations, on trains and other locations and to promote international and domestic tourism in India through public-private participation. It was conferred the status of Miniratna (Category-I Public Sector Enterprise) by the Government of India, on May 1, 2008.

The company operates one of the most transacted websites, www.irctc.co.in, in the Asia-Pacific region with transaction volume averaging 25 million to 28 million transactions per month. In line with plans to provide a “one stop solution” to customers, the company has diversified into other businesses, including services such as e-catering, executive lounges, budget hotels and travel & tourism.

Catering is company’s biggest revenue generator. For FY19, it contributed almost 55 percent of the revenue followed by Travel and Tourism, which includes state teertha that contributed 23.38 per cent of total revenue. Internet Ticketing and Rail Neer contributed 12.35 per cent and 9.28 per cent of FY19 revenue, respectively.

Catering

IRCTC provides food catering services to Indian Railways passengers on trains and at stations. On-board catering services are referred to as mobile catering and catering services at stations are referred to as static catering. In total, the company provides catering services for approximately 350 pre-paid and post-paid trains and 530 static units. Besides this, they also have 57 Jan Ahaars and 169 refreshment rooms. These are served through 27 cell kitchens and 14 base kitchens, 138 food plazas and 152 fast food units.

Internet Ticketing

IRCTC is the only entity authorized by Indian Railways to offer railway tickets online. As of August 31, 2019, more than 1.40 million passengers travelled on Indian Railways on a daily basis, which consisted of approximately 72.60 per cent of Indian Railways' tickets booked online. As a result, more than 0.84 million tickets are booked through www.irctc.co.in and “Rail Connect” on a daily basis.

Travel and Tourism

The company has been mandated by Indian Railways to provide tourism and travel related services. As a result, now the company has footprints in across all major tourism segments such as hotel bookings, rail, land, cruise and air tour packages and air ticket bookings, and is known as one of India's leading travel and tourism companies catering to the needs of diverse tourist segments.

Packaged Drinking Water (Rail Neer)

IRCTC is the only entity authorized by the Ministry of Railways to manufacture and distribute packaged drinking water at all railway stations and on trains, according to CRISIL. The company manufactures and distributes packaged drinking water under the brand “Rail Neer and has an installed production capacity of approximately 1.09 million litres per day, which caters to approximately 45 per cent of the current demand of packaged drinking water at railway premises and in trains. To increase its presence in the packaged drinking water market at railway stations, and to meet the growing demand, company has taken expansion plans and will be commissioning new plants of Rail Neer.

 Financials

For the financial year ending March 2019, the company’s total turnover stood at Rs. 1956.6 crore compared to Rs. 1602.8 crore posted in FY17, registering an increase at a CAGR of 10.49 per cent.  Revenue of the company was impacted in FY17 due to removal of service charge at the rates of Rs. 20 for Non-AC and Rs. 40 for AC ticket booked online. However, from September 1, 2019 it has been proposed to implement service charge at the rates of Rs. 15 for Non-AC and Rs. 30 for AC ticket booked online. This is likely to give boost to the company’s revenue.

Segmental Revenue of Company

The EBITDA of the company in the same period increased at a CAGR of 9 per cent and increased from Rs. 312 crore in FY17 to Rs. 372 crore in FY19. However, it is also likely to see a boost in EBITDA with an increase in the implementation of service charges. This is because internet ticketing had the best EBITDA margins of around 66 per cent at the end of FY19.

The net profit of the company has increased from Rs. 229 crore at the end of FY17 to Rs. 272.6 crore in FY19.

Valuation and recommendation

At upper price band, the issue is asking for market cap to sales (FY19) of 2.7 times, which looks reasonable. The price to earnings (FY19) of the company comes at 18.5 times, which seems that it is fairly valued, especially at 9 per cent annual growth rate in profit after tax in last three years. What is good for the company is high entry barrier where the company is operating. IRCTC has the monopoly in the industry. Moreover, the company is generating cash of around Rs. 655 crore every year, which is likely to increase with the imposition of service charge from September 1st. The company also earns higher returns on its capital which stood at 26.14 per cent for FY19. What is also good for the shareholders is that the company has been consistently paying dividends to its shareholders. Their dividend payout is 45 per cent. This means a dividend yield of around 3.8 per cent at current offered price. Therefore, considering the company’s strong cash generation, higher entry barrier to business with reasonable valuation, we suggest our readers to subscribe the issue with long term investment horizon.

*40 or lower – Avoid Investment, 41 to 45 – Risky, 46 to 50 – Invest with limited exposure, 51 to 55 – Investment recommended, 56 & above – Excellent Investment