IRCTC’s business model makes its IPO a long-term investment

ET Intelligence Group: Longterm investors can consider subscribing to the initial public offering (IPO) of government-owned Indian Railway Catering and Tourism Corp (IRCTC).IRCTC has high cashflow, return on capital employed (over 20 per cent) and dividend payout (45 per cent in FY19). Its dominant market share in railway e-ticketing (over 70 per cent in FY19), and a long and dense railway network presence provide it an edge over any company that plans to this sector.BUSINESSIRCTC is a ‘mini-ratna’ company that derives revenues from four broad business segments — catering (selling food on rail journeys), travel & tourism (tour and destinationspecific packages), eticketing and packaged drinking water (known for its brand Rail Neer). Catering contributes 55 per cent to the company’s total revenues, followed by travel & tourism that provides 23.3 per cent, e-ticketing that contributes 12.3 per cent and packaged drinking water, which contributes 9.2 per cent.The company also provides nonrailway 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.The IPO is an offer-for-sale with the government divesting 12.6 per cent stake in the company.IRCTC has distinct advantages, which, actually, are big entry barriers for any player. The Indian Railways has authorised only IRCTC to provide catering services to railways, online railway tickets and packaged drinking water at railway stations and on trains in India. This makes the company a dominant player in rail travel-related products.About 70 per cent of the train tickets booked online in FY19 were done through IRCTC. Its website has transaction volume of more than 25 million per month. This gives the scope of engagement with the company’s website. According to CRISIL data, online rail bookings are expected to grow at about 8 per cent CAGR to reach 425-435 million in FY24, with e-booking penetration improving to 81-83 per cent in the same period.IRCTC is also catering close to 45 per cent 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 per cent CAGR and to reach Rs 18,000-18,500 crore by FY24. Besides, the rail catering industry is expected to grow 7.5-8.5 per cent 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.71335602 FINANCIALSIn the past two financial years, the company’s total revenues grew at a CAGR of 10.4 per cent to Rs 1,956 crore. In the same period, earnings before interest, tax, depreciation and amortisation (EBITDA)—or operating profit-—grew at a CAGR of 9.1 per cent to Rs 372 crore. Its profit in the past two fiscals has grown at a CAGR of 9 per cent to Rs 272 crore. As of FY19, the company had an operating profit margin and net profit margin of close to 20 per cent and 14 per cent respectively. The company has no debt. As of FY19, the company had cash and cash equivalent of close to Rs 1,140 crore.RISKSIRCTC may face a big challenge if the government allows private players to sell similar product offerings.VALUATIONThe 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 quite attractive considering the factors that work in favour of its business model and its strong return ratios.

from Economic Times https://ift.tt/2nNXSkk