The Indian Railway Catering and Tourism Corporation (IRCTC), the ticketing, catering and tourism arm of the Indian Railways has opened for subscription for its initial public offering. This is the fourth entity of the Indian Railways to be hitting the stock markets after RITES, Rail Vikas Nigam and IRCON International.
As part of the IPO, the government is selling 2 crore shares, which amounts to 12.6% of its stake in the company. The shares will be sold at Rs 315-320 each as the government looks to raise nearly Rs 638 crore.
The IPO opens on Monday and will close on October 3. This means that interested investors can subscribe to the soon-to-be launched IPO during these days. Subscription also helps gauge the demand for the IPO before it is listed on the stock markets.
Here’s what you need to know about IRCTC’s IPO before investing:
Business
IRCTC has a near monopoly when it comes to selling railway tickets online. It is also the only company that is authorised to provide catering services, packaged drinking water for trains in India at railway stations, and also provide online ticketing service for railway tickets.
Online ticket sales, catering, sale of packaged drinking water and tourism are its four business segments, with catering contributing the most (52.9%) to its business. This is followed by tourism, which brings in 23.5% of the business, online ticket sales which contribute 12.4% to its revenue. Sales of Rail Neer, its packaged drinking water brand brings in 11.1% of the revenue.
Financials
In fiscal year 2019-20, the company posted a net profit of Rs 272 crore, which is a growth of 9% over the past two fiscals. Its revenues grew from Rs 1,470 crore in FY18 to Rs 1,867 in FY19. And the company operates at a profit margin of nearly 14%.
As per reports, the revenue from its catering services has more than doubled from Rs 400 crore to over Rs 1000 crore in two years.
The company also re-introduced service charge on tickets since September 2019. This is a Rs 15 charge for lower class and Rs 30 for AC class per ticket.
According to Arun Kejriwal, founder of Kejriwal Research and Investment Services, this will bring in an additional income of nearly Rs 600 crore for the company. This is because the company sells approximately 2.5 crore tickets per month or 30 crore tickets annually, and at an average of Rs 20 service charge per ticket, the amount comes up to Rs 600 crore annually.
As per reports, the company has strong fundamentals and debt-free balance sheet.
Risks
While IRCTC holds a near monopoly when it comes to online railway ticketing and railway catering, its biggest risk is a policy change. If the government allows private players to offer the services IRCTC has been offering for years, it could have a hugely negative impact on the company.
If there is a decline in use of railways as a means of transport and a major shift to air travel, this could pose another challenge. The total railway passenger traffic has remained nearly flat over the past four years, going from 8,397 million passengers in FY14 to 8,286 million passengers in FY18.
What analysts say
According to Arun Kejriwal, the issue is interesting and more than adequately priced. “Even discounting the fact that PSU stocks lose steam after listing, this company offers attractive prospects going forward,” he said in an IANS report.
ICICI Securities, based on the company’s plans to set up new water plants in the next two years, a healthy dividend pay-out of 45% in FY19 and a reasonable valuation among other positive factors, recommends subscribing to the IPO.
According to Anand Rathi, a brokerage firm, IRCTC has a unique business model and the company does not have competition across any business segment. It also holds a positive view on the IPO, recommending investors to subscribe to it.
With IRCTC having a huge opportunity to expand its catering business, and the re-introduction of service charge, Angel Broking sees great scope for earnings growth for the company. In addition, given the recent corporate tax rate cut, it is confident of the company improving its profitability and also recommends subscribing to the IPO.