IRCTC IPO - Should you subscribe?

Incorporated in September 1999, "Indian Railway Catering and Tourism Corporation Limited" -  a wholly owned Government company under the administration of Ministry of Railways has come up with its IPO. This is the fourth company under the MoR going public. RITES Ltd was the first who went public in June 2018 followed by  Rail Vikas Nigam Limited in September 2018 and Ircon International in April 2019. Out of these three, except Ircon, RITES Ltd and Rail Vikas Nigam Limited are trading at premium to its issue price as on September 27, 2019. Ircon has disappointed its investors.

This company 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. 

The company 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. The company was conferred the status of Mini – ratna (Category-I Public Sector Enterprise) by the Government of India, on May 1, 2008.

Issue Details : 

The issue is opening on September 30, 2019 and closing on October 3, 2019. The tentative dates of allotment and listing are October 10, 2019 and October 14, 2019 respectively. The allotment status can be seen on this website https://www.alankit.com/. 

The issue price is Rs. 315 - Rs. 320 per share and minimum lot is for 40 shares. The retail shareholders are offered Rs. 10 discount per share. 

The existing shareholder being The President of India acting through the Ministry of Railway is the selling shareholder who is offloading 2,01,60,000 shares. Out of that, 1,60,000 shares are reserved for employees and from balance 2,00,00,000 shares, 35% (70,00,000 shares) are reserved for Retail Investors. 

Overview : 

IRCTC operates one of the most transacted websites, www.irctc.co.in, in the Asia-Pacific region with transaction volume averaging 25 to 28 million transactions per month during the five months ended August 31, 2019. The company has also diversified into other businesses, including non-railway catering and services such as e-catering, executive lounges and budget hotels, which are in line with its objective to build a “one stop solution” for its customers. 

Currently, the company operates in four business segments, namely, internet ticketing, catering, packaged drinking water under the “Rail Neer” brand, and travel and tourism.

Object of the issue:

The objects of the offer are : (i) to carry out the disinvestments of 2,01,60,000 Equity shares by the selling shareholders constituting 12.60% of the company's paid up Equity share capital of the company; and (ii) to achieve the benefit of listing the equity shares on the Stock Exchanges. The company shall not receive any proceeds from the offer and all proceed shall go to the selling shareholder.

Pricing of the share:

The company has set the price range between Rs.315 - Rs.320 per share. The EPS (Basic & Diluted) as on March 31, 2019 was Rs. 17.04. At lower and upper price band, the PE ranged from 18.49 - 18.78. And for Retail investors considering Rs. 10 discount from upper price, PE comes to 18.19. The share is fairly priced. At lower and upper price band, PB Ratio ranges from 4.83 - 4.91 (For Retail Investors - 4.76). From this angel also, the price asked for seems very reasonable. 

Industry Peers :

As on this date, there are not listed companies in India which are engaged in the same line of business as this company and comparable to its scale of operations, here comparation with industry peers are not possible.

Competitive Strengths:

1. Authorized by Ministry of Railways to offer Indian Railway tickets online : Between Fiscal 2014 and Fiscal 2019, online rail bookings have registered an approximately 12.5% CAGR to reach approximately 284 million annually, with e-booking penetration rising to approximately 70% in Fiscal 2019. Online rail bookings are expected to grow at approximately 8% CAGR to reach approximately 425-435 million in fiscal 2024, with e-booking penetration rising approximately 81 – 83% during the same period, according to CRISIL.

2. Authorized catering service provider to passengers traveling by Indian Railways

3. Comprehensive tourism and hospitality service provider in India

4. Exclusively authorized for manufacturing and supplying packaged drinking water at railway station and trains

5. Robust operating system and internal controls

6. Qualified and experienced employees and management team

Debt Equity Ratio:

The company is cash rich. Zero debt company. The company has an established track record of delivering strong annual returns to shareholders and its return on equity has exceeded 23% for each fiscal year since Fiscal 2017. The company has been a profitable and debt free company since incorporation.

Competition :

As the company is the only entity authorized by the Ministry of Railways to offer catering services on board the train and at majority of the railway stations as well as to offer Indian Railways' ticket online, its business operation faces little to no competition in these segments.

For tourism and hospitality segments, the number, size and strength of the company's competitors varies by type of services and products concerned such as rail tour packages and air tour packages. The company is a leading player in rail tour packages. In air tour packages, it competes with Makemytrip, Cox & Kings (India) Limited, Thomas Cook (India) Limited etc.

For packaged drinking water, although the company is now the only entity authorized to distribute packaged drinking water at stations and on trains, given the fact that it is only covers approximately 45% of the total market demand, passengers are likely to purchase from its competitors in the packaged drinking water market.

Dividend:

The company has been paying dividend liberally. For Fiscal 2019, the company has declared Rs. 7.65 dividend per equity share. The amounts distributed as dividends in the past are not necessarily indicative of its dividend amounts, if any, or its dividend policy, in the future. There is no guarantee that any dividends will be declared or paid or that the amount thereof will not decrease in the future. Future dividends will depend on guidelines issued by the Government of India, its profits, revenues, capital requirements, contractual restrictions and overall financial position of the Company.

Conclusion:
  
APPLY. IRCTC is into the monopolistic business. It has a huge potential for growth ahead. Today, IRCTC has become a household name as far as train journeys are planned. The business model is sound with huge profitability scope. 

However, one thing is always to be kept in mind that Government sees such companies as Nation Building instruments and not like its shareholder. The Government thinks public interest at large. So whatever monopolistic business the company may be into, the Government's one policy decision may lead to low profitability or no profitability at all. So, not to love such stock for long.

Thank you for reading...Jai Hind


(Disclaimer : I write reviews based on my knowledge and understanding. The reader of this article should do his/her own research before taking any investment decision)