On The Right Track

Sound financials, healthy revenue prospects and good growth opportunity make this offer attractive

- Keerthi Sanagasetti

A monopoly player in the internet railway ticketing and catering businesses, the Indian Railway Catering and Tourism Corporation (IRCTC), with its sound financials, healthy revenue prospects and good growth opportunity in other segments, makes for a good long-term bet.

The Centre is offering 12.6 per cent of its current holding in IRCTC for sale in the IPO, opening September 30. This could fetch the Centre ₹635-645 crore. The IPO is entirely an offer for sale.

Currently, the company derives the majority of its revenues from the catering and hospitality business — 55 per cent of revenues in FY19. Travel and tourism, internet ticketing and packaged drinking water (branded as Rail Neer) constitute 23.3, 12.4 and 9.3 per cent respectively of revenues.

Given the healthy performance, good revenue visibility, and strong return ratios, the asking price for the IPO is reasonable. At the price band of ₹315-320 (₹10 discount to retail investors), the company is valued at 18 times its FY19 earnings. While the risk of regulatory intervention and possible threat from private players is a key overhang, its current monopoly position deserves a scarcity premium. Investors with a long-term horizon can subscribe to the issue.

Healthy financials

IRCTC’s total revenues grew by 10.5 per cent CAGR over FY17-19 to ₹1,957 crore. The growth is healthy, given that the company’s revenues have been taking a beating since November 2016, on account of the removal of service charge by the Centre, post-demonetization. In FY17, the company earned ₹362.25 crore as a service charge prior to the Centre’s withdrawal.