IRCTC IPO Analysis with Valuation Angle

Should I Invest or Not? | IRCTC SWOT Analysis

Introduction

In this article, we will discuss IRCTC IPO Analysis with Valuation Angle. The IRCTC IPO is an offer-for-sale and is a part of the government’s divestment programme for FY 2019-20 in which it is divesting 12.6% stake in the company.

IRCTC IPO Analysis with Valuation Angle

Company Profile – IRCTC

• Indian Railway Catering and Tourism Corporation (IRCTC) is a subsidiary of the Indian Railways IRCTC is a central public sector enterprise wholly-owned by the Government of India and under the administrative control of the Ministry of Railways.
• It is the only entity authorised by Indian Railways. It operates in 4 business segments :
  1. Internet ticketing
  2. Catering
  3. Packaging Drinking Water under the “Rail Neer” brand
  4. Travel and Tourism
• The website of the company, www.irctc.co.in, is among the most frequented website with about 25-28 million transactions per month. http://www.irctc.co.in is the most transacted websites in the Asia-Pacific region.
• It 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 customers.

Objectives of IPO

• The issue is an offer for sale and is a part of the government’s divestment programme for FY 2019-20.
• Thus, the main objective of the IPO offer is :
  1. To carry out the disinvestment of 2.016 Crore equity shares by the selling shareholder constituting 12.6% of company’s paid-up equity share capital
  2. To achieve the benefits of listing the equity shares on the stock exchanges.
• The company will not receive any proceeds from the offer and the proceeds from the IPO will go to the promoter of the company.

IPO Details

• IRCTC has launched its initial public offering (IPO) on September 30, 2019 with a plan to raise up to Rs.645 crore. The IPO has a price band of Rs.315-320 per equity share with 2.01 crore shares on sale.
• % Allocation of total number of shares reserved under 3 heads :
  1. Qualified Institutional Investors (FIIs and DIIs) : 50%
  2. Retail Investors : 35%
  3. Non Institutional (High Net Worth) Investors : 15%

IRCTC Key Financials

• Total revenue of IRCTC grew at a CAGR of 10.4% since last two financial years to Rs.1,956 crore. In the same period, EBITDA grew at a CAGR of 9.1% to Rs.372 crore.
• The Net profit in the past two fiscals has grown at a CAGR of 9% to Rs.272 crore. As of FY2019, the company had an operating profit margin and net profit margin of close to 20% and 14% respectively.
• The company has no debt. It is completely a debt-free company. As of FY2019, IRCTC had cash and cash equivalent of close to Rs 1,140 crore.

Revenue Mix FY2019

• Currently, Catering business is the highest contributor in terms of revenue at 55%. Whereas, Travel & Tourism and Internet Booking contribute around 23.29% and 12.35% respectively.
• However, there is a very high growth opportunities for Internet Booking and Travel &Tourism businesses in near future. The revenue growth of these 2 segments is going to add a great value to the overall profitability and business portfolio of IRCTC.

SWOT Analysis

Valuation Angle

• The company is valued at Rs.5,120 crore at the upper price band and the valuation is pegged at Rs.5,040 crore at lower band.
• The company 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. There is a clear 50% appreciation in market valuation of the company in coming years.
• So, it can be a great deal for a retail investor who can avail a discount of Rs.10 per share for such a big growth effect.

Should You Invest or Not?

• IRCTC has a unique business model and the company does not have any competition across business segments.
• Positive view on the issue based on various parameters such as strong earnings profile, diversified business segment, healthy return ratio, debt-free status, and most important monopoly business.
• Recent tax reduction by government to 25.2% and increase in revenue from service charge for online ticketing will improve profitability substantially going forward.
• There is also significant opportunity for the company to ramp up the catering business given a very large captive audience which is currently being underserved.
• Increasing business volumes from catering and packaged drinking water businesses, along with service charge for online ticket booking will drive earnings growth for the company between FY2019-21.
• IRCTC’s strong business model makes its IPO a good long-term investment.
• At the IPO price band, the stock is available at a price to earnings multiple of 10 times FY2021E EPS, which looks attractive from the perspective of future earnings growth.