IRCTC stock is still richly valued despite fall since news of OFS

While business prospects remain unchanged, one-year average target price of analysts is Rs 600

The news that the Centre is intending to sell 40 million shares--about 5 per cent stake--of Indian Railway Catering and Tourism Corporation (IRCTC) in an offer for sale (OFS) for a consideration of Rs 680 a share and a total value of Rs 2,720 crore has had a bearish effect on the stock. The share price was trending at around Rs 735 before the OFS was announced and dropped by over six per cent to Rs 689.20 on Thursday, and by another 2.5 per cent to Rs 672.15 on Friday.

There are two details that have led to this downgrade in investor perceptions. One is simply that the market price was higher than the OFS, so an adjustment down was to be expected. The other point is that liquidity for the stock will rise substantially to around 38 per cent after the OFS goes through. Historically, investors believe that greater liquidity in PSUs usually leads to a drop in share prices.

The business prospects of the company however, remain unchanged by a stake sale. Given that its revenues are tied very closely to the volume of business done by the Indian Railways, it should benefit from the “unlock” from the pandemic, and the generic increase in economic activity as the economy recovers. IRCTC revenues come from fees on ticket bookings, including both convenience fees and other non-convenience fees, and from catering and beverages supplies and tourism.

The FY 2022-23 and the next two fiscals should see strong expansion in the non-ticketing revenues as catering rates have been hiked and passenger traffic should grow given GDP growth. Analysts expect 8 per cent CAGR in revenues over the FY23-FY25 period and this should translate into 9 per cent CAGR in EPS (earnings per share). The overall EBITDA margin is expected to be around 37-38 per cent through the next two fiscals. However, despite the growth prospects, and the monopoly, the valuations are pretty high at around 55x for 2023-24 estimated EPS.  

Base effects make the valuation calculations difficult. In Q2, 2022-23, revenues increased 99 per cent year-on-year (YoY) to Rs 806 crore due to the low base effect, but revenues also declined 5.5 per cent on sequential basis compared to Q1, 2022-23. Segment revenues from Internet Ticketing, Catering & Rail Neer and Tourism increased 13.2 per cent YoY (Ticketing), 368.4 per cent (Catering), 75 per cent (Neer) YoY, 156.7 per cent YoY  (tourism). The Tourism segment reported an EBIT loss while Ticketing, Catering and Rail Neer reported EBIT margins of 84 per cent, 10.6 per cent and 7.5 per cent respectively.

The contribution of service charges, agent fees, I-pay, ad revenue to non-convenience income was 6 per cent, 12.5 per cent, 5.3 per cent and 6 per cent respectively. The Tourism EBITDA margins are expected to reach 7-8 per cent. Bus ticketing revenue was Rs 10 crore in the first half of FY23, while air ticketing revenue was Rs 5 crore in Q2. The capex will be Rs 250 crore for new offices and Rs 100 crore for IT upgrades.

Management guidance included the following points after Q2. Train side vendor tenders are in the pipeline for 200 trains. The Rail Neer capacity of 1.55 million bottles per day (mbpd) will be expanded to 1.75 mbpd by the end of 2022-23. The capacity utilisation of Rail Neer was about 75 per cent in Q2.

Setting a valuation to IRCTC on the basis of discounted cash flows at an expected 1-year forward PE of 48x, one analyst comes to a target of Rs 679. That’s pretty much the OFS price, so there’s little upside to be seen. According to a Bloomberg poll of analysts since mid-November, four of the six have a sell rating, one is buy and one is hold. Their one-year average target price is Rs 600.