IRCTC IPO opens Monday. Here's why analysts suggest subscribing to it

Indian Railway Catering and Tourism Corporation (IRCTC), the online ticketing, tourism and the catering arm of railways, is scheduled to launch its initial public offering (IPO) on Monday (September 30). The IPO is part of the government's ambitious disinvestment programme that targets raising Rs 1.05 trillion via this route in financial year 2019-20 (FY20).

Here's a look at the key details of the company, issue and whether you should subscribe to the offer or not.

About the Company

IRCTC is a Central Public Sector Enterprise (CPSE), wholly-owned by the Government of India (GoI) and under the administrative control of the Ministry of Railways (MoR). It operates one of the most transacted websites, www.irctc.co.in, in the Asia-Pacific region with transaction volume averaging 25 million to 28 million transactions per month. 

The company operates primarily in four businesses, viz, Internet ticketing (12 per cent of revenue), Catering (55 per cent of revenue), Packaged drinking water (10 per cent of revenue), and Travel and Tourism (23 per cent of revenue).

IRCTC was conferred the status of Miniratna (Category-I Public Sector Enterprise) by the Government of India, on May 1, 2008.

Financials

As per reports, the company posted revenue of Rs 1,535.38 crore, 1,470.46 crore and Rs 1,867.88 crore, for FY17, 18 and 19, respectively. Operating profit during this period stood at Rs 312.54 crore, Rs 273.1 crore, and 372.17 crore respectively, while operating profit margin came in at 20 per cent, 19 per cent and 20 per cent. Net profit during FY17 stood at Rs 229.08 crores, while in FY18 and FY19, the numbers stood at Rs 220.61 crore and Rs 272.59 crore, respectively.

About the offer

The IPO is entirely an offer for sale (OFS) where 2.01 crore equity shares, representing 12.60 per cent of the company’s paid up equity share capital, will be put on the block. The price band has been fixed between Rs 315-320 apiece. At the higher end of the price band, the company aims to raise 645.12 crore. Minimum lot size is 40 shares. 

QIB (qualified institutional buyers) have been allotted 50 per cent of the offer while non institutional buyers' (NIB) portion stands at not less than 15 per cent. Retail investors' allocation stands at not less than 35 per cent.

Key concerns

For IRCTC, business and revenues are substantially dependent on Indian Railways, which is one of the key concerns citied by brokerages. That apart, withdrawal of exclusivity of the Company for catering, online railway ticket and packaged drinking water at railway stations and trains in India by the Ministry of Railways is also a threat. Removal or reduction of Service Charge by Ministry of Railways or instructing IRCTC to share part of revenue with them, is another worry for the company, according to analysts at Angel Broking.

Should you subscribe to it? Here's what leading brokerages recommend:

ICICI Securities 

Inclusion of convenience fee on railway tickets, setting up of 10 water plants in next 2 years and recent tax reduction of corporate tax bodes well for EPS (earnings per share) growth. Coupled with healthy dividend payout (45 per cent in FY19) and RoE (26.1 per cent), we recommend SUBSCRIBE to the issue at the offer price. Further, at the IPO price band of Rs 315-320, the stock is available at a price to earnings multiple of nearly 10x (FY21E EPS), which we believe looks attractive from the perspective of future earnings growth.

IndiaNivesh Securities

IRCTC enjoys monopoly business in online rail ticket booking and food catering on running trains. We expect food catering and travel tourism segments to grow in mid-teens going ahead, while operating margins of packaged water division to should improve as more plants are commissioned. Strong fundamentals and debt-free balance sheet along with decent return ratios - ROE (return on equity) being 26 per cent, operating margins of 20 per cent and profit after tax (PAT) margin at 15 per cent augur well. We expect revenue and profit after tax (PAT) growth of over 20 per cent for next couple of years – compounded annually. IPO looks conservatively priced at a P/E of around 19x, based on FY19 earnings. Recommend subscribe.

Anand Rathi Research

IRCTC has unique business model and the company does not have any competition across any business segment. Based on various parameters like strong earnings profile, diversified business segment, healthy return ratio, debt-free status and most importantly monopoly business, we have a positive view on the issue. The shares are being offered in a price band of Rs 315-320 per equity share. At the upper price band of Rs 320, the stock is available at P/E multiple of 18.8x to its FY19 EPS of Rs 17. We have a positive outlook on the company and recommend investors Subscribe to this issue.

Angel Broking

At the upper end of the price band, IRCTC demands PE multiple of 18.8x of FY19 EPS. Recent tax reduction by Government to 25.2 per cent 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 FY19-21. We would therefore recommend to Subscribe to the issue.

Stewart & Mackertich Wealth Management

We believe the stock is valued reasonably and thus recommend to SUBSCRIBE.