IRCTC IPO: Information analysis

A central public sector enterprise, Indian Railway Catering and Tourism Corporation (IRCTC) is wholly-owned by the Government of India and under the administrative control of the Ministry of Railways. The IPO of IRCTC is part of the government's ambitious disinvestment programme aimed at raising Rs 1.05 lakh crore in the current financial year.

The company operates four business segments, namely internet ticketing (12 per cent of FY19 revenues), catering (55 per cent), packaged drinking water (9 per cent) and travel and tourism (23 per cent of revenues).

Strengths

• IRCTC is the only entity authorised by Indian Railways to offer online railway tickets. The company charges a convenience fee of Rs 15 and Rs 30 for non-AC and AC tickets, respectively. Earlier in November 2016, the government removed these charges to promote the digitisation of payments. However, from September 1, 2019, the company was allowed to collect fees, which will increase its revenues in the coming quarters.
• IRCTC is also the only entity authorised to manage catering services on trains and major static units at railway stations. Changes in the Catering Policy of 2017 mandating only IRCTC for catering in trains resulted in revenue jump of 2.5-times in the catering segment between 2017 and 2019.
• The company also enjoys a monopoly in packaged drinking water. It is the only entity authorised by the Ministry of Railways to manufacture and distribute packaged drinking water at all railway stations and trains under the "Rail Neer" brand.
• IRCTC is all set to operate the new New Delhi- Lucknow Tejas Express - scheduled to be inaugurated on October 5, 2019, which will be the first privately operated long-distance train in India.
• It also provides luxury tourism packages, comprising special luxury trains such as Buddhist Circuit Train and Maharajas' Express.

Weakness
Being in the catering business, the company has to maintain high-quality standards. Failure to do so can adversely affect the company's operations. In the past, there were many complaints about the food quality and water provided by IRCTC.

Risks and concerns
The company is highly dependent on the policies of the Ministry and Railways and operations of Indian Railways. Any change in the policies in relation to the monopoly enjoyed by the company in catering, internet ticketing and packaged water segments can adversely affect the company's future profitability.

Total IPO size: Rs 635-645 crore
Purpose of Issue: Disinvestment of stake by the government
Fresh Issue: Nil
Offer for Sale: Rs 635-645 crore
Additional details
Price band: Rs 315-320
Subscription dates: Sep 30-Oct 03
ROE (FY19): 27.3 per cent
Revenue (FY19): Rs 1868 crore
Revenue (FY19): Rs 273 crore
Post-IPO, promoter holding: 87.40 per cent (including the promoter group)
Post-IPO, market cap: Rs 5040-5120 crore
Total debt: Nil
Net worth (Post IPO): Rs 1043 crore
Price/earnings ratio: 18.6
Price/book ratio: 4.9

Company / Business
1. Are the company's earnings before tax more than Rs 50 cr in the past twelve months?
Yes, the company's earnings before tax stood at Rs 430 crore in FY19.

2. Will the company be able to scale up its business?
Yes. Increasing internet penetration, greater affordability of smartphones, increased demand for online ticket booking and e-catering is likely to attract new customers.

3. Does the company have a recognisable brand (s), which is truly valued by its customers?
Yes, the company is the only entity authorised by Indian Railways to provide catering to railways, online railway tickets and packaged drinking water at railway stations and trains in India.

4. Does the company have high repeat customer usage?
Yes, as the sole catering provider to railways and the only entity to provide online railway tickets and packaged drinking water, the company will continue to have high repeat customers.

5. Does the company have a credible moat?
Yes, the company will tend to enjoy the above-mentioned credible moats till the time there are any changes in policies by the Ministry of Railways.

6. Is the company sufficiently robust to major regulatory or geopolitical risks?
No, any changes in the policies set by the Ministry of Railways can adversely affect the company's business and operations.

7. Is the company's business immune to easy replication by new players?
Yes, the company operates at a very large scale all across India. Therefore, it is very difficult for a new player to replicate the scale of the business. Further, the Ministry of Railways has restricted the entry of private players, which makes it a monopoly business.

8. Are the company's products able to withstand being easily substituted or outdated?
Yes, customers planning to buy online railway tickets have no other option to buy tickets from any other portal.

9. Are the customers of the company devoid of significant bargaining power?
Yes, the fees charged by the company are primarily determined by the Ministry of Railways.

10. Are the suppliers of the company devoid of significant bargaining power?
Yes, the company's suppliers are mostly in the catering segment, wherein contract prices and licensee fee are predetermined through tenders.

11. Is the level of competition the company faces relatively low?
Yes, the company enjoys a dominant position in acting as an intermediary for Indian Railways' service offering to the public.

Management

12. Does any of the company's founders hold at least a five per cent stake in the company? Or do promoters totally hold more than 25 per cent stake in the company?
Yes, the company is a Central Public Sector Enterprise (CPSE) wholly owned by the Government of India.

13. Do the top three managers have more than 15 years of combined leadership at the company?
No, but the top management has a meaningful experience in the railway sector.

14. Is the management trustworthy? Is it transparent in its disclosures, which are consistent with Sebi guidelines?
Yes, we have no information which suggests otherwise.

15. Is the company free of litigation in court or with the regulator that casts doubts on the intention of the management?
Yes. However, there are several tax proceedings against the company. Besides, there are several non-material litigations against the company.

16. Is the company's accounting policy stable?
Yes, we have no significant reason to believe otherwise.

17. Is the company free of promoter pledging of its shares?
Yes, the promoter's shares are free of the pledge.

Financial

18. Did the company generate the current and five-year average return on equity of more than 15 per cent and return on capital of more than 18 per cent?
Yes, the company's average ROE and ROCE were 32 per cent and 51 per cent, respectively, for the last five years. Its current ROE and ROCE stand at 27 per cent and 43 per cent, respectively.

19. Was the company's operating cash flow positive during the previous year and at least four out of the last five years?
Yes, the company's operating cash flows have been positive for the last five years from FY15 to FY19.

20. Did the company increase its revenue by 10 per cent CAGR in the last five years?
Yes, its revenue has increased at an annualised rate of 15 per cent over the last five years.

21. Is the company's net debt-to-equity ratio less than one or is its interest coverage ratio more than two?
Yes, the company is debt-free.

22. Is the company free from reliance on huge working capital for day-to-day affairs?
Yes, the company has significant security deposits which help it manage its working capital requirements.

23. Can the company run its business without relying on external funding in the next three years?
Yes, the company has sufficient cash and bank balances and generates positive free cash-flows, which are sufficient for operations.

24. Have the company's short-term borrowings remained stable or declined (not increased by greater than 15 per cent)?
Yes, the company is free from any short-term debt.

25. Is the company free from meaningful contingent liabilities?
No, the company has several tax proceedings, totalling more than Rs 225 crore (21.6 per cent of the net worth).

The Stock/Valuation

26. Does the stock offer operating earnings yield of more than eight per cent on its enterprise value?
Yes, the operating earnings yield will be 10.8 per cent on a fully diluted, post-IPO basis.

Book running lead managers -
IDBI Capital, SBI Capital Markets and Yes Securities.