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Home >Market >Mark-to-market >Do investors want to queue up for the IRCTC public offer bandwagon?

Many people think IRCTC’s tagline is “This webpage is not available", goes a post on the internet. Many such off-hand comments floating on the web describe perhaps the long wait to connect to the Indian Railway Catering and Tourism Corp. Ltd’s (IRCTC’s) website.

As a business, though, the firm may be pulling its load steadily due to its internet ticket-booking platform. This is a monopoly business processing about 800,000 tickets daily. While this division accounts for just 12% of revenue, it enjoys a substantial profit margin contributing about 42% to its pre-tax profits. This is the reason the government is asking for a premium on its 12.6% sale of IRCTC shares. The issue opens on Monday. As such, valuations of its FY19 earnings work out to 19 times, high considering the PSU tag. Further, changes in regulations could alter its revenue model, which has happened in the past when IRCTC stopped convenience fees post demonetization.

This impacted its revenue growth in the fiscal year 2018. Over the past two years, though, IRCTC has clocked 10.3% annual growth, with revenues rising to 1,868 crore in the fiscal year 2019. Profit after tax margins have shrunk from 14.3% in FY17 to 13.9% in FY19 on higher expenses.

In September 2019, IRCTC reintroduced convenience fees on tickets sold, which will add to its revenues. IRCTC also makes money by monetizing its website through advertisements, co-branding, and access fee charges to third-party service providers. This income was about 140 crore in FY19.

About 72% of railway tickets are booked and sold online at present, hence growth from here will be gradual. Additional revenue will depend on how IRCTC monetizes its ticketing platform further. “We have worked on many new services and segments that are ready to be launched," said Mahendra Pratap Mall, chairman and managing director, IRCTC Ltd. On the anvil are e-wallets, payment gateways and co-branding opportunities. IRCTC’s low-margin catering business, which brings about 55% to its revenue, is growing at a slow pace. But its food-ordering service, delivering outside food, now provides about 20,000 meals every day, which could clock faster growth.

Packaged water is another division that’s raking in steady volumes. IRCTC is solely authorised by the ministry of railways to prepare and distribute drinking water through its Rail Neer brand.

This division caters to about 45% of the railways’ demand. Given that IRCTC expects to commission about six new plants in the next two years, its packaged-water business would address over 80% of the railways’ requirements. Analysts reckon the offering has some advantages such as low debt and high cash generation. “IRCTC has a decent RoE and 20% operating margins. Overall, we expect about 20%-plus profit growth for some years," notes Dharmesh Kant, head, research retail, IndiaNivesh Securities Ltd.

So while it appears that investors may not mind queuing up for a ticket on this bandwagon, they should keep an eye on regulatory risks post listing.

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