IRCTC - What explains the stupendous journey?

The IRCTC IPO closed on October 03, 2019 at a discovered price of Rs320. However, on October 14, 2019 the stock listed at almost twice the price.

Feb 25, 2020 11:02 IST India Infoline News Service

IRCTC
If you still recollect your high school poetry, you would surely remember the opening lines of Robert Louis Stevenson’s famous poem, Faster than fairies, faster than witches, Bridges and houses, hedges and ditches; And charging along like troops in a battle, All through the meadows the horses and cattle”. Of course, Stevenson was referring to the impression of a traveller sitting in a railway train but this could as well have been the impression of an IPO investor who had invested in IRCTC and held on by default. I am sure the analogy is not lost because IRCTC is closely linked to the railways and its stock prices have almost been reminiscent of the stupendous train journey described in Stevenson’s poem. If you still have doubts, check the chart.

Chart Source: Bloomberg
 
IRCTC – The IPO and after
The IRCTC IPO closed on October 03, 2019 at a discovered price of Rs320. However, on October 14, 2019 the stock listed at almost twice the price. Even from the listing price, the stock is up more than 3-fold in the last four months with the stock nearly doubling since the beginning of year 2020. Of course, the issue got oversubscribed nearly 112 times but the kind of price performance was beyond the wildest imagination. Even as analysts have raised concerns over the valuation of the stock, the stock continues to behave like a quasi consumer play and a quasi internet play. But what exactly is IRCTC all about?
 
IRCTC – The business model
IRCTC is a wholly owned subsidiary of the Indian Railways and handles tourism, catering, and online ticket booking services and also provides packaged drinking water in trains and at railway stations. It is classified as a mini Ratna by the Indian government. The website is already ranked among the most transacted websites in the Asia Pacific region and on an average it executes 15-18 million transactions each month. The big advantage that IRCTC has right now is that it is a monopoly service provider to the Indian Railways and there is no immediate threat of any competition in this area.
 
But, how justified are the valuations?
 There are two ways to look at the valuations. First is the existing numbers in the financial statements and the other is the likely evolution of the business model in future. Let us look at the financials first. The company is a profit making enterprise with net profit margins of nearly 15% in fiscal year 2019. The business is not too cash hungry and the IPO was just an offer for sale (for existing shareholders) and not for dilution of equity. In addition, all the four business segments of IRCTC are high operating margin businesses; with the ticketing business having OPMs of nearly 60%. The net profit of the company is expected to double in the next two years and that means the P/E will halve. But that is still expensive. Based on 2019 earnings, the stock is currently quoting at nearly 100 times 2019 EPS. So, even assuming doubling of profits in the next two years, we are still look at the current market price discounting FY21 earnings by nearly 50 times. That is when you turn to the business model of the company to see if that justifies valuations for the future?
 
Railways subsidiary or an internet platform
That is the million dollar question. At the current market price, IRCTC is valued at Rs30,800cr which is a market capitalization of a little over $4 billion. Don’t forget that heavily loss making Flipkart was sold to Wal-Mart at a fancy price of $16 billion. Compared to that, the valuation of IRCTC hardly looks menacing. In fact, despite its ability to execute 18 million transactions a month and stay profitable with net margins of above 15%, the stock is valued at much less than half of most of the cash-guzzling unicorns. A section of investors who are still buying the stock at the current price apparently believe that it is time to stop looking at IRCTC as a subsidiary of the Indian Railways and start looking at it as a monopolistic internet platform. Whether the argument is justified or not; only time will tell. That will be the second part of the IRCTC story. For now, it is perhaps the right time to enjoy the journey of IRCTC!

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