IRCTC: Will the stock witness structural de-rating?

The flip-flop around sharing of convenience fee income could dent investor sentiment significantly

Oct 29, 2021 04:10 IST India Infoline News Service

Stock of Indian Railway Catering and Tourism Corporation Ltd (IRCTC) witnessed high volatility in Friday’s session. Reason – Railway ministry’s decision to impose 50% revenue share on IRCTC’s convenience fee income from internet ticketing (Effective November 1). This decision was announced post market hours on Thursday and met with broad-based skepticism, leading to a sharp decline in the scrip on Friday morning (down ~29% from Thursday’s closing price).

This skepticism is driven by two major concerns. One is around the financial impact of such a decision and the other is more structural in nature – questioning the independence of government-owned entities in decision-making. Let us understand both these aspects in detail.

The first concern around financial impact is pretty straightforward and can be answered through number crunching. Internet ticketing segment generates 85% EBIT margin for IRCTC and formed nearly 3/4th of its pre-pandemic EBIT. If it had to share these revenues, the company’s profitability would have taken a serious hit. Price hikes seems unrealistic in the wake of the pandemic. In this scenario, analysts at IIFL Securities trimmed their EPS estimates for FY22, FY23 and FY24 by 19%, 32% and 31%, respectively. The brokerage also downsized its 12-month target price by 36.7% to Rs. 519.

As the afternoon session started setting in, news came trickling about a possible withdrawal of railway ministry’s proposal, which was confirmed by the company in the last hour of trading. Consequently, the stock price recovered partly. However, the bigger questions remain. Is the company susceptible to any such unfavorable decisions in the future? Will the stock witness a sustained de-rating? Will investors shy away from IRCTC like they have in other quality PSU entities?

Historical evidence suggests that as government’s stake falls in a PSU company, its market capitalization and financial performance improves significantly. In case of IRCTC, though, dilution of government’s stake might pose a threat to its monopoly in ticket booking.

For now, one thing seems pretty clear. The odds are stacked up against IRCTC and investors might just stay on the sidelines going forward.

The author of this article is Sheetal Agarwal

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