Q1FY24 Review: IRCTC: Modest Q1; regulatory irritants keep surfacing

11 Aug 2023 , 03:25 PM

IRCTC reported 7% YoY Ebitda growth vs analysts of IIFL Capital Services est. of 16% growth, led by 4% decline in the high-margin Internet Ticketing segment. Pre-exceptional PAT grew 16%, led by higher interest income. IRCTC took Rs519mn exceptional hit on retrospective increase in haulage charges on Tejas trains taken by the Indian Railways (IR), dating back to Aug’21. Management stated that an increase in convenience fee was unlikely in the near term; and was bullish on the prospects for the Catering segment. Representations to IR have been made to reconsider the retrospective haulage charge hike on Tejas trains. Analysts of IIFL Capital Services cut FY24/25 EPS by 7%/4%, due to lower ancillary revenue and higher haulage charge on Tejas (the prospective increase that the company has not challenged). They build in 11% EPS growth over FY23-25. Analysts of IIFL Capital Services cut SoTP-based TP from Rs572 to Rs539. At 45x 1YF PE, valuation remains rich, especially in light of potential regulatory risks. Maintain SELL. 

Ancillary revenue declined 8% YoY in Q1: 

Ticketing volumes were expectedly down 10% YoY (up 1% QoQ), since the base quarter benefited from 2S class. However, the negative surprise was an 8% YoY decline in ancillary revenue (ad, payment gateway, income from OTA, etc.), indicating a high degree of correlation with ticketing volumes. Retrospective haulage charge provision on Tejas train operations of Rs519mn for ~6.5 quarters, translates into ~Rs80mn hit per quarter. Since haulage fee is linked to the distance (and not revenue), this is a fixed cost and may result in annualised PBT hit of ~Rs320mn going forward.

Key takeaways from earnings call: 

1) Management ruled out any nearterm convenience fee increase, considering the 80%+ Ticketing segment’s Ebit margin. 2) The number of trains under Catering can potentially rise by 25%. 3) The company has written to the Railway Ministry, seeking approval to raise Rail Neer price. 4) No plans to monetise passenger data as the latter is owned by IR. 

Cut FY24/25 EPS by 7%/4%; new TP Rs539: 

Despite upbeat commentary on ancillary revenue, analysts of IIFL Capital Services note QoQ ancillary revenue decline in the past 6 quarters. Analysts of IIFL Capital Services assume 25% rise in convenience fee in FY26, which drives 23% EPS growth estimate in that year. If the Ministry of Railways approves Rail Neer price increase from Rs15 to Rs20 per litre, EPS upgrade could be ~4%; assuming no volume decline.