What do you think of IRCTC for long run?

What do you think of IRCTC for long run?
So much of hype of this stock being compared to Rajdhani express and was even called as Indian Tesla.
I will share my fundamental & technical take on this one.
Background & business model:
IRCTC was incorporated in 1986 by the Ministry of Railways (MoR), Government of India, and is a wholly-owned public-sector undertaking (PSU).
Its primary activity is to mobilise funds on behalf of the Indian Railways to finance its procurement of locomotives, passenger coaches and wagons. Apart from providing finance to the MoR, IRCTC has provided loans to Rail Vikas Nigam Limited (RVNL), a wholly-owned entity of the MoR. IRCTC is registered as an infrastructure finance company NBFC (IFC-NBFC) with the Reserve Bank of India.
Dependency on policies of the MoR:
The company’s business and revenues are substantially dependent on the policies of the MoR and operations of Indian Railways. The company’s scope of services, and the fees that they charge, are primarily determined by the MoR. At certain times in the past, the Government has made certain decisions that has adversely impacted IRCTC’s results of operations. Eg:, In 2016, MoR removed the charges that IRCTC levies on booking railway tickets online as service charge at rates of ₹20 per ticket for non AC classes and ₹40 per ticket for AC classes. This had a material adverse impact the company’s revenues.
Ministry of Finance (MoF) by separate notification on July 5, 2017 proposed to reimburse ₹80crs. to IRCTC until the Government of India (GoI) permits IRCTC to recover online ticketing cost/levy of commission on passengers utilizing the online ticketing service that IRCTC provides. The MoR reimbursed IRCTC in the amount of ₹80 crs. and ₹88 crs. for FY 2018 and 2019, respectively for IRCTC operations costs.
Later on, from September 1, 2019, the company was allowed to collect convenience fees on online ticket booking at rates of ₹15 per ticket for non AC classes and ₹30 per ticket for AC classes, and hence the quarterly results for December 2019 profits shot up significantly.
Revenue Segments:
The company generates revenue from the following segments:
1) Catering & hospitality: Provides catering services in ~300 trains, it also has commissioned 16 Food Plazas& 49 Fast food units in Fy 2019, thereby managing 254 operational units in all throughout Indian Railways, as on FY 2019 average daily bookings under E-catering stood at 17600 meals per day.
The company generates revenue within this segment in two ways, i) Base Kitchen Model; wherein the food is prepared in their base kitchen and then distributed to various pantry cars and sold to the final passengers. Ii) License fee Business: ~40% of the revenue is generated via this model within the catering segment. IRCTC gives away contracts to various vendors for which it charges a license fee eg; food plazas. However IRCTC has to share some revenue to Indian Railways.
2) Rail Neer: The company enjoys a monopoly in its packaged drinking water product under the brand 'Rail Neer', as it is the only entity authorised by the MoR to manufacture and distribute packaged drinking water at all railway stations and trains. As on Fy 19, the production of packaged drinking water was 21.50 cr. bottles.
Average daily requirement of packaged drinking water over Indian Railways is ~18 lakh bottles/day. IRCTC’s avg production is 6.8 lakh bottles/day from its 7 operational plants. To meet this additional demand, the company is setting up additional 10 more plants to cater for the growing demand of packaged drinking water. However with commissioning of these additional 10 more plants which will be operational by 2020-21 IRCTC will be able to cover 85% of the existing total demand i.e 15.30 lakh bottles/day.
3) Travel & Tourism: Apart from the rail tourism, the company also provides Domestic air packages, land tour packages, hotel bookings to name a few. The company also started promoting Theme based tourist trains viz. Shri Ramayana yatra tourist train, unity Express, Temple Ram Sethu Express, etc.
4) Internet Ticketing: E-ticketing accounts for 70% of reserved tickets on Indian Railways booked online. On an average daily ticket sold online is 10.57 lakhs, of which 7.78 lakhs of tickets are sold online through website, the balance 2.79 lakh tickets are sold via mobile app.
Below is the revenue break up from each of its business segment:
Segmental Profit %
Highest profit margin comes from Internet ticketing as they have just one expense in this segment i.e. technology, which usually requires upgradation in few years. Rest of the prfot margin segment wise can be inferred from the pie chart above.
Financial Analysis:
As on FY 2019, the company total assets were Rs. 2592 crs. of which the company had a clear cash balance of Rs. 1140 crs. and total net fixed assets of Rs. 182 crs.
The company is a entirely a debt free company, which is very positive & the company has a total share capital (including reserves) of Rs. 1043 crs.
The company’s sales growth was inconsistent in the pst, mainly due to the changing rules by MoR. The company’s profit margin has remained at 20% for the past 3 years, which is a very positive.
The company has generated and delivered a very high ROCE over the past 4 years, which is pretty commendable.
Strengths:
  1. As mentioned above, IRCTC enjoys Sovereign ownership and is of strategic importance to GoI
  2. IRCTC is also the only entity authorised to manage catering services on trains and major static units at railway stations.
  3. The company also enjoys a monopoly in its packaged drinking water product under the brand ‘Rail Neer’, as it is the only entity authorised by the MoR to manufacture and distribute packaged drinking water at all railway stations and trains
Weakness:
  1. As explained above, IRCTC’s performance is highly dependent on the policies of the MoR 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.
  2. The prices of food and packaged drinking water are regulated and hence the company IRCTC, doesn’t have the power to raise the prices on its own.
  3. Indian Railways charges license fees to IRCTC, and if that increases then it is a negative for IRCTC.
  4. As the company generates more than 50% of its revenue from the catering business, the company has to maintain high-quality standards. Failure to do so can adversely affect the company's operations, there were many complaints in the past regarding the food quality served by IRCTC.
Valuation:
Coming to the current valuation of the company the company is still highly overvalued, and is trading at 60x PE which is not comfortable given the constrain it has especially when it comes to regulated food prices, changes in policies by MoR (convenience fee) and the share to be paid to Indian Railways.
However one cannot judge purely by PE ratio, lets look at the growth rate, I am considering a CAGR of EPS for the past 4 years, the growth rate works out to 20.2%. Now instead of taking TTM EPS as Mr. Graham has suggested, I used avg Net profit for the past five years to smoothen out the variability.
Using Ben Graham’s formulae, the fair price works out to Rs. 640 per share. Until then this stock still remains highly overvalued.
Remember you are considering that the stock has fallen from its all time high of 1994 levels to the recent low of 774 levels, though currently trading at Rs. 1032. That doesn’t mean that the stock has value to outperform from current levels, reason being All time high (ATH) is not a fair value.
Technical Analysis:
Final Take, wait patiently for the mentioned levels basis Graham’s method, to start adding this stock, until then it doesnt qualifies to be added from my side.
Hope this helps.
Reference Source:
  1. Annual Report of the company || IRCTC Corporate Portal ||
  2. DRHP of the IPO https://listing.bseindia.com/download/365101/IPO/IRCTC%20LIMITED%20DRHP_20190823183900.pdf
  3. Best platform for Stock screeners and analysis
  4. 10 years fundamental data of listed Indian companies
  5. Tijori
  6. Free Stock Charts, Stock Quotes and Trade Ideas

Comments

Post a Comment

Popular posts from this blog

3 Ways to Invest in Commodities in India stock market concept

Image
Invest in Commodities in India Recently, the price of crude oil went negative due to very low oil demand because of coronavirus. This very low price of crude oil aroused interest in many traders and investors to invest in crude oil. Not only just crude almost every commodity be it natural gas, copper, aluminium, etc are also trading at very low prices. In this post we will discuss 3 ways to invest in commodities in India. #1. Buy directly from MCX All you need is a commodity trading account, which almost every broker offers. Once you have activated the commodity trading account you can directly buy crude oil and also other commodities as well through your broker. The drawback here is that commodities are traded in derivative form, which means you can trade in them through futures and options contract, which have an expiry date. So this is more of a trading product and not an investment product as you can’t hold it for long without rollover. Just recently, since US...
Read more

Do you also believe that long-term investors make more money than day traders? Why and how?

Image
Do you also believe that long-term investors make more money than day traders? Why and how? There are a number of highly successful long-term investors. The likes of Warren Buffett and Charlie Munger instantly spring to mind. They have generally returned around 20% per annum over their investment careers. While this level of return is unlikely to make any investor rich in the short run, when compounded over a long period it can lead to significant returns. For example, over a 30-year time period it could propel an initial sum of money around 237 times higher. As such, even modest sums could become seven-figure portfolios. Of course, most investors may be unable to deliver returns which are as high as 20% per annum over a 30-year time period. However, even returns which are in line with those of the wider index could end up turning a small portfolio into a large one in the long run. For example, returns of 8% per annum over the course of three decades would equate to an end...
Read more

What is the shocking secret of Ratan Tata?

Image
What is the shocking secret of Ratan Tata? 1. 65% of his earnings goes to Charity:  Ratan Tata couldn’t place himself in the billionaire list because a large amount goes in the charitable trusts ( around 65% of his earnings). He is one of the most generous person in India. Salute to his great work. 2. Donates every year for education:  Ratan Tata is very known widely for his donation activities in the country and he also donates a huge amount in the education sector. He gave $50 million to Harvard Business school and $25 million to Cornell University, specially for the Indian students. 3. Parents got separated:  In the year 1940, Ratan Tata’s parents got separated and at that time he was just a 3-year old kid. After that he was looked after by his grandmother. 4. IBM offer:  When Ratan Tata completed his education, he got a job offer from IBM but he refused to take that job and joined his family business. 5. Education:  Ratan Tata stud...
Read more