IRCTC Limited

IPO UPDATE

IRCTC Limited

Industry overview:

(i) Railways: The Indian Railways (IR) is one of the largest railway system, operated by the Ministry of Railways. It has the 4th largest freight carrier in the world and largest passenger carriers. As per Crisil Reports, the government had announced a planned outlay of Rs1.59tn for the Railways in its Interim Union Budget 2020; a 14% increase than the preceding years revised estimate of Rs1.39tn thereby driving an investment in the sector. Additionally, the share of upper class tickets reservations in the total railway passenger traffic is expected to grow slightly from ~2% in FY19 to ~3% in FY24, an overall growth in the segment at 5.5-6.5% CAGR. With the objective of increasing the share of IR in freight transport across India, the Eastern and Western Dedicated Freight Corridors (DFC) was introduced with an aim to speed up the freight train operations, creation of additional rail infrastructure to cater to the transportation demands. In the short term, investments in railways are expected to continue the strong momentum as government maintains focus on network decongestion.

(ii) Food/Catering services: As per the National Restaurant Association of India (NRAI), the food services industry was estimated at Rs3.09tn in FY16, and has grown at a ~11% CAGR to reach Rs4.24tn in FY19; driven by growth in young population of India, rising disposable incomes, uptick in discretionary spending on eat outs, and growing number of women in working population.

(iii) Travel and Tourism: The domestic tourists visits across states has witnessed strong growth largely on account of a rise in the disposable income, increase in connectivity via air and rail travel, business travels, weekend getaways, ease in booking etc. Crisil expects the tourist’s visits to grow annually by 9-10% and touch an estimated 2,760-2,810mn by 2023.

(iv) Packaged drinking water: Growth in the organized packaged drinking water market has been driven by rising health consciousness of people due to concerns over the quality of tap water supply and the possible incidence of water-borne diseases. The organized packaged drinking water market has been estimated to have grown from Rs30-35bn (at retail price) in FY14 to Rs80-85bn in FY19 at a strong 19.5% CAGR. (v) E-booking: The Indian booking industry has grown strongly on the back of healthy growth in domestic tourism and inbound tourism in India. Growth in domestic tourism has been aided by rising disposable incomes, widening reach of air and rail travel, and state-level policy initiatives for promoting tourism. The Indian e-booking industry has reached Rs1,300-1,320bn in FY19; with improvement seen in affordability of smartphones, easier access to tourists’ destinations etc.

About the Company: Indian Railway Catering and Tourism Corporation Ltd. (IRCTC) is a Mini Ratna (Category-I) Central Public Sector Enterprise under Ministry of Railways, Government of India. IRCTC was incorporated on 27th September, 1999 as an extended arm of the Indian Railways to upgrade, professionalize and manage the catering and hospitality services at stations, on trains and other locations and to promote domestic and international tourism through development of budget hotels, special tour packages, information & commercial publicity and global reservation systems. IRCTC have also diversified its business including non-railway catering services, e-catering, executing lounges, which are in line with its motto to build a “one stop solution” for its customers.

SNAPSHOT

Issue Opens Monday, Sept 30, 2019

Issue Closes Thursday, October 03, 2019

Price Band (Rs) 315/ 320

Bid Lot 40 shares and multiples thereafter

Face Value Rs10

Listing BSE & NSE

Type of Issue Offer for Sale

Offer Size (Rsmn)

Fresh Issue -

OFS 6,451

Total 6,451

*Implied Market Cap (Rsmn) 51,200

*P/E (Based on FY19 earnings)

18.8

*Note : Implied Market Cap & P/E are calculated at higher price band of Rs320

Issue allocation

Reservations % of Net Issue

QIB 50

NIP 15

Retail 35

Total 100

Object of the offer

Offer for Sale by certain selling shareholders

(disinvestment)

To achieve the benefits of listing the equity shares on the

Stock Exchanges

Last 3 year Summarized Financials

Rs(mn) FY17 FY18 FY19

Sales 15,196 14,661 18,679

EBITDA 3,126 2,731 3,722

EBITDA % 20.6 18.6 19.9

Profit After Tax 2,291 2,206 2,726

Profit Margin % 15.1 15.0 14.6

Earning Per Share 14.3 13.8 17.0

RoNW (%) 29.1 23.1 26.1

Details of Selling Shareholder & No of Shares

Offer for Sale 20,160,000

Fresh Issue -

Total 20,160,000

Source: RHP

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IPO UPDATE

IRCTC Limited

Business Segments: 1.Catering: These services are provided to the IR passengers on trains (known as mobile catering) and at stations (static catering- providing meal services at railway stations, food plazas etc.). They also offer e-catering services to passengers through its mobile application "Food on Track" and e-catering website, www.ecatering.irctc.co.in. In FY19, it was the major revenue contributor (54.99% of the total revenues).

2.Travel and Tourism: The entity has footprints across all major tourism segments such as hotel bookings, rail, land, cruise and air tour packages and air ticket bookings and is known as one of India’s leading travel and tourism companies catering to the needs of its customers. In FY19, this segment contributed around 23.38% of the total revenues. 3.Internet Ticketing: The main objective of introducing Internet ticketing services was to remove the requirement of the passengers to be physically present at the booking counters. The entity is authorized by the IR to offer railway tickets online through its website and mobile application. IRCTC has gained reputation of being one of the most transacted websites in Asia-Pacific regions, with customers booking around 8lakh tickets per day. As of 31st August, 2019, the entity had ~53.7mn active registered users. In FY19, this segment contributed around 12.35% of the total revenues. 4. Rail Neer: According to Crisil, IRCTC is the only entity authorized by the Ministry of Railways to manufacture and distribute packaged drinking water at all railway stations and on trains. They manufacture and distribute packaged drinking water under brand Rail Neer. Currently, the entity operates 10 Rail Neer plants (catering to ~40-45% of the railway demand) at Sankrail, Jagi Road, Nagpur, Bhusawal, Jabalpur, and Una; in order to meet the increasing demand in packaged drinking water, they are also setting up 10 new plants (out of which 6 are already ready for commission in this year and the balance to happen in the next year). In FY19, this segment contributed around 9.28% of the total revenues. Drivers for Business Growth: 1. Railway authorization benefit: IRCTC offers railway tickets with the help of its mobile application Rail connect. During June 2019, an average of more than 1.40mn passengers reserved online tickets and travelled on Indian Railways every day. Approximately, 72.60% of Indian Railways' tickets are booked online with an average of more than 0.80mn tickets booked through www.irctc.co.in and its mobile application on a daily basis. Recently, the IR has given the discretion of selection of two routes of its choice, freedom to fix the fare depending on the market demand and the type of class opted by the passengers. Accordingly, after thorough scrutiny of the passenger profile data and highest wait list throughout the year, the 2 routes chosen by the entity are Lucknow-Delhi and Mumbai-Ahmedabad. IRCTC is offering special services by compensating each passenger in case of train delay, insurance cover etc. It expects to earn at least Rs50cr a year from the two trains mainly through fares and catering services. The first non-Indian Railway passenger train between Lucknow-Delhi will flag off on 4th October, 2019. 2. Strengthen products and services offered online: In order to keep a hold on the significant number of visitors on its website, IRCTC intends to continuously develop its online offerings with enhanced product design capabilities and other value added services in order to offer their customers a personalized experience. It is in the process of incorporating mobile e-wallet services to improve the ease of bookings at a faster pace. An average of approximately 2,800 tickets were booked per day using e-wallet during the month of August 2019. 3. Brand Name: IRCTC is recognized as one of the leading brands in rail catering and internet ticketing. They are focused on becoming an established leader in other business segments including travel and tourism. With the help of value added products and service offered to passengers, tourists and others; targeting both railway and non-railway related services, it continues to build a business that will help promote their brand and thereby provide easy user interface accessibility for the services being offered. Risks and concerns: Policy change: A business being dependent on the policies framed by the Ministry of Railways can hamper the operations of the entity. Competition threats: Having a monopoly in catering, packaged drinking water and other areas, if the ministry permits more competition that would have an impact on the operations and profitability of the entity. Financials and future prospects:

In FY19, Revenues from operations clocked a growth of 27%; at Rs18,679mn as compared to Rs14,661mn in FY18 (major contribution being from the Catering segment in FY19)

The Ebitda margins for the year stood at 19.9% as compared to 18.6% in FY18

PAT for FY19 came in at Rs2,726mn as compared to Rs2,206mn in FY18; growth of 24% driven by increased revenues from catering business as well as concession fees

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Source: RHP

Exhibit 1: Revenue Breakup

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IPO UPDATE

IRCTC Limited

Financials and future prospects (contd.):

The company has been able to establish a good record for its shareholders; ROE at 26.1% in FY19. Additionally the company is debt free since corporation.

IRCTC will not receive any proceeds, this being an OFS; the government’s stake in IRCTC would reduce to 12.5% after the IPO

Comparing the last 2-3 years, the company has been paying consistent dividend with 45% outgo in FY19

Having a good cash and cash equivalents caters to working capital needs of the business

The capex plans for this year is ~Rs160-170cr, with the intent to upgrade it to about Rs180-200cr in another 2-2.5 years

Outlook and Valuations: IRCTC has the monopoly in its business, further enjoying the high entry barriers. The company has been consistently paying dividends to its shareholders (dividend payout 45%). At the higher price band of Rs320 the P/E works out to be 18.8x. The company has no listed peers but looks to be fairly priced for subscription. With consistent revenue growth, the company has maintained margins in the higher teens over the past 2-3 years. Considering the company’s strong cash generation, higher entry barrier to business with reasonable valuation, we suggest a Subscribe to the issue with long term investment horizon. However, with the volatile market conditions one may or may not get any listing gains.

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IPO UPDATE

IRCTC Limited

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