Railway PSU Indian Railway Catering and Tourism Corporation (IRCTC) IPO for Rs 645 crore kicked off on Monday. IRCTC IPO will remain open for subscription between September 30th and October 3rd. Through the IRCTC IPO, the government looks to raise up to Rs 645.12 crore at the higher end of the price band. The railway PSU has set a price band of Rs 315-320 for its intended public offer. IRCTC is offering a discount of Rs 10 per share to retail investors and employees. The minimum bis lot has been fixed at 40 shares, and in multiples of 40 shares thereafter. IRCTC IPO is a complete offer for sale of 2 crore shares (representing 12.50 percent of total paid-up equity) by the Ministry of Railways. The firm said that there would also be additional employee reservation portion of 1.6 lakh shares, taking the total offer size to 12.6% of total paid-up equity. Even as investors maybe mulling whether to subscribe to the issue, we take a look at what analysts have to say.

Also read: Reliance ADAG AGM LIVE: Anil Ambani addresses shareholders of Reliance Capital, Reliance Power

Key strengths

Sharing key strengths of the railway PSU, IndiaNivesh said that IRCTC is a monopoly as it is authorised by the minister of railway to offer Indian railway tickets online. “IRCTC enjoys monopoly business in online rail ticket booking and food catering on running trains. Mobile application based food ordering is gaining fast traction among travellers. It provides multiple caterers in tune with today’s taste and preferences of commuters,” said the research firm. IRCTC has strong fundamentals and debt free balance sheet along with decent return ratios. The ROE stands at about 26%, while operating margins of 20% and PAT margin at 15% augurs well for the railway PSU. “We expect revenue and PAT CAGR of 20% plus for next couple of years,” said the firm.

Financials

IRCTC generated a revenue of Rs 1,899 crore in FY19, up 25% from the previous fiscal. The net profit jumped 23.5% on-year to Rs 272.50 crore in financial year 2019. The firm which sells tickets for Indian Railways and handles its catering services saw 72 lakh logins per day, and 2.5 crore logins in a month. IRCTC has earned the reputation of being one of the most transacted websites in the Asia-Pacific region, with customers booking around 8 lakh tickets per day. Incorporated by the government in 1999, IRCTC was  conferred the status of Miniratna (Category-I Public Sector Enterprise) status in 2008.

Key risks

Noting the key risk of IRCTC business, Anand Rathi said that the company’s business and revenues are substantially dependent on Indian Railways. Therefore, any adverse change in policy of the Ministry of Railways may adversely affect profitability. The company does not have ability to pass on any increase in raw ingredient costs due to price regulation by Indian Railways. The company uses PET bottles and other plastic items for its packaged drinking water and food, which is subject to various regulatory requirements and increasing public scrutiny, noted the research firm.

Valuations

Taking stock of the prospects of IRCTC IPO, Anand Rathi noted that the firm has a unique business model and the company does not have any competition across any business segment. “Based on various parameters like strong earnings profile, diversified business segment, healthy return ratio, debt free status and most importantly monopoly business, we have a positive view on the issue,” said the firm. At the upper price band of Rs 320, the stock is available at P/E multiple of 18.8x to its FY19 EPS of Rs 17, the brokerage firm said in IRCTC IPO note. “We have a positive outlook for the company and we recommend investors to Subscribe to this issue,” it added. According to IndiaNivesh, IRCTC IPO looks conservatively priced at a PE ratio of around 19x based on FY19 earnings, warranting a subscribe rating.