Everybody's favorite railway company is going public soon. So we thought we'd do a nice little review
The Nature of a Monopoly
For the uninitiated, IRCTC or the Indian Railway Catering and Tourism Corporation is the only entity authorized by the Indian Railways to provide catering services, railway tickets online and packaged drinking water at railway stations and trains in India. This makes the company a monopoly — an entity that controls the entire market.
When people say you can be anybody you want, they are lying to you. You can’t be IRCTC.
And if you want to buy a railway ticket online, you must go through them. No options here.
This is by design. The Indian government has a responsibility to connect the most remote parts of India to the rest of the country, even if it means running unprofitable routes. You can’t trust a private enterprise to do the same.
And so, it makes sense for the government to monopolise Indian Railways. And by extension, catering and ticketing services as well.
So the fact of the matter is — IRCTC is a monopoly and a profitable one at that.
Yes, it’s profitable.
This is because IRCTC is only responsible for collecting ticket revenues. It doesn’t run the railways. If it had been running the whole thing, it wouldn’t be as profitable perhaps.
Also, when it collects the money, it promptly sends it back to the government. The only way they make make money here is by posting advertisements on the IRCTC website and also from other fee collected from selling agents. However, this only forms a small part of its revenue.
A bulk of it comes from catering services and selling tour packages. The catering services in particular is a very lucrative revenue source. Last year alone they made ~1000 Crores here. And almost all evidence points to more growth in the segment from here on in.
And we are only scratching the surface here.
The government has committed more money to the railway sector than ever before. More people are likely to travel by railways as the infrastructure improves and everybody’s booking tickets online.
Take for instance the absolute numbers here. As of June 2019, close to 1.4 Million passengers took to the railways each day and almost 70% of them were buying tickets online. So this narrative about future growth seems all the more compelling.
Also, there is this other contention that the government would probably be looking at supporting IRCTC in a massive way now.The argument here is simple. It’s common knowledge that the government is desperate to raise some money. And by extension, the government will want to sell as much stake in IRCTC as possible (without losing control that is). And if IRCTC continues to make money, the company will look like a real enticing opportunity for other prospective investors. Ergo, more money for the government as it continues to divest.
So it makes sense for them to better IRCTC's financial prospects, right?
Well, if only things were as straightforward as they seem.
In the name of National Interest
Back in 2017, the Ministry of Railways came up with a radical proposal to boost online ticket sales. Earlier, if you were booking tickets online, you had to pay a small service fee — Rs. 40 if you were travelling in an AC Cabin and Rs. 20 if you were travelling sleeper class. The government decided to waive this fee off completely and bam, almost overnight you had a major policy change that wiped out a good part of the company’s revenues.
The government eventually decided to reimburse about 160 Crores to offset the losses, but the damage was done.
Think about it for a moment.
If you were invested in IRCTC back when the announcement was made, what would you have done next? It would have been a harrowing experience, to say the least. And the funny thing is, this cuts both ways. In the same year, a new Catering Policy was put in place and this allowed IRCTC to expand beyond railway catering and take control of food plaza, food courts and other fast food units operated by other departments in the Indian Railways.
And suddenly IRCTC had cash coming in from all sides. Revenue from catering services doubled in just 2 years — from ~400 Crores to over a 1000 crores, a rather spectacular turnaround. And we are almost certain that you would be jumping for joy this time around if you were an IRCTC shareholder.
The point is, the government’s interests might not always align with the shareholder’s interests. The abolition of the erstwhile service fee was done in the larger interest of the nation. The change in the catering policy was instituted for better efficiencies. And its highly unlikely that these policies were pursued for-profit motives.
And that is the major concern here.
IRCTC is a government-controlled monopoly, but one that champions the cause of the people. So will the interests of the shareholders be prioritized from here on? That we do not know.
But what we do know is that it’s still a pretty solid enterprise with relatively stable cash flows. And that it is definitely worth something.
Which kind of brings us to the last point. What is the government’s asking rate here?
Is there Value for Money?
The way people calculate value is by looking at a rather peculiar financial ratio - P/E.
To put simply, P/E of a stock is the ratio of the stock price to the earnings per share. A high P/E simply means people are willing to pay a premium for buying the company. When this number reaches disproportionately high levels, relative to industry standards, the stock is deemed to be overvalued.
Currently, IRCTCs asking price is between 315–320. That translates to a P/E of ~18. The only problem is that there is no industry benchmark here.
In the offer document, IRCTC compares itself to MakeMyTrip and Yatra. But that is not accurate. IRCTC is not MakeMyTrip. It is a monopoly that earns a bulk of its revenue from catering service. They are not the same things.
So it’s really hard to tell if buying into IRCTC at this price is value for money.
But who knows? It’s possible that IRCTC lives up to its expectations and delivers on its promises. Or it’s possible that some of those expectations might not materialise due to policy considerations.
So that means, we will have to leave you with the facts and hopefully, you can take a call yourself.
So tell me, fellow reader, Where is your bet?
Point of Interest: The government has recently decided to reinstate the convenience fee-Rs. 30 if you are travelling AC and Rs. 15 if you are travelling sleeper class. It's quite likely that this will improve prospects overall considering the convenience fee goes straight to the bottom line i.e. profits.