IRCTC stock: Why a monopoly business cannot be a ‘Buy’ at any price
Source: Live Mint
Indian Railway Catering and Tourism Corp. Ltd’s (IRCTC) shares hit a new low for 2024 at ₹777.20 on Monday and are hovering near those levels. The stock’s lacklustre price performance over the past three years is a reminder that companies, even in monopoly businesses like IRCTC in railway ticket booking, do not see a linear rise in profit and market capitalization.
This applies more so if the monopoly business is a government-owned company, which means there are higher chances that it will not be allowed to make windfall profits and will face challenges in cost-cutting through manpower rationalization.
As IRCTC would find it difficult to raise ticket-booking charges, it has to rely on volume growth and ancillary businesses. While volume growth has its constraints, ancillary businesses have not done enough to please its investors.
IRCTC’s shares touched a high of ₹1,279 on 19 October 2021 (after adjusting for 5:1 stock split) when it traded at a staggering price-to-earnings multiple of more than 150x based on FY22 earnings per share (EPS) of ₹8. From FY22 to FY24, its net profit grew at a compound annual growth rate (CAGR) of 33%, which is good but not good enough to justify the valuation.
However, in H1FY25, the profit before exceptional items increased by a mere 6%. The disappointment over the slowdown in growth has brought down the stock’s valuation now to 48x of FY25 earnings, as per Prabhudas Lilladher’s estimates.
What led to the slowdown in profit growth?
Well, internet ticketing accounted for 80% of IRCTC’s Ebit (earnings before interest and tax) even in H1FY25 despite the diversification into ancillary businesses such as rail neer, catering and tourism. Internet ticketing penetration level has already reached 83%, which would curtail the scope for additional gains from the conversion of offline mode to online.
As far as the number of ticket bookings is concerned, it can only grow in line with the passenger traffic. IRCTC’s ticket sales and convenience fees grew by just about 6% each in H1FY25. The growth rate is in keeping with the trends seen in the ministry of finance data where the railway passenger traffic grew by 5% in FY24 to 6.73 billion, lower than FY20 or before the covid-19 outbreak.
The moot question then is if traffic growth will get better hereon. Sure, one can be optimistic about that, but it cannot be ignored that some traffic is getting diverted to airlines and roads. Aviation traffic surged 15% in FY24. With more airport connectivity and affordability, aviation traffic should grow. While giving reliable estimates of road traffic is not feasible, it is likely to have grown with better quality roads, increasing vehicle penetration and toll digitalization.
Among the ancillary businesses, the two meaningful segments are catering and rail neer. However, their revenue growth has to pick up as the margins in both segments are sub-15%, much lower than the margin of 80% in internet ticketing. Even here, it has to be noted that catering pricing is regulated by the Railway Board, which normally approves an increase almost every six years.
Everything put together, earnings outlook is bleak and there is limited scope for any surprise. Prabhudas Lilladher expects sales and profit after tax CAGR of 8.4% and 7.5%, respectively, over FY25-FY27, driven by catering and rail neer divisions as growth in high-margin ticketing segment has plateaued. The broking firm’s target price is ₹833 after assigning a multiple of 47.5x over FY26 estimated EPS.
