IRCTC IPO: Railway's ticketing arm to get premium valuation on Dalal Street

State-owned Indian Railway Catering and Tourism Corporation (IRCTC) is expected to get a premium valuation on Dalal Street, with analysts expecting post listing gains due to its superior financial metrics compared to listed domestic peers such as ITC-owned International Travel House (ITH) and Thomas Cook (India).

IRCTC also beats Nasdaq listed MakeMyTrip.com in terms of profitability, though its smaller than both Thomas Cook (India) and MakeMyTrip.com in terms of revenues.

"Prospective investors should bear in mind that IRCTC has a monopoly in online booking of rail tickets and offers package tours on Indian Rail. This gives it an assured business unlike many of peers which have to operate in a highly competitive environment," said an analyst.

IRCTC is also the sole seller and supplier of package drinking water to railways and it accounted for nearly 10 per cent of the company's revenues last fiscal.

IRCTC has set the price band for its initial public offering at Rs 315-320 per share and the government hopes to raise Rs 635 to Rs 645 crore in this price band. The IPO will open for subscription on September 30 and close on October 3.

The IPO comprises of an offer for sale of 2 crore shares (representing 12.5 per cent of total paid-up equity) by the Ministry of Railways. There would also be an additional employee reservation portion of 1.6 lakh shares, taking the total offer size to 12.6 per cent of total paid-up equity.

Robust financials

In terms of financials, in FY19, IRCTC had one of the highest operating margins of 23.6 per cent against 3.7 per cent reported by Thomas Cook (India) and 7.2 per cent by ITH. Margins were negative for MakeMyTrip.com as its reported loss at operating level during the fiscal.

This translates into one of the best net profits and return on net worth. IRCTC reported a net profit of Rs 272.6 crore on revenues of around Rs 1,957 crore last fiscal. With net worth of Rs 1,043 crore at the end of March this year, this translates into a market leading return on net worth of 26.1 per cent at par with top companies in highly profitable sectors such as consumer goods and IT services export. "This will give a lot of comfort to prospective investors that in turn will support its valuation," said another analyst with a brokerage firm.

In comparison, Thomas Cook (India) reported net profit of just Rs 88.8 crore last fiscal on revenues of Rs 6,772 crore that gave it a very low return on net worth of 1 per cent.

IRCTC is also a dividend paying company and distributed Rs 122.4 crore to its promoters (the government) in FY19.

Relative valuation

At its upper price band of Rs 320 per share, IRCTC is valued at Rs 5,120 crore that translates into a price to earnings multiple of around 19 times based on its FY19 financials. This is lower than the current earnings multiple of around 27 times enjoyed by ITH and around 61 times of Thomas Cook (India).

However, the two are not strictly comparable to IRCTC due to their low margins and profitability. At its upper price band, IRCTC is asking for a price to book value of around five times which is much higher than its listed peers in the industry.

"At its upper price band, the company offers a dividend yield of 2.4 per cent which is one the best in the industry and comparable to cash rich companies in consumer-oriented sectors," said an analyst.

This makes IRCTC a good bet on India's growing travel and tourism market. "Some investors may find it expensive compared to peers but the stock looks a value buy when compared to cash rich and financially stable companies in consumer goods and technology space," he added.

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