IRCTC: Near-term returns may go off track

Resumption of passenger trains key challenge

The stock of Indian Railway Catering and Tourism Corporation (IRCTC) has seen a sharp recovery of 67 per cent from its March lows, significantly higher than the 39 per cent rise in the Sensex. Though IRCTC’S strong longterm growth potential, led by its monopolistic position in Indian railway services partly justifies the Street’s action, investors should brace for lower returns in the near term, in light of poor top-line visibility.

IRCTC is the only company authorised by the Railways to provide catering services, e-ticketing services, and packaged drinking water at railway stations and trains.

Uncertainty over resumption of passenger trains and the travel and tourism sector would take a toll on IRCTC’S overall performance in the near term. Therefore, some analysts have slashed their FY21 revenue and earnings estimates for IRCTC by up to 80 per cent and 87 per cent, respectively, after its March 2020 quarter results announced last Friday. They have also downgraded the stock to ‘add’ or ‘accumulate’ from ‘buy’ earlier. Given the pressure on business, the company’s return on equity is also expected to come down significantly to up to 8 per cent in FY21 from 44 per cent last financial year.

“As passenger train services are suspended until 12 August 2020 and traffic growth will be lower in the initial few months after operations resume, we expect H1FY21 (April-september 2020) to be a complete wash out,” Jinesh Joshi, analyst at Prabhudas Lilladher said in his note.

Given the rising number of Covid-19 cases, there is scepticism about when passenger trains would resume their operations.

Further, many analysts believe that people would continue to avoid eating outside/street food even after the lockdown is entirely lifted and passenger movement is allowed. As a result, recovery would be tougher for IRCTC’S catering business, which, along with Rail Neer (packaged drinking water), accounted for over 55 per cent of its revenue in FY20.

In Q4 of FY20, while catering business was down 20 per cent year-on-year (YOY), most other segments, including internet ticketing and Rail Neer, reported a growth.

Absence of convenience fee on e-ticketing in the base quarter led to about a threefold jump in its high-margin internet ticketing business and also improved overall profitability. IRCTC’S total revenue and profit before tax was up 18 per cent and 113 per cent YOY to ~586.9 crore and ~208.6 crore, respectively.

However, the figures for at least the first few quarters of 2020 -21 may be visibly different.