IRCTC is on right track to spur growth but rich valuation a hurdle

Investors in the Indian Railway Catering and Tourism Corp. Ltd (IRCTC) are grappling with mixed emotions following the company’s March quarter (Q4FY24) results. While revenue growth across critical segments was robust, operating margins declined.

Revenue rose nearly 20% year-on-year, primarily driven by the key catering division. However, the Ebit (earnings before interest and taxes) margin dropped a sharp 341 basis points to 8.7%, despite stable revenue growth, disappointing investors. The decline was attributed to administrative expenses and other one-off charges. 

In the internet ticketing segment, margins dipped due to a higher share of UPI transactions, where the company charges less. The tourism segment’s margin was adversely impacted by retrospectively charged haulage costs for Tejas trains. 

Despite these setbacks, the management is confident of improving margins across segments, particularly in the catering business, which contributes 46% to IRCTC’s revenue and is expected to see its Ebit margin improve to 15% in FY25.

Moreover, IRCTC is actively seeking long-term contracts to boost revenue growth. The company manages over 470 catering chains and services over 700 trains. It has also partnered with food aggregators like Zomato, catering to over 100,000 daily bookings across 407 stations, presenting significant potential for further expansion.

Exploring new growth avenues

Catering was the primary revenue driver in FY24, but IRCTC plans to explore multiple growth avenues in FY25 and beyond. The company sees significant potential in its underdeveloped segments like packaged drinking water and tourism products. IRCTC is strategically building its Rail Neer bottling capacity, ramping production to 1.45 million bottles per day in Q4FY24 from 1.1 million in FY23, and 1.2 million for the full year FY24.

IRCTC is strategically building its Rail Neer bottling capacity, ramping up production to 1.45 million bottles per day in Q4FY24 from 1.1 million in FY23.

“Going forward, the company will benefit from increased capacity due to the dedicated freight corridor, an increase in Vande Bharat trains (currently at 41 vs potential of 451), train-side vending, and the renewal of long-term catering contracts. Hence, we are building robust growth in catering and tourism revenues with a CAGR of 16% & 25% over FY24-FY26E,” said an IDBI Capital Markets Pvt. Ltd report.

Meanwhile, in the calendar year so far, the IRCTC stock has risen by a modest 9%. The stock is trading at a one-year forward price-to-earnings multiple of around 57 times, showed Bloomberg data. While the company seems to be making the right moves to drive growth across various segments, valuations seem rich against the current backdrop. 

While IRCTC enjoys a monopoly in the Indian railway ecosystem, providing a variety of services, the 50% stock run-up over the last year appears to have already priced in many of these positives.

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