The Indian Railway Catering and Tourism Corporation's (IRCTC) Rs 645 crore initial public offering will close today. The IRCTC IPO, which opened for subscription on September 30, has already been subscribed over 3 times at the end of the second day of bidding on October 1. The IRCTC IPO, which has a price band of Rs 315 to Rs 320 per share, comprises an offer for sale of two crore shares, representing 12.50 percent of total paid-up equity by the Ministry of Railways.
Most brokerages are positive and have given a buy recommendation on the IRCTC IPO, given its reasonable valuation and monopoly in the railways. The analysts also note that the key risk and concerns for the company remain change in the policy of Ministry of Railways could impact financials, competition could pose a risk to its monopoly position, and stricter regulatory requirements for use of plastic.
So should you subscribe? Here's what top brokerages say:
According to the brokerage, as the sole entity authorized by Indian Railways to provide its services, the company enjoys significant barriers to entry for each business segment. The company is likely to reap future benefits of favourable regulations as it scales other products like e-wallets, train operations, and hotels, it added. The company is likely to benefit from monopolistic nature of the business, significant growth over FY19-21, an asset-light business model with healthy dividend payouts, and strong parentage. Hence, the brokerage recommends investors to 'subscribe' to the IPO.
Recent tax reduction by the government to 25.2 percent and an increase in revenue from service charge for online ticketing will improve profitability substantially going forward, the brokerage said. It also added that there is a significant opportunity for the Company to ramp up the catering business given a very large captive audience which is currently being underserved.
"Increasing business volumes from catering and Packaged drinking water businesses, along with service charge for online ticket booking will drive earnings growth for the company between FY19-21. We would, therefore, recommend to Subscribe to the issue," it noted.
As per the brokerage, the inclusion of convenience fee on railway tickets, setting up of 10 water plants in the next 2 years and recent tax reduction of corporate tax bodes well for EPS growth. Coupled with healthy dividend payout (45 percent in FY19) and return on equity (RoE) (26.1 percent), the brokerage recommends 'subscribe' to the issue at the offer price. Further, at the IPO price band of Rs 315-320, the stock is available at a price to earnings multiple of 10x (FY21E EPS), which they believe looks attractive from the perspective of future earnings growth.
Given the near-term growth potential, the brokerage values the company at 13x FY21E EPS translating in a potential target price of Rs 431/share, and thus, they expect it to witness a healthy listing gain. They recommend 'subscribe' to the issue. However, the company remains exposed to the potential risk of any change in policies or allowing of open competition by government, they added.
According to the brokerage, IRCTC has a unique business model and the company does not have any competition across any business segment. Based on various parameters like strong earnings profile, diversified business segment, healthy return ratio, debt-free status and most importantly monopoly business, they have a positive view on the issue. The issue has been offered at a price band of Rs 315-320 per equity share. At the upper price band of Rs 320, the stock is available at P/E multiple of 18.8x to its FY19 EPS of Rs 17. The brokerage has a positive outlook for the company and we recommend investors to 'subscribe' to this issue.
Stewart and Mackertich
The stock is valued at a price to equity ratio of 18.8 and 18.5 based on upper and lower issue price band. the brokerage believes the stock is valued reasonably and thus recommend to subscribe.
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First Published: IST