IRCTC

Hello friends,

I wrote a detailed article on this stock in Sakal Money monthly magazine a couple of months back. This is a stock that satisfies almost every requirement of value investing principles as advocated by Buffett et al. The simple and straightforward principle of value investing is to buy fundamentally strong companies at a discount to their fair value and sell them at a premium to their fair value. So, the business quality and the valuation are of utmost importance in value investing.

These are turbulent times due to Trump trade war and there could be good opportunities for value investing, should the geopolitical situation worsens. IRCTC has to be on your radar in such a case.

When the market is nervous, I get excited and when the market is overly excited, I get scared.

–Warren Buffett

Established in 1999, IRCTC (Indian Railway Catering and Tourism Corporation) is a government-owned company in the railway sector. In the last few years, the government has been focusing a lot on the modernization and expansion of the railways and a lot of provision is being made for this in every year’s budget, due to which IRCTC has also come into the limelight like IRFC, RITES, RailTel, RVNL and other railway companies that provide services complementary to the railways. This company has been awarded the Mini Ratna status by the Government of India. The business of this company is to provide all kinds of facilities to the railway passengers as outlined below.

• Catering services: This includes both food served at the railway station and food served on the train itself. This is the main business of this company and the share of this business segment in the total income is about 46%. Station-based services include food plazas, fast food and public catering complexes, while catering services are provided from pantries and mini pantries during train travel.
• Online railway tickets: The facility of selling travel tickets and making advance reservations for railway passengers is available from the website of this company, which has the highest transaction volume in the Asia-Pacific region. The share of this business segment in the total income is about 29%. Since most of the income is received in advance, this is an extremely beneficial business segment for the company from the viewpoint of cash flows.
• Tourism: Through this business segment, the company provides tourism packages, airline tickets, and travel facilities for large companies. This includes sightseeing tours, state tours and other types of tour packages. Not only train travel, but also air, bus and taxi travel is organized and includes food, accommodation and sightseeing. This tourism is relatively cheap and is becoming progressively popular. This business segment contributes about 13% to the total revenue and is continuously growing.
• Drinking water (Rail Neer): The company provides bottled drinking water at railway stations and in railway trains. This business segment contributes about 8% to the total revenue.
• Religious tourism: The company also organizes many religious tours within the country. Religious tourism is becoming as popular of late as other tourism. This business segment contributes about 4% to the total revenue and is also showing good growth.
  
  Competitive advantage or MOAT
• Monopoly: The company has the monopoly granted by Ministry of Railways to provide tickets, reservations, catering services and drinking water for train travel, so the company has no competition in earning about 83% of the total revenue. Although there is a lot of competition in the field of tourism and religious pilgrimages, the company gets a competitive advantage in this too as it has a monopoly in booking and organizing affordable train travel.
• Strong brand: It is a well-run company and has been very successful in gaining customer trust in the quality of services and products.
  Warren Buffett likes such monopolies because they do not require very smart people to run these businesses.

“I like to invest in businesses that are so strong that even a fool can run them, because sooner or later one will ”

— Warren Buffett

Capital Investment

• Cheap Hotel Construction: Projects for construction of cheap hotels are underway in Lucknow, Khajuraho and Kevadia
• Rail Neer Plant: The drinking water production plant in Vijayawada, which was expected to start on October 24, is not yet operational, but the plants in Sinhadari and Bhubaneswar have become operational.
• Capital investment from Rs 33 crore in 2023 has reached Rs 443 crore in 2024, which shows a significant increase in investment in ongoing projects.

Railway Development Plan
The business growth of this company and all other railway-related companies is mainly related to the development of railways. The development of the railway network has been a priority area of ​​the government in the last few years and the government has also been making generous provisions for this in every budget. The plans include a separate dedicated railway freight corridor, modernization of stations, better facilities for passengers, fast trains for faster travel and the use of modern technology for all these things. Freight transport costs in India are around 13-14%, which are much higher than the 7-8% cost in developed countries. This increases the cost of production of Indian goods and proves to be a major negative for exports. In order to reduce the cost of freight and transport goods in less time, roads, ports and airports along with railways are being developed.

The government is taking appropriate steps by recognizing the need for modernization. Along with this, it is necessary to provide good passenger services of the railways for the development of the tourism sector and the government is also making efforts in this regard.
According to the National Rail Scheme, a capital provision of Rs. 2,65,200 crore has been made for the railways in the financial year 2024-25. This mainly includes the following schemes.
1) Pradhan Mantri Gati Shakti Yojana: Under this scheme, all the infrastructure projects implemented by the National Rail Scheme and various ministries will be integrated.
2) Mumbai Ahmedabad High Speed ​​​​Rail: Under this project, a train running at a speed of 320 km per hour will be started between Mumbai and Ahmedabad. This 508 km distance will be covered in just three hours. This project is likely to be operational in 2028.
3) Vande Bharat trains: These trains, running at a speed of 130-160 km per hour, are currently running on some routes and will be started on more and more routes.
4) Amrut Bharat Station Scheme: This Rs 24,470 crore scheme will modernise 1,309 stations. It includes better toilets, WiFi facilities, better waiting rooms and outstation transport facilities.
5) Latest Technology: Use of high technology in all railway facilities to increase safety and efficiency.

Business Growth Drivers:
1) The 1,300 km dedicated eastern freight corridor and 1,500 km dedicated western freight crridor at a cost of Rs 102,000 crore are almost operational. This has made the old railway lines fully available for passenger traffic. New and fast trains are being started on these lines and this will lead to a huge increase in passenger traffic.
2) The above projects will make rail travel much shorter and more comfortable. Rail travel is much cheaper than air travel and more comfortable than road travel, which is why more and more people prefer rail travel.
3) The number of railway passengers has grown by a mere 1.3% CAGR in the last twenty years. The reason for this low growth is that despite high demand, supply has remained limited. Tickets for most routes are available only if booked well in advance. However, this number will increase at a higher rate as the number of trains increases.

Financials:
The company’s current market value is around Rs 58,500 crore with an annual revenue of Rs 4,500 crore and a net profit of around Rs 1,250 crore. The company’s equity capital is Rs 160 crore and the face value of the share is Rs 2. The government owns 62.4% of the company and about 22% is with domestic and foreign financial institutions. The remaining 16% is with retail investors.
Balance sheet: The company’s balance sheet is Rs 6,800 crore, of which 2,406 crore is in cash or cash equivalents. In the last few years, the ratio of cash or cash equivalents to the total balance sheet has been around 40%. The debt is almost zero. Since the company receives all the revenue from ticket sales in advance, the working capital requirement is very low. This is a big advantage for the company. However, the balance sheet shows an amount of about Rs 1726 crore as receivables. This is a huge amount in terms of the size of the balance sheet. Of this, about Rs 1296 crore is due from the government and the railways. The balance sheet shows a capital investment of Rs 466 crore in 2024, but project-wise figures are not available. The reserves figure in the balance sheet shows a compound growth of 24%. This figure has now increased to Rs 3363 crore from Rs 424 crore in 2015. If this growth continues, the company may consider issuing bonus shares in the near future.

Business Growth: In the last five years, the company has shown a compound growth of 18% and 32% in sales and net profit respectively, which is very good. The rest of the company’s figures are mentioned in the table below, which are all good. The company is debt-free, cash-rich and pays regular dividends. The current dividend yield is 0.96%. Operating margins and net profit margins are good and stable.
Cash Flow: The company has good cash flow. The ratio of net profit to operating cash is around 60% which is good but it should be higher for this company. Free cash flow is increasing.
Valuation:
The stock is currently trading at Rs. 731, well below its one-year high of Rs. 1,148. The stock is quoting at a PE of 47.4 which is much below its five year median of 68.3. Price to sales and price to cash flow ratios are 12.8 and 66. PEG is near 1.5. The Petroski score is 6. The intrinsic value calculated using DCF method, assuming a 20% increase in free cash flow, comes to only Rs. 409. This intrinsic value looks low due to the reduction in free cash flow due to capital investments in the past year. Moreover, it is always difficult to estimate future growth using DCF method and there is a high possibility that this company will show a growth of 30-35%, so even considering the growth, it is a bit expensive at the current price. If the market declines and the price comes to between Rs. 650-700, then this company should be attractive for long-term investment.

Hope you like the article. Let me know of any comments that you may have.

Often the journey is more interesting than the destination

Yours truly

Please subscribe to the blog if you like by clicking the icon above and then approving the mail you subsequently receive

Disclaimer: The content does not constitute a buy or sell recommendation. Readers are advised to consult their investment advisors for any investment-related decisions.