ValuePickr Forum

IRCTC: a necessity, a monopoly

Hi there everyone,

In our IPO discussion thread we had posts prior to listing of IRCTC. I could not find a thread on IRCTC therefore I am starting one. Request VPers to start contributing :slight_smile:

I intended to have a very crisp start to this thread by framing 3 simple questions which should set us on the path to understanding more about the company. I was inspired by the thread started by @Donald to have this framework approach to understand businesses. Aside I think IRCTC is a relatively easy business to understand. Please correct me if I am wrong.

Inputs and participation welcome from @dd1474 , @yourraj , @bheeshma , @Vivek_6954 , @rathi.saurav , @himanshupant , @jhasuraj , @pmehta , @bhaskarjain and others

The 3 questions:
1. How do they make money
2. Why do they make this money
3. How will they make more money

How does IRCTC make money?
IRCTC makes money via 4 business lines

  1. Internet Ticketing
  2. Catering
  3. Packaged Drinking Water
  4. Travel & Tourism

Finshots has a nice infographic capturing the numbers.

Internet Ticketing:

  • The only entity authorized by Indian Railways to offer railway tickets online via website and mobile apps
  • 1.40 million+ passengers travelled on Indian Railways on a daily basis, which consisted of approximately 71.42% of Indian Railways’ tickets booked online (June '19)
  • More than 0.80 million tickets booked through irctc.co.in and Rail Connect on a daily basis
  • Transaction volume of more than 25 million per month and 7.2 million logins per day

Catering:

  • Food catering services to Indian Railway passengers on trains and at stations
  • On-board catering services are referred to as mobile catering and catering services at stations are referred to as static catering
  • Provide catering services for approximately 350 pre-paid and post-paid trains and 530 static units
  • Catering services through mobile catering units, base kitchens, cell kitchens, refreshment rooms, food plazas, food courts, train side vending, and Jan Ahaars over the Indian Railways network
  • Offer e-catering services to passengers through mobile application Food on Track and e catering website, ecatering.irctc.co.in
  • Operate executive lounges, budget hotels, and retiring rooms

Packaged Drinking Water:

  • Only entity authorized by the Ministry of Railways to manufacture and distribute packaged drinking water at all railway stations and on trains under brand ‘Rail Neer’
  • 10 Rail Neer plants located at Nangloi, Danapur, Palur, Ambernath, Amethi, Parassala, Bilaspur, Hapur, Ahmedabad and Bhopal, with an installed production capacity of approximately 1.09 million litres per day, which caters to approximately 45% of the current demand of packaged drinking water at railway premises and in trains
  • Setting up new Rail Neer plants at Sankrail, Jagi Road, Nagpur, Bhusawal, Jabalpur, and Una and further plants at Vijaywada Ranchi, Vishakhapatnam, and Bhubneshwar
  • Installed water vending machines at railway stations to provide purified, chilled and portable drinking water

Travel and Tourism:

  • Presence across all major tourism segments such as hotel bookings, rail, land, cruise and air tour packages and air ticket bookings

Why do they make this money
Regulatory advantage:
The second question has a straightforward answer - In 3 of the 4 business lines they hold a monopoly owing to regulations. They sell roughly 8-10 lakh tickets online daily which constitutes 3/4th of all the tickets sold in the country daily. In catering which constitutes the chunk of the revenue they are at an advantage owing to the Catering Policy of 2017. For packaged drinking water it is the only entity allowed to sell in rails and on stations. Though this is the smallest revenue contributor. The tourism segment is where they make quarter of the revenues but face competition. This segment has had a decline over the last 4 years. They have Rail Tour Packages which has seen major de growth and Land Tour Packages which has seen an uptick.

Pricing Power:
They truly dont have pricing power. Someone can correct me if I am wrong. This is one of the risks called out in the DRHP also. For instance during demonetisation they had to remove convenience fee on the directive of the government. Another instance is that they have a tender process for in rail delivery for which they charge 12% which is also fixed as per directives.

Network effects in ticketing business:
This business line reaps revenues without much increase in costs. It is directly linked to passenger numbers and adoption of online ticketing. IRCTC is also a very sophisticated payments player and has a lot of advantages owing to its monopolistic position.

A snapshot again by Finshots below

How will they make more money

Growth in rail passengers:

  • Passenger traffic on the suburban network is likely to grow at a 0.5-1.5% CAGR till 2024 while non-suburban passenger traffic remain flat
  • Within non-suburban passenger traffic, share of upper class reserved ticket bookings in total railway passenger traffic is expected to grow slightly from ~2% in fiscal 2019 to ~3% in fiscal 2024, with the segment growing at a 5.5-6.5% CAGR during the period on account of growing preference for convenient travel
  • Share of second class mail/express ticket bookings (reserved) is expected to inch up from ~17% in fiscal 2019 to ~18% in fiscal 2024, with the segment growing at a 1.5-2.5% CAGR

Catering Revenues:
Catering revenue is expected to grow at 7.5-8.5% CAGR between fiscals 2019 and 2024 The growth in IRCTC’s catering revenues is expected to be driven by:

  • Likely increase in passenger traffic due to addition of new non-suburban trains i.e. long distance trains
  • Rising affordability and variety of food items available in catering services
  • Increasing coverage of catering services through addition of base kitchens and static catering units

Packaged Drinking Water:

Rail Neer distributes water to only a few Railway establishments in India due to constraints in capacity Rail Neer is expected to increase coverage to majority of Railway establishments in the country via PPP
Market size of railway establishment for the packaged water is estimated to grow at 2.1%-2.2% till '24

Travel, Tourism & e-booking:

  • Domestic and foreign tourists expected to grow at 9%-10% CAGR till '24
  • Government initiatives to promote tourism via improved infrastructure, easing of visa regime, assurance of quality standards in services of tourism service providers, projecting the country as a 365 days tourist destination and so on
  • India contributes more to South Asia tourism than the average levels for the region
  • Currently 50% of ebooking is for airlines, 30% for hotels and 20% for rails. IRCTC has complete market share in rails due to regulations. Overall growth till 2024 is expected to be 16%-17% on a CAGR basis
  • IRCTC does not offer international hotels, buses and cabs in its ebooking product portfolio. So that is a scope of expansion
  • IRCTC has special train tourist packages based on certain themes. Also luxury train rides
  • All government entities book their airline tickets via only 3 entities and IRCTC is one of them
  • They have their own wallet which I am not sure is actually making any revenues or not. They have a partnership with SBI to issue co branded cards. I believe this is quite popular

The achilles heel for IRCTC is what makes it a good investment today and that’s its monopoly. Any change in regulations with respect to opening up of
a) Ticketing to other players
b) Bringing in 3P vendors for catering
c) Allowing other packaged drinking water suppliers to sell at railway establishments
will take away revenues from IRCTC. It is in a very comfortable position as of now. And with growth in travel and online ticketing the numbers should keep coming in. This is something which I believe retail investors will have to keep gauging and reacting appropriately.

I am not touching anything on valuations. Feel free to do so in the posts below. Also lets ask 2nd and 3rd order questions. That is the key.

Regards
Deepak

Disc: Invested. Transactions in last 30 days. Not a registered advisor.
Sources: DRHP, Isec, Finshorts, HDFC sec

24 Likes

Biggest risk with government created monopolies(especially in consumer sector) is that it can really vanish in thin air rapidly.

Remember MTNL, VSNL etc.

Ticketing service charges were removed after demonetization and reintroduced only before IPO to shore-up valuations. So nothing stops government from taking such decisions again.

Also, like airlines, government may want to have more ticketing portals not restrict it to one company.

Now we are going to have private stations and trains.

Drinking water: Not sure how long such monopoly is sustainable. Does sound like a fair trade practice in current scenario itself.

Catering: With privatization more efficient players are likely to step in if allowed. Will be a matter of time.

Enjoy the ride till it lasts.

Disc: Not invested

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Hi

If you read this portion of the opening post @nav_1996.

A query - were MTNL and VSNL profitable companies? And were they debt free also? I am unaware.

Rgds

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Sorry. Missed that line :flushed: as it was long post.

Yes MTNL, BSNL and VSNL all were highly profitable companies.

When disinvestment began, it created euphoria and many investors made good money in PSUs. Possibility of gain in certain PSUs, enjoying monopoly going forward cannot be ruled out.
However, the moment a sector is opened for private participation, the PSU will vanish. Many Navratnas have vanished, and rest will follow suit. Government created monopolies are not worth much.

Very true, look at BHEL once private players entered in power plants equipment manufacturing they just vanished in thin air. I remember during 2000 era time that BHEL used to chose their clients and dictate for whom they manufacture and supply their equipment and reject or delay small captive power plant projects.

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Market is giving disproportionate valuation to private life insurance players. In my view it is a bet on vanishing LIC. Great investment opportunity can be found in areas being opened for private participation.

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Just have a look at the disclaimers in the audit report for the last two quarters.

Some basic housekeeping is missing.

My tweet summarizing the observation on this:-

No Views, just highlighting few facts, which is missed in euphoria.

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Last few times I booked railway tickets I booked via PayTM. It was much smoother and easier. Though before the final payment, it does ask you to login to IRCTC account, there is no other interface with IRCTC except for email confirmation received. Ticket confirmation by email comes from PayTM as well. I am not aware if there are other booking partners, but this trend should pick up as it is more convenient to users. If this trend of booking via other partners continues, what could be the impact on ticketing revenues of IRCTC? How much commissions/charges are shared with other booking partners? There is likely to be an impact on advertising revenues as the IRCTC website gets lees traffic.

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Hi @akbarkhan

This is a good observation. Coincidentally I have worked with IRCTC a few times on such integrations since 2012.

Currently there are two ways in which one can book rail tickets online

  1. Via IRCTC website or their app. I believe they now have both android and iOS
  2. Via IRCTC partners such as the one you mentioned

In type 1 the external partners mostly serve as payment instruments be it via wallet or whole gamut of payment instruments.

In type 2 IRCTC exposes APIs to external partners who build the ticketing experience themselves. Like the way paytm, google etc. have done. IRCTC actually started doing this long time back when apps were not even prominent. In my earlier role at Airtel Money (now payments bank) our team did exactly this using the USSD interface.

If you want to see the nitty gritties on how income sharing for both 1 and 2 are then it is actually available in public domain. IRCTC is quite transparent in this. (somehow my IP is not able to access irctc website at the moment else would have shared the links).

Rgds
Deepak

11 Likes

Very true sir but i may be different prospective .though a portion of the earning will go to the shared service provider who facilate the user in booking the ticket but a a customer giving option to save money in terms of cash backs or less time consuming those service providers well disrve the compensation but at the same time the major chunk of the revenue goes to IRCTC and moreover it’s seats get filled and i am sure they have plan in place to cover the running expenses/ KM .

If Bajaj finance get benefit by opening their service to hospital it is win - win case . I recently went in to Café coffee day which is inside Satguru Partap Singh (SPS) Apollo Hospital in Ludhiana . who will think that some will sip ultra costly coffee in the atmosphere of the Hospital but it was full . my intent in sharing above example is who is to find out that who are the beneficiaries ? answer is it is hospital – service provider and customer so over all something for every stackholder in the ecosystem . I should not consider this a big risk but have following concerns .

  • Who are the main customers - Middle income having plenty of time for the disposal and don’t mind saving money with home filled water bottle / cagger ./ home Cooked food . and from last couple of years railway passenger traffic has remained nearly flat .

  • Disruption in transportation will come from the E-vehicles .

  • Another is working capital - which one part is fixed and other is variable . But the major porion of working capital is used in maintance of the infrastructure / software / licence fees and i am sure in long terms the fares will be regulated by the government .

  • Next concern is Going forward the trafficking if not in control of IRCTC if the trains are not able to reach i destination than this initial pull will go away . as railways is famous for IST ( Indian stretchable time ).

  • They are not using and database but using excel sheets which is major concern raised by @dd1474 at IPO Review - Discussion until listing

  • till now the market of running the tarins is monopoly but as the railways has intended to route privatise this will be real threat . Ministry of Railways and National Institution for Transforming India (NITI) Aayog, Government of India are spearheading participation of private entities in operation of passenger trains on 100 routes. In this respect, a draft of Request for Qualification (RFQ) document, Concession Agreement Guiding Principles, Project Information Memorandum (PIM) along with a Presentation on the salient features of the Project (Draft Documents) have been uploaded on the Ministry of Railways website http://www.indianrailways.gov.in/railwayboard

Regards

3 Likes

One more critical point in IRCTC is how much growth is sustainable? Q3FY20 results are due to onetime impact of charge which would not be shared with Railway and hence profit appear very high. Henceforth, my view is the growth would be, at best, inflationery. Find enclosed my experience with Railway fare (Mumbai Local Train First Class quarterly season pass Churchage-Borivali)
image
We find hardly 2.8% increase even in first call fare over decade (13 years to be precise).
So when Railway itself face all issue to raise fare, how we shall expect fare hike being frequent feature for IRCTC?

Second point would be of supply. Currently, huge block is owned by Indian Railway, When that block is divested, we may see real price alignment.

Third, while IRCTC would have great data to be data anlytics, are they really equipped to get benefit out of that? I would appreciate if any member can through some light on this issue. Particularly when we see Auditor comment on data being kept in excel and also various incidences appearing about the system being misutilised. Find enclosed one link in 2020.

While I like IRCTC as user, at current price and given the organisation strength (particularly on technical side), I see real challanges in sustainable wealth creation.

Discl: I got allotment in IRCTC IPO. Sold 50% of my holding and still own small position. My view may be biased, not a SEBI registered advisor.

4 Likes

While booking ticket using Paytm or any other app, we pay ticket price (at booking window) + IRCTC service charges + Paytm service charge (normally mentioned as payment gateway charges … approx 1.8% of transaction amount +GST)

As IRCTC is allowing these apps to use their API, I understand they might be charging (rather paying) them for exposing their API services.

Its just my thought based on industry experience. As such I don’t have access to exact terms / conditions follwed by paytm / irctc .

One of the API vendor selling IRCTC API is following

3 Likes

Hi everyone!

Since most of the points of IRCTC 04 business segments are covered by you sir and others in the forum, I would like to share what is not being covered till now ( a new business segment) and why its stock price has galloped from level of Rs 850-900 to the present price of Rs 1500 plus.

In passenger trains, earlier IRCTC used to earn by managing on board catering service in trains and by earning commission by selling train tickets through its Internet ticketing services. Whole train fares excluding catering charges (in pre paid trains such as Shatabdi, Rajdhani etc) go to Indian Railways kitty.

But, recently, IRCTC got new business from Indian Railways to run/manage whole operations of premium trains on its own. Key features of this new business are as follows:

  1. IRCTC will look after whole operation of train i.e ticket checking, catering, on–board housekeeping will be done by IRCTC.

  2. Payment received from passengers through selling ticket will be retained by IRCTC.

  3. Ticket in these trains can be booked through IRCTC website/apps only and cannot be booked through Railway counters.

  4. IRCTC has a pricing power to charge tickets.

  5. Dynamic fare strategy is introduced by IRCTC just like we see in Airlines, i.e during peak seasons or holiday seasons, when demand is high, IRCTC will charge high fare.

  6. IRCTC will have all the right to earn though advertisement in trains just like we see in Delhi metro.

  7. Parcel booking will be manage by IRCTC and its revenue will also go to IRCTC kitty.

  8. IRCTC will have to pay haulage charges to Indian Railways i.e cost of running, maintaining train, using IR track, infrastructure, electricity charges etc. These charges would be approx. Rs. 14 lakh per day for 01 train (These charges will vary with no. coaches in train, distance covered and type of train).

Currently IRCTC is managing 02 Tejas train over IR network:

a. Train no. 82501 Lucknow-New Delhi Tejas express and back on same date and train no. 82502 New Delhi - Lucknow Tejas express. IRCTC is managing this train since 05.Oct.2019. Train capacity is approx. 950 seats.

I have done an analysis on IRCTC earning from this train:

During non-peak seasons, average occupancy is 700 for one side trip i.e 1400 passengers for one day round trip. Average price per ticket (Include both executive and normal chair car) is Rs 1500 per ticket.

Total earning from one day would be approx. 1400*Rs. 1500=21 lakh.

I.e Net profit from operations of train during non peak season would be around. 21 lakh -14 lakh= 07 lakh per day (A).

Please note that income from advertisement and parcel booking is not included.

During peak season, which are during Holi (15 days), May-June/summer holiday (02 months), Rakhi (15 days), Diwali ( one month) and new year/winter holidays time(01 month)

Total: 05 months in an year,

Train will run on full occupancy and will charge ticket on dynamic fare (high fares). I.e approx. 950*2: 1900 passengers will travel per day and average price per ticket would be approx. Rs 2000 per passenger.

1900*Rs. 2000= Rs. 38 lakh per day of income (excl. advertisement income and parcel income)

I.e 38 lakh – 14 lakh of haulage charges= Rs. 24 lakh per day (B)

Now lets assume non peak season is for 07 month and peak season for 05 month in an year

Total income:

(A) 07 lakh 36507 month/12 month= 15 Cr.

(B) 24 lakh * 365*05 month/12 month= 37 cr.

Total income= 52 cr. per year excluding Income from advertisement and parcel services.

Income from advertisement and parcel services cannot be determined right now as it is introduced new for IRCTC. If we assume income from these sources compensate for staff cost then the net profit from one such train should be at least 50 cr.

This case study is only for above train only. Occupancy is taken from IRCTC website. Haulage charges from Railway operating staff, who are in my contacts.

b. 2nd train is Train no. 82902 Ahmedabad-Mumbai Tejas express and back on same date by train no. 82901 Mumbai-Ahmedabad Tejas express. IRCTC is managing this train since 17.01.2020. Train capacity is approx. 750 seats. This trains runs on mostly on full occupancy throughout the year as it is a very busy route of IR and used mainly by business class people.

Since train capacity is less, haulage charges will also be less.

I am expecting that this train will also earn around 50 cr./per year as this train usually run on full occupancy and IRCTC is charging more fare than usual throughout the year.

c. IRCTC will run 3d private train Kashi Mahakaal express w.e.f 20-feb-2020. There are two routes, 1st is Varanasi- Indore- via Lucknow and back and 2nd is Varanasi- Indore via Allahabad and back. Can’t predict the earning right now but should be like above trains.

These above 03 trains alone should add approx. 150 cr plus of annual profit.

These are just 03 trains, as per announcement by FM, more Tejas like trains will be introduced. IRCTC is getting a new train every month. That is the reason i believe stock is surging after announcement of every new train.

New players are not entering in next 02 years and by that time IRCTC will get many more such trains.

**Events to watch are change in govt. policy which affects IRCTC business but for now we should not be worried. Every new train, allotted to IRCTC, is a big positive for the company.

Regards.

Disc.: Invested in stock.

PS: Just watch Prime minister inaugurating 3rd private train allotted to IRCTC on 16.02.2020.

26 Likes

Interesting analysis. It would be helpful to cite some of the numbers you have provided. I understand it is only a very rough calculation, but I beleive that the risk of ‘on time guarantee’ is not accounted for. A representative of IRCTC has quoted on Bloomberg that the economic performance of these trains were much better than the expectations (couldn’t find the web link to cite).

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Hi,

Reimbursement on late arrival of train is not exactly what people think:

  1. No reimbursement if train is late because of natural phenomena such fog (which is the main reason).
  2. Reimbursement is only given if is a passenger claims it.
  3. Priority is given by IR to these trains to reach on time.
  4. Not heard many instances in last 03 month about late arrival of train.
  5. Also amount is less, i.e Rs 100 if train is late by more than 01 hrs and Rs. 250 if train is late by 02 hours. Whereas average ticket fare is Rs. 1500.
  6. Above all IRCTC has done insurance of passengers, which bears reimbursement claims.

Regards,

5 Likes

Train allotted to IRCTC by Ministry of Railways

IRCTC MD clarifies many questions discussed in the forum above.

IRCTC-14-2-20-PL CONCALL NOTES.pdf (617.9 KB)

Prabhudas Liladhar projecting an EPS of 56 and 63 for FY 21 n 22. What PE will you assign to this profit making internet platform based compamy?

IRCTC is a core portfolio stock to be held as long as its a monopoly imho .

IRCTC comprises of combo of Make mytrip,Bisleri,Swiggy ,Paytm tks to its Eticketing ,Rail Neer,Ecatering and wallet business but a profit making business tks to monopoly IMHO. Imagine its marketcap had it listed abroad as internet based platform companies are rage all over the world .

Its also a play on data of huge chunk of Indian population nearly 70-80% which could be monetized in future.

Also its a cornered stock due to strong hand bought it.Nippon MF itself bought 15% of small size 600 crore IPO float like Affle on listing day.

What if GOI increases e ticketing charges by 5-10 Rs as well .We happily give Rs 200 as conveyance charges while booking flight. This will go straight to bottomline.

Views may be biased due to holding since Ipo and averaging on upside.

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Just checked on Stockedge app for Reliance Nippon purchase, of the approx 2 crore free float, reliance Nippon mf purchased 15,00,000 shares, which comes to around 7.5% of free float
Thanks

1 Like