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Below are Views On  IRCTC enjoys a monopoly business in Indian online train ticket booking services By Hemang Jani, Motilal Oswal Financial Services.

Drama of convenience fees being introduced and then withdrawn: Government yesterday announced the revenue sharing arrangement with IRCTC wherein the latter has to share the income generated from convenience fees for bookings made on its website on a 50:50 basis. Government used to have a sharing on convenience fee with IRCTC prior to demonetization (Nov’16). However to promote digital, government removed the convenience fee and hence the sharing was also removed. Convenience fee was reintroduced by the government for IRCTC in Sep’19 just before its IPO however this time the government did not take any sharing. Yesterday the government announced reintroduction of revenue-sharing effective from Nov’21 but it was not well taken by minority shareholders. The stock tanked ~30% intraday to hit a low of Rs639 from its peak of Rs983. Post this knee jerk reaction, the government was forced to withdraw its decision and the stock recovered smartly to Rs852 (down just 13% from its peak) as the roll back got announced.

Convenience fee will continue to pose a risk - ~25% hit to the bottomline: This will always remain as a key overhang until there is a clear policy from the government on the sharing ratio. Convenience fees revenue formed ~17% of FY20 total revenue and 75% of EBIT. If the IRCTC shares 50% revenue with the railways then the net impact of it on IRCTC earnings would be ~23-25%. Also one of the biggest risks for IRCTC is that the government controls the fees charged by it to the public and has the authority to change it which could lead to its resultant impact on IRCTC financials. For example it reduced it to zero post demon. Thus IRCTC is making efforts in diversifying its business model and reduce its reliance on the ticketing convenience fees, by entering into segments like travel and tourism and catering.

Monopoly business model: IRCTC enjoys a monopoly business in Indian online train ticket booking services. The sharp rise (almost 100% growth) in railway ticket bookings in 2QFY22 was one of the major reasons for the strong outperformance from the stock. The stock price multiplied 3.5x since start of this year touching high of Rs983 post-split (Rs6400 pre-split). It has entered into newer segments like running private train, travel & tourism and catering, which provides diversification. Investors are currently liking platform oriented business models and thus rewarded IRCTC well.

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