Should You Invest in IRCTC Ltd. for Long Term? Stock Analysis by Finology

One of India's strongest monopolies, IRCTC is the all-in-one travel companion for seamlessly integrating train bookings with catering, tourism & hospitality services.

Finology Research Desk has analysed the company this week, providing a clear verdict on whether Indian Railway Catering & Tourism Corporation Ltd. is a good long-term stock or not. Find out in this article.

What makes the Travel & Tourism industry special?

The Travel and Tourism industry has been experiencing rapid recovery in India after the outbreak of COVID-19. India is being ranked at the 39th position in the Travel and Tourism Development Index (TTDI) by World Economic Forum in 2024. This industry was valued at USD 19.44 billion in 2024 and is expected to grow at a CAGR of 8.27%, reaching USD 31.21 billion by 2030. Travel and tourism are two of the largest industries in India, contributing  9.1%  to the country’s GDP as of 2023. This increase is driven by rising disposable income, infrastructural improvement of railways and airports, and government initiatives to promote travel and tourism in India. 

The Indian railway system stands as the lifeblood and foundation of the Indian economy, spanning thousands of kilometres and covering the entire nation. It ranks as the 4th largest railway system in the world after the US, China, and Russia, contributing about 1.5% of the country’s GDP. The railway board holds the monopoly over provision of railway services in India. Due to its low cost, railways continue to be the most popular means of transportation for long-distance travel in India. With total number of passengers reaching 715 Cr. in FY25 from 673 crore in FY24, marking a 6% increase from the previous year. 

Before the digital era, booking a train ticket was a very troublesome task and involved visiting railway reservation counters in India. With the expansion and ease of online railway ticket booking, passengers can now book railway tickets from the comfort of their homes 24/7, except during the daily maintenance period of 11:45 pm to 12:20 am. This facilitated real-time information on train schedules, seat availability and instant payment options, making the process convenient and faster.

The government has taken several measures to improve the services provided by the railways in India, such as technological advancements, improved cleanliness and enhanced safety & passenger amenities.  

The Indian catering service market experiences substantial growth driven by various factors like urbanisation, tourism, and prevalence of busy lifestyles, which is prompting individuals to seek convenient alternatives to cooking. The catering industry is primarily classified into three segments: The organised sector, the unorganised sector, and special categories. The organised sector includes standalone restaurants with less than three outlets and chain format restaurants with three or more outlets in India. The unorganised sector comprises roadside eateries such as street food, dhabhas, etc. Special Categories, on the other hand, include railway catering, flight catering, hospital catering, and catering in the government programs (mid-day meals) etc. Event caterers are classified under the head "Others", which are involved in catering at venues having varying sets of food processes and food handling from venue to venue. 

Railway Catering in India is solely handled by the Indian Railway Catering and Tourism Corporation (IRCTC). It has the only authority to manage and provide catering services on trains and at railway stations in India as of 2024. Railway catering can be classified on the basis of point of consumption or sale as mobile catering, static catering and e-catering. IRCTC is also engaged in the business of packaged drinking water.

Accessing safe drinking water remains a persistent challenge in India which is compelling many individuals to rely increasingly on bottled water. The Indian bottled water market was valued at USD 6.77 billion in 2023 and is expected to grow at a CAGR of 13.17% to reach USD 12.56 billion by 2030. It is one of the fastest growing industries in India, which is driven by increasing awareness of waterborne diseases (such as cholera, typhoid), improved price and easier availability. The increasing demand for packaged drinking water is further intensified by the tourism sector, with tourists often opting for bottled water due to safety concerns and ease of availability.

Source: Mordor Intelligence

Business Model of IRCTC

Founded in 1999, IRCTC is a central public sector enterprise which is owned by the Government of India, under the administrative control of the Ministry of Railways. It is engaged in the business of providing online railway tickets, packaged drinking water and catering services at railway stations and on trains in India. Apart from these, they also operate in the travel and tourism segment.

Revenue Mix of IRCTC

The company derives its revenue from four segments - internet ticketing, catering, packaged drinking water and travel and tourism.

Source: Company, Finology Research Desk

Internet ticketing: contributed 30.33% of the company’s revenue, which accounts for 82.68% of the total tickets reserved online in India.

Catering: This segment contributes about 45.60% to the company’s revenue by providing comprehensive catering services at stations and on trains. IRCTC operates in the catering segment through three modes, comprising mobile catering (which provides meals to onboard train passengers), static catering (which comprises food courts, fast food units at the stations) and e-catering (which allows passengers to order meals online and get them delivered on the train). It also provides executive lounges, budget hotels, and retiring rooms for the convenience of the passengers on Indian Railways.  

Packaged Drinking Water (Rail Neer): Packaged drinking water segment contributes about 7.65% to the company’s overall revenue. IRCTC manufactures and distributes packaged drinking water under the name “Rail Neer” in India. With over 19 plants and an installed production capacity of 1.09 million litres per day, it caters to 45% of the current demand of packaged drinking water at 410+ railway stations and in various trains in India.

Travel and Tourism: This segment contributes about 12.86% to the company’s revenue. It operates across all major tourism segments such as hotel bookings, rail, land, cruise and air tour packages and air ticket bookings. It is known as one of India's leading travel and tourism companies, catering to the needs of diverse tourist segments. IRCTC provides packages for domestic and foreign tours. They also provide special purpose tours like cultural exchange tours, educational tours etc.

Unit Economics of IRCTC

Source: Annual Report FY24, Finology Research Desk

COGS accounts for ~52.7% of the total income of the company. The majority ~22% of these expenses incurred by the company are expenses of catering and comprehensive services provided for premium trains - Rajdhani, Shatabdi, etc. Apart from these, the other input costs include licence fees, tourism and train operations costs, manufacturing and direct expenses,etc. 

Employee costs account for ~6.5% of the company’s total income. Employee costs as % of sales, which earlier used to account for ~14% of the total income (FY15-FY22) have halved over the last 2 years, showing improving efficiencies of costs.

The company operates on 0x debt-to-equity and has an asset-light business model. Therefore, finance costs and depreciation and amortisation costs combined have remained low and stable at ~2-3% of total income. 

Other expenses which majorly include costs for repairs and maintenance, freight,etc. accounted for ~5.3% of the total income. These costs been stable over the years and have grown in line with revenue growth. 

The company's tax burden has been relatively higher, accounting for ~8.7% of the total income. Over the years, it has ranged between 9% to 10%, aligning with the corporate marginal tax rate of 25%.

After accounting for all the expenses, the company delivered a strong net profit margin of ~25.1%. The company has been demonstrating strong profitability with net margins expanding over the years from ~12% in FY15 to ~25.1% in FY24.

Porter's Five Forces Analysis of IRCTC

Source: Finology Research Desk

1. Low Competition in the Industry - IRCTC faces low competition in its core segments such as railway ticketing, catering services and packaged drinking water, as it holds the monopoly power in these areas and works under the administrative control of the Ministry of Railways However, In the travel and tourism segment, IRCTC faces stiff competition from players like Makemytrip, Easemytrip, Ixigo, Goibibo, Oyo- competing over price, breadth of services and products, customer service, ease of use etc. 

2. Moderate Threat of Substitutes - IRCTC has a moderate threat of substitutes in the business. At the industry level, Railways face increasing competition from other means of transport such as roadways and airways. Increasing affordability and popularity of airlines and premiumisation of bus services offer faster and convenient travel options, particularly for long-distance or time-sensitive travel. This may impact ICTC’s primary segments such as online ticketing, catering and packaged drinking water. 

3. Low Threat of New Entrants - The threat of new entrants is low in the IRCTC’s business due to high regulatory barriers and public sector monopoly. IRCTC is the only entity authorised by the government to provide online railway tickets and catering services, as well as packaged drinking water at railway stations and trains. The integration of IRCTC’s ticketing system with the Centre for Railway Information System (CRIS), along with regulatory and technical complexities, makes it very difficult for private players to enter this segment. However, in the other segments, such as catering and packaged drinking water, if IRCTC fails to fulfil the growing demand and maintain the quality standards and hygiene, it may open the doors for private players to step in and fill the gap.

4. Low Bargaining Power of Customers -  Customers do not hold significant bargaining power given the monopoly nature of IRCTC’s business. IRCTC is the official and only provider of ticketing, catering and drinking water services for Indian railways which restricts the influence of customers due to lack of direct alternatives.

5. Moderate Bargaining Power of Suppliers - IRCTC depends on third party distributors and local suppliers for sourcing and timely delivery of ingredients, including fresh produce. These suppliers are selected through a limited tender process, which makes it difficult to easily change or add new suppliers given the time consuming nature of the process, giving moderate bargaining power of suppliers in critical situations.

What led us to reject IRCTC Ltd. for Finology 30?

1. Regulatory Risks

IRCTC's business and revenues depend on the policies of the Ministry of Railways and the operations of Indian Railways. The Ministry of Railways determines the scope of fees and services charged by the company. This creates a risk on the revenues of the company. For instance, in 2016, the Ministry of Railways removed the charges the company used to levy on passengers for booking railway tickets online as a service charge at rates of ₹20 per ticket for non-AC classes and ₹40 per ticket for AC classes. This had adversely impacted the company’s revenues. The regulatory risks are an uncontrollable factor for the company, and given that the government is more likely to prioritise public interest (just like the removal of service charges in 2016) over the company's operating performance, the regulatory risks are very high for the company.

2. Capital Misallocation Risks

IRCTC has generated strong free cash flows. As a PSU, it faces a risk of inefficiently utilising these free cash flows. The government in India has often made decisions against the interests of minority shareholders. For instance, the government forced ONGC to acquire HPCL via debt funding in the past. ONGC, despite being highly cash positive, was ordered to take on debt for purchasing HPCL from the government. The government owns both ONGC and HPCL, but it needed money, forcing ONGC to buy its ownership of HPCL for a whopping Rs 36,000 crore, for which ONGC borrowed about Rs 24,000 crore. This incident is a classic case of the government as the primary shareholder getting in the way of the efficient functioning of a company.

Similarly, the government may tap into IRCTC’s free cash reserve to fund its own needs which could lead to misallocation of capital and thus negatively affecting the growth prospects of the company.

The Bottom Line

For Finology 30, our ideology has focused on business models which have more control over their business operations and are less vulnerable to being negatively impacted by regulatory risks. For now, IRCTC Ltd. failed to pass our investment checklist.

So, we decided not to go ahead with IRCTC Ltd.