RBI Payment License Will Expand Financial Services

Key Takeaways

• Expansion in e-Catering and partnerships with Swiggy and Zomato could drive revenue growth and improve net margins due to economies of scale.
  
• Focus on high-margin luxury train services and potential payment aggregator license could boost earnings, profitability, and expand financial services.
  
• Growth potential in Internet Ticketing is limited, while declining Catering margins and reliance on new train projects could impact revenue stability.

Catalysts

Engages in the provision of catering and hospitality, Internet ticketing, travel and tourism, and packaged drinking water services in India.

• The expansion of IRCTC's e-Catering business, with a significant increase in daily meals served, suggests potential for revenue growth as the company partners with Swiggy and Zomato, which may also improve net margins due to economies of scale.
  
• Increased focus on high-margin luxury train services, like the Maharajas' Express and Golden Chariot, is expected to drive revenue and improve the overall profitability of the Tourism segment, increasing earnings and EBITDA margins.
  
• The development and anticipated approval of a payment aggregator license by the RBI could expand IRCTC’s financial services, potentially adding a high-margin revenue stream that could significantly boost earnings.
  
• Capacity expansion in the Rail Neer segment, with new plants increasing production capacity, is likely to drive future revenue growth while maintaining or improving EBITDA margins through efficient production scale.
  
• Continued government investment in rail infrastructure, as indicated by upcoming new train launches such as Vande Bharat and Amrit Bharat trains, is expected to provide volume growth in both ticketing and catering services, potentially increasing revenue and maintaining strong margins.

Indian Railway Catering & Tourism Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Indian Railway Catering & Tourism's revenue will grow by 4.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 27.2% today to 30.3% in 3 years time.
• Analysts expect earnings to reach ₹15.6 billion (and earnings per share of ₹19.48) by about February 2028, up from ₹12.4 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as ₹19.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 60.9x on those 2028 earnings, up from 47.1x today. This future PE is greater than the current PE for the IN Commercial Services industry at 21.9x.
• Analysts expect the number of shares outstanding to grow by 0.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.48%, as per the Simply Wall St company report.

Indian Railway Catering & Tourism Future Earnings Per Share Growth

Risks

• The Internet Ticketing segment is nearing saturation with 87.42% of tickets booked online, indicating limited future growth in this high-margin area, potentially affecting revenue and net margins.
  
• The Catering segment, despite revenue growth, has seen a decline in EBITDA margin from 15.44% to 12.19% year-on-year, which could impact overall profitability if margins continue to compress.
  
• The Rail Neer segment operates with relatively low margins, which may limit its contribution to overall earnings despite its revenue growth.
  
• Any significant regulatory changes, such as adjustments in advance booking periods, could impact net revenues derived from convenience fees linked to cancellations and booking volumes.
  
• Dependency on new train projects, like Vande Bharat and luxury train revenue, to maintain Tourism growth could risk revenue stability if these projects face delays or demand declines.

Valuation

• The analysts have a consensus price target of ₹810.875 for Indian Railway Catering & Tourism based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1200.0, and the most bearish reporting a price target of just ₹570.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹51.5 billion, earnings will come to ₹15.6 billion, and it would be trading on a PE ratio of 60.9x, assuming you use a discount rate of 13.5%.
  
• Given the current share price of ₹731.1, the analyst price target of ₹810.88 is 9.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.