IRCTC: Railways Scores A Self-Goal

India’s Ministry of Railways needs some lessons in value-creation, urgently. In the absence of that, it continues to destroy the value of one of its most-valuable assets: the Indian Railway Catering and Tourism Corp. or IRCTC.

The ministry informed IRCTC of its decision to reinstate sharing of convenience fees equally—that is in the ratio of 50:50.

The fee, which is nothing but a service charge on tickets sold through the company’s portal, has a history.

Prior to 2014, while the ministry decided the quantum of the charge levied, IRCTC didn’t have to share it.

In 2014, it decided to split the charge 80:20, with IRCTC getting the bulk of it. But a year later, the ministry reduced the company’s share to 50%.

It also doubled the service charge to Rs 20 for non-AC and Rs 40 for AC bookings, according to letters from the Railway Board.

The fee was discontinued on Nov. 23, 2016, following demonetisation to give a fillip to digital transactions.

But the company lost a revenue stream. So, after its several representations, the ministry restored the fee at a reduced rate from Sept. 1, 2019.

IRCTC now collects Rs 15+GST for non-air conditioned seat bookings, and Rs 30+GST for AC reservations. The rates are lower if customers pay using BHIM or UPI.

In fiscal 2021, due to Covid-19 pandemic restrictions on rail travel, IRCTC saw its revenue from the convenience fee dip 42.3% year-on-year to Rs 299 crore. Still, the fee contributes significantly to its operating income and net profit margin.

Last year, internet ticketing accounted for 51% of IRCTC’s revenue from operations. 67% of the internet ticketing revenue came from convenience fees, which means 34.4% of the company’s overall revenue from operations comes from convenience fees.

Internet ticketing was the only profitable business for IRCTC in FY21. A year earlier, it contributed 96% of the company’s profit. Other businesses such as catering and other travel services yield very low margins.

An equal sharing of the convenience fee with the ministry means a massive impact on its profitability. That could trigger an earnings downgrade and a correction in the stock price.

The government sold 20% in IRCTC in December 2020 as part of its initial public offer at Rs 1,377.60 apiece. The shares rallied more than threefold after that. The IPOs and listings of online platforms like Zomato and EaseMyTrip at high valuations contributed to the surge.

The rub-off propelled IRCTC’s market value to a high of Rs 1 lakh crore briefly, before it started tumbling. The company’s shares closed at Rs 913.50 apiece on an ex-split basis with a market cap of Rs 73,080 crore as on Oct. 28.

The ministry sent the letter on sharing of convenience fee on Oct. 27 and the company received it on Oct. 28. Yet, in all likelihood, the decision was not taken in a day and would have been in the works for weeks. Does the massive run-up and the subsequently slide in IRCTC’s shares point to markets being aware of such a material decision?

The move by the ministry may provide the railways a revenue share of Rs 150-200 crore. But erosion in IRCTC’s market value will be multifold.

Rail travellers are all too familiar with a message in coaches: ‘To Stop Train, Pull Chain’. Misuse, however, comes with a penalty.

In this case, it’s not the ministry that will pay but retail investors who bought IRCTC shares after December.

Note: The Ministry of Railways reversed its decision on sharing of convenience fees, said Tuhin Kanta Pandey, Secretary DIPAM via twitter on Oct. 29.

Sajeet Manghat is Executive Editor at BloombergQuint.