Prabhudas Lilladher (PL) has revised its rating on Indian Railway Catering and Tourism Corporation (IRCTC) to HOLD from the previous REDUCE recommendation, following a 19% dip in stock price over six months. The revised target price (TP) is Rs833, indicating limited upside potential as the company currently trades at a high valuation multiple of 47x to 44x for FY26E to FY27E. Despite stable EBITDA margins and growth in specific revenue segments, IRCTC’s overall performance is mixed, with subdued performance in the catering division offset by growth in ticketing and Rail Neer sales. The growth outlook remains moderate, with sales and PAT projected to grow at 8.4% and 7.5% CAGR through FY27E.

Key Financial Highlights

Revenue Growth
IRCTC reported a 7.2% year-on-year (YoY) increase in revenue, reaching Rs10,640 million for Q2FY25, aligning closely with PL’s estimate of Rs10,857 million. The following segments contributed to revenue performance:

Catering: Revenue grew by 11.7% YoY to Rs4,820 million but underperformed expectations, impacted by kitchen closures and train cancellations.
Internet Ticketing: Showed a strong performance with a 13.3% YoY growth, totaling Rs3,710 million. The convenience fee contributed significantly, with 134 million tickets booked during the quarter.
Rail Neer: Revenue surged by 15.7% YoY to Rs902 million, with enhanced utilization of production plants reaching 75%.
Tourism: Declined by 21.5% YoY, reaching Rs1,244 million, attributed to reduced travel demand.
EBITDA and PAT Margins
EBITDA remained largely flat at Rs3,728 million, translating to a 35.0% margin, in line with projections. Adjusted PAT for the quarter rose by 4.5% YoY to Rs3,078 million, yielding a PAT margin of 28.9%, also aligning closely with expectations.

Segmental Analysis and Outlook

Catering Division Performance
The catering segment underperformed, recording only 12.8% EBIT margin against the expected 14.0%. Challenges included operational disruptions due to monsoon-induced train cancellations and the closure of specific kitchens, resulting in a constrained revenue stream. The outlook for catering is expected to improve in Q3FY25, fueled by festive travel.

Internet Ticketing Segment
Internet ticketing remains a high-margin segment, with an 81% EBIT margin, generating Rs2.5 billion from convenience fees in Q2FY25. UPI payments represented 47% of transactions, reflecting digital adoption. This segment is nearing maturity, with limited growth prospects, as PL anticipates it will maintain, but not significantly exceed, current levels.

Rail Neer Production and Expansion
IRCTC’s Rail Neer division recorded robust growth, supported by full operational capacity across 20 plants and 75% utilization in Q2FY25. Rail Neer is projected to continue as a stable growth driver, with potential improvements in the upcoming quarters due to rising demand in domestic travel.

Tourism Segment Decline
Tourism services declined substantially YoY, reflecting reduced revenue from railway-based tourism initiatives. The segment faced operational challenges, including low passenger volumes and a lack of ancillary revenue sources outside the railway ecosystem. Management is exploring strategies to diversify tourism services and bolster future growth.

Investment Thesis and Valuation

Valuation and Multiples
At current levels, IRCTC trades at a high price-to-earnings ratio of 47x for FY26E and 44x for FY27E, signaling a premium valuation with limited room for re-rating. Prabhudas Lilladher's decision to maintain a TP of Rs833 reflects an alignment with the company's growth trajectory, with a projected PAT CAGR of 7.5% over the next three fiscal years.

Sales and Earnings Growth
PL forecasts a moderate sales growth of 8.4% CAGR from FY25E to FY27E, driven by the catering and Rail Neer divisions. This aligns with IRCTC’s shift toward stable but single-digit earnings growth, especially as high-margin segments like ticketing have plateaued. Overall, PAT is expected to grow at a CAGR of 7.5% through FY27E, given the constraints in margin expansion across divisions.

Strategic Initiatives and Challenges

Cost Management and Margins
The management has indicated an increase in depreciation expenses starting Q3FY25, stemming from the capitalization of a new office building. Additionally, a CSR spend of Rs130-140 million in Q2FY25 adversely impacted margins, signaling the need for careful cost management as operating margins are under pressure.

Dividend and Cash Flow
IRCTC maintains a dividend yield of approximately 0.8% to 1.0% over the forecast period. The free cash flow generation remains robust, supporting steady dividend payouts and capital expenditure needs, with capital expenditures projected to stabilize at approximately Rs800 million annually through FY27E.

Risks and Recommendation

Key Risks
The main risks for IRCTC include potential disruptions in catering and tourism services due to seasonal factors and economic slowdown. Additionally, the high valuation multiple places the stock in a vulnerable position if growth expectations are not met. Finally, any regulatory changes in fee structures or competition in Rail Neer production could impact earnings.

Recommendation
Based on the current valuation and growth outlook, PL has assigned a HOLD rating on IRCTC with a target price of Rs833. Investors are advised to monitor the stock closely, as IRCTC’s growth trajectory remains modest amidst high valuations. While IRCTC continues to present a stable revenue model, particularly in ticketing and Rail Neer, the premium valuation offers limited upside, positioning it primarily as a HOLD for steady, risk-conscious investors.