Daybreak - How an e-ticket discount has become IRCTC's Achilles' heel

Episode Date: August 13, 2024

For many in the Indian Railway Catering and Tourism Corporation (IRCTC), this year’s Union Budget announcement was a damp squib.On 23 July, several officials from the ticketing-and-catering arm of Indian Railways waited for over an hour, with the collective hope that Finance Minister Nirmala Sitharaman would quash the discounts on UPI payments. The reason behind their discontent is that the discount has cost IRCTC an arm and a leg. The company has lost Rs 40 crore in revenue. But despite all of the pushback, this year’s Budget did not mention revoking the mandate anywhere. So, what’s going on? And why isn’t the government backing down?Tune in to find out. P.S. The Ken podcast team is looking for a talented podcast producer and an audio journalist. If you fit the bill or know someone who does, please apply! 

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Ramon Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing and extensive post-production.

Sita and I are still reeling from the intensity of our first studio recording. Intermission launches on March 23rd. To get alert, as soon as we release our first video. episode, please follow intermission on Spotify and Apple Podcast or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. For officials at the Indian Railway Catering and Tourism Corporation, or IRCTC as it's better known, there was a lot riding on this year's budget. Let me explain. You see, for the last few years, there's been a lot of discontent around one particular government mandate.

imposed way back in 2019. The country was reeling from demonetization at the time and the government wanted to promote digital payments. So to encourage it, it basically said if you pay for an e-ticket using UPI, we are going to give you a discount. Now, of course, the mandate was introduced with the best intentions. But what ended up happening was that IRCTC's revenue

took quite the beating because of it. You see, it's e-ticketing vertical, is IRCTC's second highest revenue contributor. It also happens to bring in the most profits. So since 2019, IRCT insiders have been skeptical about this discount for obvious reasons. The discontent began as water cooler conversations, but in the last few years, the charter has finally reached the IRCTC boardroom. Their argument is pretty simple.

India no longer needs to incentivize UPI payments. And the latest data from the RBI backs up their point. Consider this. Four out of every five digital payments in the country were made using UPI as a fiscal 2024. The same trend also plays out on the IRCTC website. As of last year, one in every three users paid for their train tickets using UPI. So for a lot of IRCTC officials, they believe that UPI doesn't really need to be incentivized anymore. everyone is already using it.

And it isn't just because of discounts. They use it because it is way more convenient. So the discount in that sense is unnecessary at this point. The hope was that during this budget, the mandate would be revoked. But despite all the pushback, that didn't end up happening. The reason they are so frustrated by the discount is because it has caused the IRCTC and arm and a leg.

In fact, the company has lost as much as 40 crore rupees in revenue because of it. Even the IRCTC's own chairman, Sanjay Kumar Jain, who until recently was a big proponent of the mandate, now seems to see this as a lost cause. In fact, he's been steering the company's strategy towards other lower margin verticals, like catering to drive revenues, which doesn't really align with the company's big plans for the future. It wants to become a Navratna company, which would allow it far more. financial and operational freedom. But the UPI discount could prove to be its Achilles heel.

So what's going on and why isn't the government backing down? Welcome to Daybreak, a business podcast from the Ken. I'm your host Rahil Filippos and I'll be joining my colleagues, Ninka Sharma, every week to bring you one business story that is worth understanding and worth your time. Today is Wednesday, the 14th of August. The story begins around November 2016. IRCTC at the time was levying a convenience fee of about $20. per ticket for non-AC classes and $40 for AC classes.

Things were going really well. E-ticket revenue was breaking all sorts of records. And then along came demonetization. Cut to one month later. In December 2016, the railway ministry decided to remove all convenience charges. The goal was to promote digital transactions, which was fair enough. Demonitization made all of us rely more heavily on digital payments and UPI,

so much so that that particular project by the government was a resounding success. But the unfortunate collateral was IRCTC's revenue dropping by 54 crore rupees. By March 2019, its e-ticketing revenue dropped by over 60%. IRCTC officials were worried. This was their highest margin product. They were scared that with time it would be reduced to just another ancillary service. Now remember, this was the year that the company was going to go public. So a drastic drop in revenue like this one had some serious repercussions.

So a delegation from the IRCTC decided to take a pretty bold step. They very cautiously approached the railways ministry. Remember, IRCTC is a government company. So they had to tread cautiously. Instead of directly citing falling revenues, the delegation pointed to the upcoming public listing. They told the ministry that a sudden and drastic increase in revenue would be great for investor confidence. And their strategy worked. They managed to convince railways and the matter eventually made its way to the finance ministry.

But after a lot of to and fro, the finance ministry said there was no two ways about it. digital transactions still had to be incentivized. But what did end up happening was that the IRCTC and finance ministry struck somewhat of an unofficial barter. The Ken actually corroborated this off-the-record agreement with at least two more retired IRCTC officials, a former NPCI executive and a senior Indian Railways official. Here's what they agreed on. IRCTC could charge convenience fees in exchange for giving deeper decisions. discounts on UPI.

Now, the upside of this was that it could finally start levying convenience fees again. But the downside was that it was still 30% less than what it was before 2016. Also, it meant that every time someone chooses to pay using UPI, which, as you would imagine, happens pretty often, IRCTC has to forgo a third of its per-ticket revenue. Now, this leaves IRCTC's chairman, Sanjay Kumar Jain, in a pretty state. situation because he knows that his request to get rid of it completely will be turned down by the ministry. And going and asking anyway would mean risking his goodwill with the ministry. And there's a lot at stake. More on that in the next segment.

We have an exciting announcement to make. If you're a regular listener, you would know that the Ken's podcast have hit many milestones this year. From daybreak, crossing one million downloads to the launch of our first ever premium podcast two by two. We want to keep this momentum going. And for that, we are looking for talented people to join our team. We're looking for a podcast producer to help us produce great narrative-driven shows at the intersection of journalism and business. We're also looking for an audio journalist who has covered one or more business sectors,

ideally careers or education or tech and startups, for at least two years. If you fit the bill or if you know anybody who does, please check out the link. in the show notes. And now, back to the episode. I know so far it probably seems like IRCTC is grappling with a crisis situation. But for an outsider, it's really hard to tell. Especially when the company posted its highest ever operating revenue of well over €4,000 crore rupees for the year-ended March 2024. Even its absolute EBITDA rose by around 15% year-on-year.

Basically, it has the makings of what any analyst would call an exceptional performance. but it's when you look closer and really zoom in that the crack start to appear. Abita margins for IRCTC's business segments fell significantly between March 20203 and 2024. Tourism margins dropped to 9.4% from 13.5% year-on-year, while catering margins fell by nearly 30%. But all of this, IRCTC saw coming. It had entered into new catering and tourism contracts which contributed to inflated overhead costs, like setting up new kitchens and administrative charges.

But what's really hitting it where it hurts is e-ticketing, because these margins will continue to slide. This unfortunately works against IRCTC's ambitions. You see, its officials want the mini-ratna company to enter the league of Navratna companies, a dream that Suresh C. Angadi, former Minister of State for Railways, once saw. It's an ambitious goal, but given the resounding success of its IP, IRCTC has been dreaming big.

So how does a company become an Avratna company? Well, to become an Avratna, the company should have a mini-ratna status, which IRCTC already got in 2008. It should have been profitable for the last three years and have a composite score of 60 or above in six selected performance indicators like net profit, earnings per share,

intersectoral performance, etc. IRCTC has been profitable since its inception. so it ticks all the boxes. But the government-induced instability in its margins has become its Achilles heel. To make up for loss margins, it is now doubling down on other segments like catering and tourism.

But food is a high-risk business. Like one official put it, one slip up in terms of hygiene and you're looking at years of reputation going down the drain. Unfortunately, it's a pivot that IRCTC will have to take, especially considering that at the end of the year and in March 2022, catering overtook e-ticketing as IRCTC's largest revenue contributor.

Also, several senior IRCTC and railway's officials say that the company has no choice but to forget all the lost UPI revenue for now. A finance ministry official said that the government's UPI incentive isn't going anywhere at least for the next couple years. And unfortunately for the IRCDC, its Navratna status just isn't on the government's list of priorities at the moment. So it has no choice but to wait for the next union budget. Or perhaps even the one after. Daybreak is produced from the newsroom of the Ken, India's first subscriber-focused business news platform.

What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters and podcast extras. Head to the Ken.com and click on the red subscribe button on the top of the website. Today's episode was hosted by Rahil Filippos, produced by me Snigda Sharma, and edited by Rajiv Sien.