Online FDI: Will Suresh Prabhu’s IRCTC Become India’s Alibaba Or Air India?

The government’s decision to allow 100 percent foreign direct investment (FDI) in online “marketplaces” like Flipkart, subject to conditions, legitimises such e-commerce sites. But having done so, it has to act even faster with its own potential world-beater in this space. In case the Modi government does not fully realise it, Indian Railways (IR) owns the world’s largest and most profitable online ticketer, IRCTC, boringly expanded as the Indian Railways Catering and Tourism Corporation Ltd. On any day, IRCTC books more railway tickets than all the airline tickets sold in the world.

Despite low railway ticket prices, IRCTC’s revenues would be what online marketplaces in India dream about. It collected gross ticketing revenues of over Rs 20,000 crore (nearly $3 billion) in 2014-15 even though it sells only 55 percent of total railway tickets through the internet. On total income of Rs 1,141 crore, up nearly 20 percent from the year before, it made net profits of Rs 131 crore – a spectacular 81 percent growth over the year before. Compare this with losses of Rs 5,000 crore by Flipkart, Amazon India and Snapdeal put together in the same year. And these are unicorns – companies valued at more than $1 billion each.

To be sure, Flipkart was valued at $15 billion at its last round of funding in 2015, a figure recently lowered to $11 billion on the books of some of the investors as profits are miles away.

This is what makes IRCTC an uncut diamond in the government’s arsenal. Polish it with the dash of entrepreneurship, and it will glow; leave it to its public sector lethargy, and it could turn into charcoal.

As things stand, IRCTC sees its mission as establishing “itself as a leader in the area(s) of hospitality services, travel and tourism, packaged drinking water, and internet ticketing by providing value-added products and services for passengers, tourists and other customers, targeting IR (Indian Railways) and non-IR-related services alike, building a resilient business portfolio that is scalable and based on core competence.”

Nothing wrong with this motherhood statement, for this is about leveraging the customers it already gets on Indian Railways, to whom it can sell tickets and bottled water (Rail Neer), and offer catering and tourism services, among other things.

But there is a serious ambition deficit here. When you have a database of over 31 million customers who use your services again and again, and on whom you make a clear profit by virtue of your ticketing monopoly, why do you think IRCTC should only be into e-ticketing, catering and tourism?

Flipkart, Amazon and Snapdeal would offer their right arms to be able to access a tenth of IRCTC’s captive customer base. So, instead of offering links to Amazon’s products from its website, IRCTC should see itself as India’s Amazon or Alibaba, and not a mere sales outlet for the railways’ customers. Now that online marketplaces have been allowed 100 percent FDI, IRCTC will become a poor cousin of such online businesses if it does not move fast and become a “marketplace” itself.

The problem is that Indian governments have been foolish in the way they have opened up to competition. They end public sector monopolies and then tie the hands of the public sector, so that they cannot compete at all. This is why when telecom was opened up, BSNL and MTNL became basket-cases. When aviation was opened up, Indian Airlines and Air India were ruined by merger and lack of autonomy – thanks to the stewardship of Praful Patel and the Civil Aviation Ministers after him.

The same could happen to IRCTC if Narendra Modi and Suresh Prabhu, the Railway Minister, do not see the opening up of the online marketplace to Flipkart and Amazon as both a threat and an opportunity. If IRCTC acts slow, as is the temperament in the public sector, in five years’ time it will be a pale imitation of its current self. It will be gasping for business.

The right way to create market champions is to allow the public sector freedom to compete before their monopoly is ended. If coal is to be thrown open to the private sector, Coal India must first be liberated from babudom. Ditto for IRCTC.

This is what Prabhu needs to do, and he has convince his boss about why this is vital for IRCTC’s future. He can assure him that IRCTC will remain with the government, but it will be a diamond in the basket, and not charcoal. Here are some of the things it must do.

First, IRCTC must divest 5-10 percent to a strategic operational partner – for around $1 billion (Rs 6,800 crore). This will establish base valuation for future disinvestments. How did we get this value? Flipkart, with losses of over Rs 2,000 crore, has a valuation of over Rs 70,000 crore. IRCTC, if its management is seen as innovative, should aim for a similar valuation. After strategic divestment, it should be listed in India and the New York Stock Exchange, where you may get better valuations.

Second, Prabhu must privatise management – and this can be done easily. He can bring in private professionals at the top and offer them the normal public sector salary (which they will sniff at) and compensate them instead with 1-2 percent of free equity after five years – if certain predetermined growth and profit milestones are met. If IRCTC succeeds as a marketplace, its valuation in 2021 will be upwards of Rs 1,00,000 crore. So 1 percent of that value would be more than Rs 1,000 crore. A nice reward package for any professional/group of professionals.

Third, IRCTC has to redefine itself as India’s national online commerce champ, selling everything from rail to bus to airline tickets, arrange hotels and hospitality, and sell everything that and Amazon or Flipkart sell, from mobile phones to garments. It must become India’s preferred online marketplace.

The one mistake government must not make is to listen to free-market and privatisation theorists prematurely. In India, only the public sector can develop scale, and retaining its monopoly (IRCTC makes its money from its e-ticketing monopoly, where it earns Rs 10-20 per e-ticket sold, apart from franchise revenues in catering) in the short run is vital to make IRCTC a world beater.

The fact is the Amazons and Googles of the world can raise billions of dollars at the drop of a hat in the deep western capital market. The only counter to their financing prowess is a government company that uses its monopoly efficiently to grow scale and profitability before it can be privatised. But that option will disappear if IRCTC is run like a kirana shop, with a serious ambition deficit.

In 10 years, IRCTC can either become India’s Alibaba or an Air India. Suresh Prabhu’s time to decide its future is now, especially as the FDI door has been thrown wide open.