IRCTC's Stellar IPO: Did The Government Leave Money on The Table?

Events in the capital markets seldom garner attention from the general media. Capital market developments are largely limited to pink-coloured newspapers in the country. The third month of 2017 was, however, different. Newspapers and online portals gave equal coverage to an event—the listing of Avenue Supermarts. The DMart retail store operator’s stock listed at over 100% to its issue price, which meant that people who invested in the Avenue Supermarts’ shares doubled their money within a few days. Wide coverage of Avenue Supermarts’ listing attracted many people towards the primary markets. But stellar listings like Avenue Supermarts have been far and few in between.

After a long hiatus, people were reminded of the primary market’s power of wealth creation recently when the shares of Indian Railway Catering and Tourism Corporation listed. The public sector company made an outstanding debut on the market with shares soaring nearly 128% on the first day itself. The subscription data had already signalled towards a mammoth listing. IRCTC’s issue was oversubscribed by 112 times, which meant the demand for the shares had outstripped the supply by a wide margin. On October 14, the shares listed at Rs 644 and touched an intra-day high of Rs 743.80 as against an issue price of just Rs 320.

Source: The Economic Times

Did government undervalue IRCTC?

To understand why companies like IRCTC are valued differently by different entities, it is important to understand the business of the company. IRCTC has exclusive rights to provide catering services on trains, sell packaged drinking water at railway stations and sell railway tickets online. The Indian Railways ferries over 8.2 billion passengers every year and IRCTC has a presence across various levels of the railway system, which provides the company with a huge captive customer base. Moreover, IRCTC has a monopoly in most of the sectors of its operations, potentially boosting its valuation.

IRCTC’s business can be classified into four broad categories—catering services, e-ticketing, tours and packages and packaged drinking water under the ‘Rail Neer’ brand. Catering contributed 55% of the total revenues, while tours and packages contribute 23.3%. E-ticketing services make up for 12.3% and packaged drinking water contribute 9.2% of the revenues. The current breakup of revenue contribution, however, masks the real potential of the company. When the government decided to offload a 12.5% stake in the company for Rs 645 crores, it valued the company at around Rs 5,160 crores. At the current price of Rs 910 per share, IRCTC’s market capitalization is Rs 14, 600 crores, nearly three times that of the value before listing.

If seen just a public sector enterprise, the government may have been right to undervalue IRCTC. But when one looks at IRCTC as the only large profitable e-commerce company in the country, with a monopoly in several sectors, its valuation increases automatically. In 2018-19, the company earned a net profit of Rs 273 crore on gross revenues of Rs 1,957 crores. IRCTC’s profits are in contrast to major e-commerce firms such as Flipkart or Amazon or similar portals like MakeMyTrip, which report huge losses every year. The likes of Bajaj Markets cannot be taken into consideration as they have a completely unique business model. While most online retail companies focus on physical goods, people can invest in mutual funds or fixed deposits on Bajaj Markets.

Getting back to IRCTC, it’s performance may further improve as the company has reinstated a convenience fee of Rs 10-30 per booking on the web and mobile platforms. It could potentially boost its revenues by Rs 300-900 crores, considering IRCTC handles 2.5 crore transactions per month. However, it is easier to give valuations in the hindsight. The government probably took into account the subdued market sentiments while valuing the company. The liquidity crisis coupled with negative sentiments has led to a weakness in the IPO market. The government could not have afforded an embarrassment like the sale of Air India, which did not evince interest from a single buyer.

Conclusion

IRCTC was a good opportunity for investors to own a part of a high-quality company. However, an investor should not rely on a single asset class and should always look to diversify his/her investments to mitigate market risks. A mix of equity, debt and physical assets like gold can pay rich dividends in the long run. You can invest in digital gold or fixed deposits through Bajaj Markets. The platform provides an easy and hassle-free medium of investing for professional and amateur investors alike. Besides a plethora of financial products, you can also buy the latest electronics, gadgets and appliances from leading brands with exciting offers on Bajaj Markets.

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