IRCTC Ltd Bumper Listing Gains

IRCTC Listing – What Should Investors Do?

Introduction

In this article, we are going to see the IRCTC Ltd (Indian Railway Catering & Tourism Corporation) bumper listing gains on its listing debut on BSE and NSE on 14th October. Shares of IRCTC rose as much as 132% to Rs.743, as compared to issue price of Rs.320. What should investors do after such grand debut?

IRCTC Ltd Bumper Listing Gains

IRCTC IPO was subscribed 112 times

• Shares of IRCTC Ltd made a grand debut on Monday, 14th October, after they got listed on BSE and NSE with a 101.25 premium over issue price of Rs.320. Its initial public offering (IPO) received the highest ever subscription among PSUs.
• The IPO of IRCTC was subscribed a massive 112 times. It received Rs.72,000 Cr worth of bids. The retail category was subscribed nearly 15 times while qualified institutional buyers (QIBs) segment got subscribed 109 times and non-institutional investors (NIIs) category 355 times.
• This IPO was open for subscription between 30th September and 3rd October. The issue comprised an offer-for-sale of 2.01 Cr shares of face value of Rs.10 each.
• The issue price was fixed at Rs.320 per share, which is the higher end of the IPO price band. Retail investors and employees of the company received shares at a discount of Rs.10 per share. Hence the final IPO price for them is Rs.310 per share.

Company Overview

• The stellar response for IRCTC IPO may help in supporting the government’s drive to raise funds of Rs.1.1 Trillion by selling stake in PSU firms in FY2019-20. However, not all share sales will evoke such a massive response. IRCTC is an exception because of the quality of businesses it offers.
• Diversified Business :
  • IRCTC was conferred the Mini–Ratna status in May 2008.
  • IRCTC is the only entity authorised by Indian Railways to provide catering services to railways, online railway tickets and packaged drinking water at railway stations and trains in India.
  • It also provides non-railway services including budget hotels, e-catering and executive lounges to create a one-stop solution for customers.
  • The company is in steady business model, which is likely to grow at 12-15%. The revenue of company is expected to boost in the next 1-2 years due to :
    1. Restoration of convenience charges for e-ticket from September 2019 is likely to generate additional annual revenue of Rs.450 Cr.
    2. The company would get additional benefit from the recent corporate tax rate cut regime where effective tax is reduced to 25%.
• The company has healthy balance sheet with over Rs 1,100 crore cash to support capital expenditure.
• It has good dividend pay-out track record, as it paid around 50% average payout in the last 3 years.

Government Holding in IRCTC Ltd

• The Government is executing the divestment programme of PSU stake in state run firms. This move is in accordance with the governments” divestment target of Rs.1.1 Trillion for FY2019-20.
• Thus, government holding in IRCTC is reduced from 100% to 87.4% after issue, by selling the stake of almost 12.6% through public issue.
• As per SEBI’s Regulations and guidelines, any public listed company is entitled to maintain the promoter holding maximum up to 75%. Thus, IRCTC Ltd is further required to reduce its government stake from 87.4% to 75% in near future.

IRCTC Ltd Valuation Analysis

• Here, we have calculated the Profit After Tax (PAT) projections of IRCTC for FY2019-20, assuming the Profit before tax growth of 20%. Thus, after updated reduced corporate tax rates from earlier 36.5% to 25.17%, Profit After Tax comes out to be Rs.386 Cr for FY2019-20. And by considering the PE ratio to be 20, we have made the projections for the market capitalization of IRCTC to be Rs.7,700 Cr for FY2019-20.
• Now, after today’s massive debut if IRCTC listing the stock was trading at PE of around 40, deriving its market cap to be around Rs.11,580 Cr. The over-subscription of IPO by 112 times played a key role in a overwhelming debut of the stock.
• So, we believe that IRCTC stock is currently overvalued and will get corrected by 30% in a course of time.

What Should Investors Do?

There are 3 options which retail investors can opt for :

1. Book Partial Profit : By getting the principal amount invested in IPO and retaining the additional profit, one can opt for partial profit booking. Profits earned can be invested for long-term due to higher earnings visibility of the company.
2. Hold and Stay Invested : One can also hold the entire amount (principal + profit earned) invested and hold the stock in the long-term investment. Because, IRCTC is a good long-term investment bet given its unique business model and monopoly in the business it operates. Hence. one stay invested.
3. Sell Entire Allotment : The most practical option in current scenario is one should get over the listing euphoria. The bumper listing was expected owing to phenomenal over-subscription of the offer. Thus, retail investors, who got allotment in the IPO, should utilise this opportunity to exit. Because the stock which is currently trading at almost 40 PE is possessing a very attractive and overvaluation. So, one can sell the entire allotment in this golden phase because the stock might get corrected to PE of 20-22 in a course of time.

Conclusion

• IRCTC’s overwhelming debut is a bright spot in India’s IPO market. IRCTC’s IPO is the biggest and the most successful among the four companies from the Indian Railways stable that have gone public.
• The company is likely to benefit from monopolistic nature of business, significant growth over FY19-21, an asset-light business model with healthy dividend payouts and strong parentage.
• Retail investors can opt for one of the following 3 options after such a incredible listing of IRCTC :
  • Book Partial Profit
  • Hold as a long-term investment
  • Sell Entire Allotment