Despite bulls' preference for IRCTC IPO, important to tread with caution

In the first two days of the three-day offer, the IPO was oversubscribed by 325 per cent

Some things stand out for Indian Railway Catering and Tourism Corporation (IRCTC): it’s government-owned, it has exclusive rights to railway ticketing and catering, and, from points one and two, is more prone to policy risk.

It’s an innocent mistake to compare the ticketing platform to, say, MakeMyTrip or yatra.com -- sure, both sell tickets and tour packages online, but truth be told there is no benchmark or parallel to compare IRCTC with, as bulk of its revenue comes from catering services. This makes IRCTC’s public float unique, and it makes sense to tread with caution on it.

IRCTC is floating 20.2 million shares to raise Rs 645 crore, valuing the business at Rs 5,120 crore (Rs 320/share), and Rs 5,040 crore (Rs 315/share) at the lower end. All the proceeds will go to its shareholder - the Government of India. 

In the first two days of the three-day offer, which ends October 3 (October 2 is an off on account of Gandhi Jayanti), the IPO was oversubscribed by 325 per cent (over three times) as bids for 6.56 million shares were received by the end of market hours on Tuesday, according to the National Stock Exchange (NSE).

Investors are bullish on IRCTC, not only because it is in the government’s interest to grow railway ticketing, which is a consequence of expansion of Indian Railways itself, but the company has displayed handsome business growth over the years.

It reported sales of Rs 1,868 crore, a growth of 27 per cent in FY19, while profits were higher by 24 per cent at Rs 273 crore. Also, in just two years, the company’s catering revenue have grown to Rs 1,000 crore from Rs 400 crore. 

With 1.4 million travellers taking trains each day, the scale of the business is unparalleled. There is also handsome growth prospects given that the government has allocated the highest-ever budget, Rs 1.6 lakh crore, to Indian Railways this year, which will translate to more routes and in turn higher ticket bookings. 

IRCTC also stands to gain from the plan to have more advertisements on railway stations and IRCTC's internet properties.

However, unlike MMT or yatra.com, which are corporate entities with the sole purpose of maximising profits for shareholders, IRCTC will continue to be owned by the government, which has to balance IRCTC’s profits with the interest of Indian rail travellers. This may result in actions that may not always be in the interest of shareholders of IRCTC.

For instance, in order to boost online ticket sales, the railway ministry in 2017 waived off online ticketing booking charge — Rs 40 on AC cabin and Rs 20 for sleeper class ticket — in an overnight policy change, which resulted in a huge fall in IRCTC revenues. Its profits and revenues sank by 4 per cent in FY18.

Interesting, the same year a new catering policy allowed IRCTC to manage some food outlets and kiosks at railway stations, that were earlier managed by other railway departments, which gave a boost to sales in the catering vertical. 

Given that railways is a priority sector for the government, both from a nation interest and business point of view, a whole wide variety of markers may come into play when deciding policies in railways, and in extension railway ticketing, in times to come.