The rush for a piece of Indian Railway Catering and Tourism Corporation Ltd. (IRCTC) is unprecedented for any PSU disinvestment. In the 112 times subscription for the initial public offering (IPO) , there is a significant message.
The government hoped to raise ₹645 crore from the IPO. But it has been flooded with subscription amounting to a cool ₹72,195 crore! On offer were 2.02 crore shares to the public; the subscriptions received were for 225.61 crore shares.
This is as much a comment on IRCTC’s fundamental strengths and monopoly position in its business as it is for the appetite for good PSU stocks in the market. The response to IRCTC should be seen in the backdrop of the volatile markets, depressed investor sentiment and supposed liquidity constraints in the market. The market’s signal is clear: it is hungry for quality PSU stocks and can generate the resources for the right candidate. For the government, which has set a target of ₹1.05 lakh crore from disinvestment this fiscal this is certainly good news.
But why the mad investor rush for IRCTC? Imagine a company that is a monopoly in issuing online tickets for the Railways. Though online ticketing accounts for just over 12% of total revenues, it accounts for over a third of profits before tax.
And, this is despite the removal of service charges for online bookings in 2017. With the re-entry of service charges from September this year in the form of ‘convenience fee’, IRCTC’s revenues will rise; importantly, its profit will soar because unlike earlier, the convenience fee will not be shared with the Railways and will go through straight to the company’s bottomline.
Second, IRCTC is the chosen vehicle for the Railways’ experiment with ‘private trains’. Two of its Tejas trains — one of which will be flagged off on Oct. 5 from New Delhi to Lucknow — will be operated by IRCTC, and there is promise of more to come.
The company has the freedom to set fares on these trains and will pay a licence fee to the Railways for use of its infrastructure. IRCTC can hope to grow its revenues and earnings significantly from this business if it can maintain quality and punctuality of its trains.
Third, IRCTC has almost a monopoly share of on-rail food catering which it does on over 350 trains.
It also has outlets in over 500 stations apart from food courts.
A little more than half its revenues and about 28% of its profits come from catering and travel segments. Finally, IRCTC is a debt-free company with a high marginal tax rate and will be one of the big beneficiaries of the corporate tax cut announced last month.
