ndian Railway Catering and Tourism Corp. Ltd’s (IRCTC’s) shares have risen nearly 400% in just four months since its initial public offering at 320 per share.

While the shares have been on a fast track since listing, they got a further boost after profits jumped by about 180% in the December quarter. Even using annualized Q3 earnings, IRCTC’s price-earnings multiple works out to about 31 times, which is unusually high for a public sector unit (PSU).

Note that shares of leading PSUs such as Oil and Natural Gas Corp. Ltd (ONGC) and NTPC Ltd are trading near decadal lows, and sentiment for PSU stocks, in general, is near all-time lows. In ONGC’s case, its market capitalization of 1.32 trillion is only about 0.65 times its book value, while its earnings yield is nearly 20%. Clearly, investors are pricing in a decline in performance going ahead. IRCTC’s earnings yield, in contrast, is just 3.2%.

Herein lies the trouble with IRCTC’s valuations. “One of the reasons PSU stocks trade at low valuations is their fortunes can change overnight with just a stroke of a bureaucrat’s pen. IRCTC isn’t immune to this risk, and it’s surprising that investors are ignoring this, especially at a time when sentiment for all other PSU stocks is so low," says Nitin Rao, founder of Alphaideas.in, an investment blog.

The main reason IRCTC’s profits jumped 180% in Q3 was, in fact, a change in government policy. Soon after the demonetization exercise, the government had asked the company to discontinue the convenience fee it charged its customers, with a view to promoting digital transactions. This fee has now been reinstated, and has resulted in a 4.1-times jump in revenue from the internet ticketing business. In fact, segment-wise results show that internet ticketing accounted for the entire 157 crore year-on-year jump in profit before tax.

In other words, profit of all other segments put together was flat. Since one policy change has resulted in such a big upswing in profit, investors should note that the probability of the reverse happening is equally high.

A year from now, when the profit base catches up, earnings growth will cease to be as exciting.

After all, in the past, government policy has brought down many a mighty PSU, even with a monopoly. There are already signs of some risky ventures by IRCTC—news reports late last year suggested that the company will be involved in developing a five-star hotel in Delhi. So, risks related to capital allocation cannot be ruled out.

And finally, like most PSUs, there is the sword hanging of further dilution by the government, which will increase free float and could lower valuations. The fact that these worries haven’t derailed the IRCTC stock yet suggests that the company has almost shed its PSU tag as far as investors are concerned.

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