Graphic: Santosh Sharma/Mint
Graphic: Santosh Sharma/Mint

What’s behind the stellar success of the IRCTC IPO?

  • The IRCTC IPO was subscribed 112 times, which means the company got bids worth 72200 crore, while it set out to raise 645 crore
  • An interesting feature of the IRCTC IPO was that the shares reserved for employees were subscribed nearly 6 times

Invest in what you know," is a mantra Peter Lynch is well known for, although the famous investor and mutual fund manager has clarified that the above simplistic excerpt misrepresents his philosophy for stock-picking.

From the looks of it, the broad advice is held dearly by Indian investors. They turned up in droves to subscribe to the initial public offering (IPO) of Indian Railway Catering and Tourism Corp. Ltd (IRCTC). The company effectively has a monopoly as a booking platform for railway tickets, and is a business that is familiar to most Indians who invest in stocks. The high brand recall is a big reason the IPO evinced such high interest, say analysts.

In all, the IPO was subscribed 112 times, which means the firm got bids worth 72,200 crore, while it set out to raise 645 crore.

Lynch’s main quibble with blindly buying businesses that are familiar is that it ignores the serious role of fundamental research. Of course, IPO investors are in any case known for having only short-term investment horizons. But in the case of the IRCTC IPO, it turns out that the issue was available at a really attractive valuation.

The issue was priced at a price-earnings multiple of 18.8 times its FY19 earnings; but starting this September, the company has introduced a convenience fee, which is expected to more than double its profits. As such, the issue was effectively priced at below 10 times earnings, which is low for a monopoly business, said analysts. The company has other new revenue streams, such as the introduction of new train routes under its banner, where it has freedom on pricing. Besides, income from other monopoly businesses, such as on-board catering and sale of packaged drinking water, ensures that IRCTC generates fairly decent cash flow. In FY19, the company’s free cash flow was nearly 25% of its operating revenue.

An interesting feature of the IRCTC IPO was that the shares reserved for employees were subscribed nearly six times. “It is rare for the employee portion of the issue to be oversubscribed, especially when it comes to issuances by government-owned companies. Strong interest from insiders is always a positive sign," said Nitin Rao, founder of alphaideas.in, an investment blog.

“The prices quoted in the grey market suggest a jump of 55-60% in the IRCTC stock on listing," he added.

Of course, the improvement in investor sentiment after the corporate tax cuts also helped.

But investors should note that the IRCTC IPO had some strong factors working in its favour, such as the high brand recall, benefits of being a monopoly and low valuations. The success of this IPO does not mean all issuances will do well.

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