IRCTC shares rallies 16% post the stock split in the ratio of 1:5. Let's understand how stock split works and why is it beneficial for investors.
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Shares of Indian Railway Catering and Tourism Corporation (IRCTC) rallied 16 percent on Thursday's after the stock turned ex-split. The company had fixed October 29 as the record day for the stock split in the ratio of 1:5. The board of IRCTC had approved a stock split on August 12.
Basically, this means that each stock will be split into 5 shares. This increases the liquidity of the stock by decreasing its stock price, thus making it more affordable for investors.
The stock had hit a record high of ₹1,279 (adjusted to stock split) on October 19, 2021, and has doubled investor wealth, rising over 100 percent, just in the last three months. In comparison, the benchmark Sensex has gained around 16 percent in this period.
Understanding stock split
A stock split increases the number of shares of a firm, in this case, the total number of shares will increase 5 times but the share price will decrease. This in turn does not affect the market cap of the firm. Existing shares slip but the value remains the same.
For example, in the case of IRCTC, if an investor held 5 shares of the firm, then the number of shares will increase to 25, the stock price of each share will decrease, but their underlying value will remain the same.
The main reason behind a stock split is to make shares more affordable for the shareholders. It generally occurs after a major run-up of a stock's price. Before the stock split, the shares of IRCTC were trading around ₹4000, even after a steep decline from its record high of ₹6,369, hit on October 19, 2021.
The stock price of IRCTC was pretty expensive for small investors but after the split, the share price had decreased to around ₹900, making it more alluring for investors.
Every time there is a corporate action like a stock split in #IRCTC today and the stock price drops in adjustment, retail investors tend to buy the stock wrongly thinking that the stock has become cheaper.
It not only benefits the existing investors, by increasing the number of shares they hold, it is also good news for future investors, who were not able to invest in the stock due to the high stock price.
There are no additional costs incurred during a stock split. The firm's fundamentals like profit, revenue, operational costs, etc are not at all impacted in case of a stock split, neither is the market cap of the firm.
Going ahead the fundamentals of IRCTC is very strong and while at the previous price (before the stock split), analysts recommended holding the stock instead of buying due to higher valuations. The split only makes the stock more appetizing to investors.
Along with the stock split announcement, an increase in railway bookings as the economy opens up and more people looking to travel on the back of vaccination drives and a decrease in COVID cases are very positive for the stock.
In the June 2021 quarter, the railways catering company posted a net profit of ₹82.52 crore as against a net loss of ₹24.60 crore in the corresponding quarter last year. Its revenue from operations surged 85.4 percent YoY to ₹243.4 crore.
Going ahead, the expansion plans of the firm like moving its business to bus, air tickets as well as tour and travel planners could open up a whole new potential opportunity for the firm to strengthen its position.
IRCTC is in a pure monopoly business as it is the only authorized firm to provide online tickets and catering services to the Indian railways. It has a dominant position in online rail bookings and packaged drinking water with around 73 percent and 45 percent market share, respectively.
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