IRCTC IPO: Can it be another D-Mart?

Who doesn’t remember the D-Mart IPO? The hype, which surrounded it, the oversubscription and everything else. Recent IRCTC IPO is reflecting similar vibes and looks like the history is repeating itself. But, nothing can be said with 100% surety and therefore, the future of IRCTC is still veiled. Even though, the company is backed in its monopoly by the government itself and enjoys entire market share. But, who knows what’s on cards?

IRCTC- The Company that enjoys the entire market share in its Industry. Indian Railways has authorized only IRCTC to provide catering services, railway tickets online, and packaged drinking water at railway stations and trains in India. Yes, this is the company that does not have any competitors till now.

Business Segments 

The business segments of IRCTC are its Catering services, which contribute to more than 50% of its revenue, Travel and Tourism, Rail Neer (packaged drinking water division), and the Online Ticketing Operations (can be read as the cash-generating machine).

Most Transacted website in Asia Pacific Region

More than 14 lakh passengers travel on Indian Railways on a daily basis, which consisted of approximately 71.42% of Indian Railways' tickets booked online. As a result, there are more than 8 lakh tickets booked through IRCTC (the only platform which has the power to book tickets). Yes, the customer does not have any other platform to book tickets.

This is only the start because as more and more money is invested to improve the infrastructure and the connectivity, it is sure that the passengers traveling in railways will only increase.

What can be better for IRCTC!

 Let’s dig deeper

Apart from enjoying the monopoly status, the company is also profitable, as it does not look after the whole railway operations. Selling tickets and providing catering services are the two major revenue-generating operations of IRCTC.

The company’s balance sheet also looks very strong as it is completely debt-free (read as the zero debt company). The ROE in the last 3 fiscals was more than 23%. Further it also boasts strong cash and cash equivalents of 460Cr. as of 31-03-19.

The government has also reinstated the service charge while booking tickets online (Rs 15 for sleeper class and Rs 30 for AC class). This makes everything look rosy for IRCTC, since its profitability will also increase.

Our Major Concern here is:

IRCTC is a government-owned monopoly, and we very well know that the government works for the benefit of the entire nation and takes decisions keeping in mind the people at large and not the shareholders.
So, we are a little unsure, that if tomorrow a law is passed and it changes the entire game for IRCTC, then what will the shareholders do.

For example, to boost digital payment in 2017 the government removed the service charge that was collected by IRCTC.  This led to a significant fall in revenue and profits.
Just think for few minutes..what will happen if this law just gets passed after you invest in the company….

Now Coming into the Big Question

IS the IPO Undervalued @ the price band of Rs 315-320?

The simple and most popular way to check a company’s valuation is the P/E (Price/Earnings) ratio. As the name suggests, it is derived by dividing price per share with earnings per share. Basically, it gives you an understanding that 1 rupee of earning is priced how many times in the market.

In short, if you invest 100 rupees in a fixed deposit and get 8% as interest then your P/E could be calculated as 12.5 (100/8).

If a stock’s P/E ratio is less than its peers in the industry or the industry benchmark than on the face it can be termed as an undervalued share but one needs to analyze further and find out why is the market giving it a low valuation.

At a price band of 315-320 the P/E of IRCTC is nearly 18. The only sad thing here is, it does not have any competitor as it is the only company in its industry, making the valuation tricky.

Should you apply only for Listing Gains?

The share is already trading at 480ish level, which is 50% premium according to the unofficial grey market. We believe that there can be serious listing gains because of improved market sentiments and the monopoly status enjoyed by IRCTC. The recent reinstatement of service charges will also boost the profitability, which makes the stock more attractive.

How to Apply?

Nowadays most of the IPOs are through book building method which means that the company provides an indicative price band (315-320 for IRCTC) and the final price is decided through the book-building process. Under this method, the basis of allotment is finalized within 10-12 days and if you are allotted any shares then it will also get credited in your Demat A/c within a couple of days after that.

While applying for an IPO, the most important thing that you need to understand is ASBA (Application Supported by Blocked Amounts). For retail investors (guys like us) going through this route is most beneficial. The benefit of the ASBA route is that one does not need to pay any money or issue a cheque for an IPO until the allotment is made.

Process of Applying through Net Banking

This can be done by logging in to the net banking portal of your bank and select the “IPO Application” option from the menu. Then fill the required information like client ID, No. of units (40 shares minimum and multiple thereon for IRCTC). Please note that the names of the applicants should be as per the sequence of name on his/her depository account. The application money will remain blocked up to the finalization of allotment.