ITS Assignment – 2 | IRCTC IPO Analysis

Efforts by : Chelumalla Rishi Revanth, 18118

IRCTC has recently issued an IPO on September 30th, 2019 and much to surprise of the
street the IPO was a huge success with the bids overshooting the targeted value by several
times. Given the history of IRCTC the market predicted a high demand for the shares of IRCTC,
but the more than expected high demand of the stocks has lead to a bit of scepticism to creep
in the minds of investors who are eagerly waiting to see how IRCTC shall justify the high bids
it received in its future investments. There are speculations on the way regarding the
resurgence of Indian market which has slumped in the recent times but as of now it is unsure
as to whether the purchasing power of the society has actually increased or was it a tactical
or unknowingly done mistake of artificially inflating the demand of IPO by pricing the stock
conservatively. Looking at the responses of the Indian Railways post the closure of the IPO, it
certainly seems as though there was a methodical error on the part of the issuers in
calculating the demand for the stock. One respite for the promoters in this aspect is that they
have disinvested only 12.2% for their stock holding and hence government can further
disinvest the remaining stocks at a better price in the secondary market based on the
learnings from the IPO issue. This would help the government raise much bigger capital from
the secondary market while maintaining the stability and lustre of the primary market.
Any IPO’s demand for subscription is very much dependent on the operating business
model of the firm, its competitive advantages and its future investments/growth trajectory.
For the ease of understanding and logical flow, I would like to divide the current report into
four subdivisions, analysis of the current IPO issue, business model of IRCTC and its core
competencies, IRCTC’s financials & investors’ perspective.
Problems and nitigrities of IRCTC IPO issue
One obvious thing which is very evident from the statistics of the IPO is that the issuers
have conservatively priced the stocks which reflect the poor estimations of the IRCTC’s net
potential by the promoters. Three numbers would adequately justify the above argument;
IRCTC aimed the IPO for a targeted capital raise of Rs. 645cr with an issue of around 2.02cr
shares at a per piece price in the range of Rs. 315-320. The ultimate result of pricing the stock
so low was the huge unexpected demand of bids wherein the submitted bids amounted to a
whopping total of Rs. 72,000cr at an estimated 225.67cr no. of shares. In the current market
scenario where there is a bearish run of stocks & both the firms and investors are unsure of
the unravelling of the upcoming year due to impending election season, a staggering
overshoot of bid subscription by 112 times is certainly an important opportunity cost missed
by the government which could have used this surplus to boost the economy in the desperate
times. Also the recent cuts in corporate taxes & the slumping GST collections is hurting the
treasury of the government a lot and this capital would have certainly helped heal those woes.
This pattern of high subscription rates is prevalent across all major categories of investors
with HNIs subscription overshooting by 354.5 times being the highest. This is just the second

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highest response received by a PSU IPO issue in the last 20 months. The following snapshots
show the basic details of the IPO issue.

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IRCTC Business Model
IRCTC was a wholly owned subsidiary of India Railways until recently when it issued its
IPO. It was included as part of the Mini-Ratna category under CPSEs of the state owned
enterprises in 2008. The company majorly operates in four key strategic areas:
1. Travel & Tourism : IRCTC has been playing a key role as the transportation & tourism
aggregator for the common people of India where in it provides a wide range of
services starting from travel packages to non-railway services like air ticket bookings,
hotel bookings, cruise tour packages, etc.
2. Packaged Drinking Water : IRCTC is the sole entity authorised by the Indian Railways
for the manufacturing and distribution of packaged drinking water, both on trains as
well as at stations.
3. Catering Services : The entity also provides food/catering services to passengers both
on trains and at railway stations which includes variety of meals in the present day.
IRCTC is also maintaining special lounges at railway stations for the benefit of the
passengers who would like to have some rest in case of train delays or cancellations.
4. E-Ticketing : The firm maintains an exclusive website and a mobile app (Rail Connect)
for the convenience of passengers who avail a variety of services on it starting from
booking the tickets to ordering meals. This website is one of the most transacted sites
in Asia – Pacific Region. Around 15 to 18 million transactions are placed through the
website on a monthly basis. It also recently included the i-Pay payment gateway as
part of its infrastructure for accepting debit/credit card payments.
Competitive advantages of IRCTC
The main strengths of the company lies in its robust business model and the
operational capabilities. Being the sole authorised entity by Indian Railways for operating the
trains, packaged drinking water, ticketing services makes it a monopoly in this sector. Hence
when a company is in a monopolistic situation, it becomes very easy for it to capture the
growing market every year without threats from new entrants. The investment decisions also
become easier as there is nothing to worry about the strategic moves of the other players in
the sector.
Industry view and key threats to IRCTC
1. There is no threat of new entrants for IRCTC as it is the only entity authorised for
operating the trains and for manufacturing and distributing packaged drinking water.
However, IRCTC has to innovate and maintain its catering services on a continual basis
as the food services and drinking water industry in India is highly fragmented and
unorganised. Therefore the small local outlets at the stations could be one threat for
IRCTC.
2. Previous loyal passengers of Indian Railways are constantly shifting to air travel as a
means of transportation given the rising prices of Rail Tickets and the dropping prices
of airlines. Other value added services of airlines are also perceived to be much better
than ones provided by IRCTC.

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 3. IRCTC does not have the ability to pass on the increasing costs of Raw materials onto
customers due to the subsidy regulations provided by Indian Railways.
4. IRCTC still uses PET and plastic bottles for the packaging of its various products which
are going to be subject to several regulations given the increasing attention of the
world towards greener practices.
5. IRCTC is still very much dependent on Indian Railways for its business decisions and
revenues. Therefore any changes in policies made by Indian Railways could severely
affect the operations of IRCTC and its profits.
Financial view of IRCTC
Revenue Streams of IRCTC :

Financials of IRCTC :

Looking at the above records it is easy to identify that the firm is steadily growing in
terms of both Revenue and PAT by maintaining good operating margins of around 23-24%.
The good thing about this company is that it is debt free and completely raises capital through
its earnings only and now through its IPO. The market capitalizations of the company is around
Rs. 5100cr. The P/E multiple is around 18x which is quite good. It also has an excellent return
on net worth (RONW) of 26% in FY ’19. From the investors’ point of view, IRCTC has been
regularly giving out dividends, 50% on average in the last 3 years. Moreover, the reduction in
corporate tax from 35% to 25% is going to save more cash for the company. Along side the
corporate tax, the company has also started levying convenience charges on all online
transactions through its website and mobile app, thereby garnering an estimated additional
revenue of Rs.300cr in 2019-20 and Rs. 450cr in 2020-21.

Investors’ and Issuers’ perspective

There is no doubt to say that the issuers of the IPO have conservatively priced the stocks due
to which several investors have tried to lap in the opportunity presented with. The
miscalculation of this price could be attributed to an error in estimating the net potential of

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the company or due to a bias towards PSUs in India, which are generally considered to be
subservient to the humongous private MNCs. This notion has to change and the current IRCTC
IPO serves as an epitome of why PSUs with great growth potential can also demand a
premium on its stocks. One path to take for the issuers in times of high demand for the IPO is
a Green Shoe Option. When the issuer exercises this option, it allows the underwriter to
supply more stocks (around 15% extra) in to the stock market thereby stabilising the after
listing stock price. This option would also allow the investors more probability to get a share
at a fair price. Therefore as a result the investor confidence in the company increases thereby
allowing the company to command more bids at better prices.
Looking into the future, the growth for IRCTC seems excellent given its investment
areas. IRCTC is deciding on opening 10 new water plants for scaling up its packaged drinking
water manufacturing. It is also venturing into the option of privatised trains which shall be
completely operated by IRCTC. Also the recent success of Tejas Express and Vande Bharat
Express has proved to be ornamental in the experimentation of semi high speed trains. IRCTC
is planning to launch many more trains on the similar lines.

References
1. https://economictimes.indiatimes.com/markets/ipos/fpos/irctcs-strong-business-model-makes-
its-ipo-a-good-long-term-investment/articleshow/71367466.cms
2. https://www.thehindubusinessline.com/markets/stock-markets/at-over-111-times-irctc-ipo-
gets-biggest-ever-subscription-for-psus/article29585681.ece
3. https://www.thehindubusinessline.com/markets/stock-markets/irctc-ipo-success-points-to-
ponder/article29592831.ece#
4. https://economictimes.indiatimes.com/markets/stocks/news/irctc-ipo-to-open-on-monday-key-
things-to-know/key-risks/slideshow/71335793.cms
5. https://www.thehindubusinessline.com/markets/lessons-from-irctc-ipo-time-to-explore-green-
shoe-option/article29659391.ece
6. https://investorzone.in/ipo/irctc-ipo/

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