Pricing an initial public offering (IPO) is considered an art, for no small reason. One need look no further than the Indian Railway Catering and Tourism Corporation (IRCTC) IPO, which closed on Thursday, to understand why. The numbers always tell a story. While the government had targeted a mop-up of ₹645 crore, IRCTC’s IPO saw bids amounting to a whopping ₹72,000 crore! For a government that is desperately trying to shore up its revenues at a time when it has announced a reduction in the corporate tax rate and coping with falling Goods and Sevices Tax (GST) collections, this definitely is an opportunity missed.
Clearly, the Centre and its merchant bankers erred in conservatively pricing the issue. Had they been more aggressive, the disinvestment receipts from the IRCTC offer-for-sale would have been far higher. And that tells us why pricing an IPO is an art.
IRCTC is in a sweet spot as it is not only an e-Commerce player, but also enjoys a monopoly over the business of booking railway tickets online. It has a monopoly over the catering of food served on trains. It is exclusively authorised to manufacture and supply packaged drinking water at stations/trains. And it is not just confined to the railways -- IRCTC also supports booking of flight tickets and holiday packages, among other things.
Given its strong fundamentals, a debt-free balance sheet and decent return ratios (Return on Equity of 20 per cent, operating margins of 20 percent and PAT margin of 15 per cent), pricing the issue at a price-earnings multiple of 19x FY’19 Earnings Per Share (EPS) of 17 and 13x FY21E earnings is at best conservative.
IRCTC has a healthy balance sheet, with ₹1,100 crore of cash to support capital expenditure. The icing on the cake is the corporation’s good dividend payout record — 50 per cent on average in the last three years. With Indian Railways reinstating the convenience fee/service charge for e-tickets from September 2019, this move is expected to generate additional annual revenue of ₹300 crore in 2019-20 and ₹450 crore in 2020-21 for IRCTC.
Moreover, albeit unexpected when this IPO was planned, the recent corporate tax rate bonanza should see IRCTC save a tidy sum on the tax front.
Also read: With an oversubscription of 112 times, IRCTC’s stock offer is a showstopper
Separating the wheat from the chaff
It has to be realised that investors – both institutional and retail -- are now quite adept at separating the wheat from the chaff. Whether it is in a bull run or in a bear market, there will always be strong demand for companies that have an interesting, stable and unique business model such as the one IRCTC clearly seems to have developed in recent years. Having an e-Commerce-based business model is certainly an advantage as the gains are only going to be exponential once volumes kick in for the same fixed IT infrastructure cost. There is heightened investor interest around the world in Internet-based companies.
Foreign investors and domestic institutions are always going to lap up such public sector companies when the IPOs are conservatively priced. The Government and its merchant bankers would therefore do well to go in for stiffer pricing when it involves fundamentally strong companies such as IRCTC -- even if the IPO is hitting the market when economic conditions are tough and sentiment is weak.
Breathing life into a lacklustre disinvestment programme
The overarching thought in the capital market fraternity is that IRCTC’s price band was conservative and may well lead to strong listing gains for investors who managed to get a slice of the IRCTC pie. On its part, the Centre has only shed a 12 per cent stake in IRCTC, leaving itself room to do more in future, if it so chooses. Be that as it may, the IPO’s success could give a leg up to an otherwise lacklustre divestment programme so far this fiscal year.
It is time planners realised that there is no harm in commanding a price premium for IPOs that offer profitable growth, even if they comes from the public sector stable. They need to shed the notion that public sector assets cannot command a big premium in the market. In a rush to achieve disinvestment targets, it shouldn’t end up being a case of the family silver being sold for a song.
Also read: IRCTC IPO call: Green signal