IRCTC IPO: Not enough to repair investor disinterest in PSUs

| Updated on October 06, 2019

If the Centre is hoping that it can simply replicate IRCTC’s success with its future offers, it would be quite mistaken

The runaway response to the IRCTC Initial Public Offer, where the ₹645-crore offer was deluged by applications worth ₹72,000 crore, has infused renewed cheer into India’s moribund primary market and prompted market watchers to revise their opinions on the fate of the public sector disinvestment programme this year. Unlike other public sector IPOs before it, where subscription numbers were massaged by obliging domestic institutions such as LIC, the response to the IRCTC offer appears to be genuine, with the foreign institutional investor, retail and employee quotas all boasting good over-subscription numbers. But if the Centre is hoping that it can simply replicate IRCTC’s success with its future offers, it would be quite mistaken. It would take a lot more than the subscription numbers to one IPO to repair Indian investors’ disillusionment with PSU stocks as a class.

There are three reasons why IRCTC’s success is unlikely to presage a bumper response to future PSU offers. For one, unlike a majority of PSUs which operate in capital-intensive, cyclical and B2B sectors, IRCTC is a consumer-facing and asset-light e-commerce play on Bharat’s rising travel spends. Seen in this light, the Centre left money on the table with its unambitious asking price valuing IRCTC at 19 times its past earnings and less than 15 times forward earnings. This is at a steep discount to the prevailing market multiple of 26 times. While IRCTC’s business model or its prospects needed little promotion given consumer familiarity with the brand, both the government and its lead managers have been quite poor at showcasing the strengths of more complex PSU businesses in the past. Offers from IRCON, RITES, MIDHANI or GIC had wound up even before most retail investors could come to grips with their business. Two, even PSU offers that have flaunted big over-subscription numbers have delivered poor post-listing performance to their investors in the past. Seven out of the 10 PSU IPOs preceding IRCTC’s languish below their issue price, with some (GIC and New India Assurance) sporting losses of over 75 per cent. While institutional investors often exploit discounted PSU IPOs by flipping them for listing gains, retail investors staying long-term have burnt their fingers. Three, the government’s own lackadaisical attitude towards minority shareholder rights has actively contributed to PSU businesses in general quoting at steep valuation discounts in the secondary market to their private sector peers. As the promoter of disinvested firms, the government has gleefully trampled over public shareholder interests by regularly raiding PSU balance sheets for dividends and buybacks (Coal India, NTPC, ONGC), forcing them into arranged marriages (ONGC with HPCL) and co-opting them into social projects without the concurrence of their Boards (PSU bank loan melas).

Staying off such interference is critical to make sure that future IPOs from public sector firms can command a good response.

Published on October 06, 2019

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