What you learn from IRCTC’s dizzying journey

Stocks of Public Sector Undertakings (PSUs) in India are generally held to be boring bets for investors, given that they operate in old economy businesses, rarely go in for exciting corporate moves such as new business forays, buyouts or mergers, and faithfully maintain a high dividend yield by coughing up payouts at their promoter’s behest.

But Indian Railway Catering and Tourism Corporation (IRCTC), the monopoly ticketing arm of Indian Railways, has behaved in a very non-PSU like fashion right from its IPO in October 2019. With the offer made at a throwaway price of ₹320, the share more than doubled on listing and was up fourfold within fifteen months, scaling ₹1400 by January 2021.

A dizzying rise….

It had good reason to do so. Though two waves of Covid had battered IRCTC’s revenues and profits in FY21 to a third of FY20 levels, IRCTC continued to seed new revenue streams during the pandemic.

It flagged off hotel, bus and airline ticketing services, launched domestic and international tour packages, debuted its own payment gateway and scaled up its insurance and co-branded credit card business, while bidding for private train routes put on block by the Railways. It also took the first steps towards monetising its mammoth 6 crore user base with cross-selling and advertising.

This helped the investor community forget its pathological aversion to PSUs, to imagine a rosy future for IRCTC. The stock’s PE scaled three digits as analysts modelled a fivefold bounce in its earnings by FY23. This was based on the Railways getting back to business-as-usual (which would restore IRCTC’s internet ticketing, catering and bottled water revenues) and adding to its bottomline from its nascent new businesses. Talk of new ticketing opportunities from AC 3 coaches and the pricing power enjoyed by IRCTC on convenience fees added to its bull case, helping the stock’s pricey PE of 150-200 times in mid-2021, scale dizzying heights of over 320 times by October 2021, prompting entertaining Twitter face-offs between IRCTC fans and haters.

And a sharp setback

But if private promoters in this situation would have done everything to keep the rosy narrative going, PSUs’ promoter - the Indian government - works in mysterious ways. A stock exchange intimation by IRCTC post-market hours on October 28 blandly intimating that the Ministry of Railways had ‘decided’ to ‘share’ 50 per cent of IRCTC’s convenience fees from November, dealt a nasty surprise to its fans.

Though internet ticketing brought in just 27 per cent of its revenues in FY20 and sharing it would deprive it of just ₹150-300 crore a year in convenience fees (depending on one’s forecast for FY23/24), ticketing is IRCTC’s key margin-generator accounting for over three-fourths of its earnings. A lot of the bullish narrative around an expanding profit pool for the company was also built around its ticketing business.

The filing therefore prompted sell-side analysts to burn the midnight oil to revise their excel models. Overnight IRCTC found its FY23/24 earnings projections lowered by 25-30 per cent, with a sharp PE de-rating predicted.

Stock price action on Friday did not disappoint the bears, with the stock losing 25 per cent shortly after opening to a post-split price of ₹639, erasing nearly ₹20,000 crore in market cap. Even as this prompted some teeth-gnashing about the Government’s folly in giving up ₹13,000 crore of market wealth (it owns 67 per cent) to gain ₹150-300 crore in revenue, pre-noon parleys between the company and the Railway Board seemed to yield results. By 11 am, business channels were beaming ‘breaking news’ on the Railway Ministry changing its mind, with the Secretary of DIPAM (earlier the disinvestment ministry) confirming that the Railways Ministry has rethought its decision. This caused the stock to forge an equally steep climb.

Lessons

The IRCTC saga reiterates some age-old learnings about PSU stocks that makes seasoned investors very choosy about them.

One, the left hand of the government may not know what the right hand is doing. Even if the Centre is a majority stake-holder in a listed PSU, the Ministry controlling it may make shareholder-unfriendly moves that prioritise its own interests over that of the shareholders.

Two, Government monopolies, unlike private monopolies, often do not have pricing power. They operate at the mercy of their respective ministries, which may prioritise social good or political popularity over shoring up the profits of the PSU. The losing battle that activist UK fund The Children’s Investment Fund fought with Coal India, about government interference in its pricing decisions and NMDC’s inability to fully cash in on global iron ore rallies, are evidence of this. IRCTC’s own convenience fees and the Railways’ share in it have been altered quite often in the past. Pre-listing, the Ministry of Railways used to share IRCTC’s convenience fees 50:50. Just before its IPO, the Centre took a decision to ‘waive’ IRCTC’s fee completely, decimating a key revenue and profit source. The fee was later partly restored post listing. Even last year, the Railways’ changing policies on catering contracts have raised doubts on the sustainability of IRCTC’s catering profits. The latest fee-sharing saga should therefore prompt IRCTC fans to keep the promoter risk in mind, while modelling earnings and according eye-watering valuations to the stock.

Three, despite the Centre’s keenness to divest, Ministries in it often prove clueless about the concept of corporate governance that requires giving minority shareholders a fair deal post-listing. Ministry bosses often continue to look upon listed PSUs as their fiefdom. The IRCTC saga has at least shown that DIPAM, under this government, is not asleep at the wheel and can act swiftly to reverse market-alienating decisions of babudom.

All this apart, the IRCTC roller-coaster also underlines the importance of investors in good companies, not giving in to hair-trigger reactions, when responding to market events. Investors who sold their IRCTC shares in panic at lows would be ruing their decision to jump off a still-racing train.

That the stock showed a build-up in buying volumes ahead of the official announcement to withdraw the sharing arrangement, also shows that the market (or insiders in it) often know far more about a company’s actions than you would imagine. If you find a stock behaving in a fashion that you think to be completely irrational after a news event, take time to digest it and gather all the information, without acting impulsively. Budget for the possibility that the market may be right and you may be wrong.

The IRCTC saga also demonstrates the brutality and quickness with which the market can punish a highly fancied (and expensively priced) ‘quality’ stock, when there’s an alteration to the bull case it has imagined. Taking the right decisions (to hold, sell or buy) through such periods of pain is an essential part of a multi-bagger journey, which is why equity returns are never easily made.

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