The video talked about how attempts to estimate demand in setting an issue or offer price for IPOs can sometimes result in spectacular failures. This post is about the October 2019 listing of the Indian Railways Catering and Tourism Corporation (IRCTC).

The IPO

Thr Government of India periodically divests itself of its holding of public sector assets. With IRCTC (a subsidiary of Indian Railways), this was an offer of sale, meaning that IRCTC itself didn’t receive any money, the government is reducing its holdings in exchange for receiving the proceeds of the IPO.  The offer was to raise about Rs. 645 crore (not large in the government’s grand scheme of things), by selling shares in IRCTC within a price band of Rs 315-320.  Two crore shares were offered to subscribing investors with an additional one lakh shares being reserved for employees. The issue was about 110 times over-subscribed, this interest itself hinting huge latent demand. The usual book-building methods were followed with at least 50% of the issue going to QIBs (qualified institutional buyers, including mutual funds), about 15% to non-institutional buyers and 35% to retail investors. The book running lead managers were IDBI Capital Markets & Securities Limited, SBI Capital Markets Limited and Yes Securities (India) Limited.

About IRCTC

IRCTC handles the catering, tourism and online ticketing operations for the Indian Railways. Catering is about 55% of revenues, travel and tourism about 25%, packaged drinking water about 10% and e-ticketing about 10% (with about 70% market share). They have a monopoly on railway catering, and are the only authority to distribute packaged drinking water. Its future plans include levying service charges of Rs 15 for non-AC and Rs 30 for AC coach tickets, starting an e-wallet and so on. Since a full-blown effort at estimating a price for the stock is beyond the scope of this post, I will restrict myself to pointing out something the video mentions–that of making peer comparisons. Financial analysts have compared IRCTC’s catering business to quick service restaurants that operate McDonalds, its ticketing business to Make my trip and its drinking water business to Varun Beverages.

What happened at listing and what might happen after?

The listing price was Rs. 315-320. At this price the government’s 12.6% stake would be valued at Rs 5000 crore. On listing on October 17th, the stock opened for trading in the low 600s and closed at Rs 728.6 (more than twice as much), a little later moving as high as Rs 933 (three times as much) and presently trades around Rs. 874. Investors who got their subscriptions, doubled their money overnight. One wonders why the rules don’t permit a reset of the price band in the face of the huge oversubscription, something that happens in other locations. Obviously, Indian Railways is miffed and is protesting that due diligence wasn’t done. This complaining seems reasonable given that there has been a long history of offers of sale for public sector companies.

Investors in the market have been buying into the rosy picture being painted for IRCTC. What will happen to it in the long run?