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There’s a company in India called the Indian Railway Catering and Tourism

Corporation (IRCTC).

If you have ever lived in India, chances are you have used IRCTC at least once.
That’s because IRCTC is an exclusive partner to the Indian Railways, and handles
online ticketing, catering and a bunch of other products and services.

I don’t have to tell you why being an exclusive partner to the world’s largest train
network is a big deal.

Last week, IRCTC went for an IPO (Initial Public Offering), and listed itself on the
Bombay Stock Exchange.

How did it go?

• The stock opened just over 100% higher than its issue price of Rs 320 ($

• Not content, it then jumped another 16% to touch a high of Rs 744 ($


• It was the biggest listing gain for any company in India in nearly two

So… pretty good, right?

Depends. Nearly everyone is happy. Except one.

The Indian Railways.

Who are quite, quite miffed.

But why?

Let’s find out. To do this, let’s use a technique called the 5 Whys. It’s a method
popularised by Toyota to improve problem solving, where we will ask ‘why’ five times
until we figure out an answer.
Why do an IPO?

IRCTC is an unusual company. First, it’s a PSU (Public Sector Unit), a three-letter
acronym that basically means it’s run by the government of India. PSUs generally
have a reputation in India—the popular perception is that they are dinosaurs that are
hugely overstaffed, over-leveraged and heavily loss-making.

Not IRCTC though.

• First, it has quite a growth curve. It earned a total revenue of Rs 1,956

crore ($295 Mn) in the year ended March 2019, up 25% from the previous

• It also makes money. IRCTC’s operating profit grew 25% to Rs 430 crore
($65 Mn) in the same period.

• It’s fairly innovative. IRCTC launched online ticketing back in 2002, well
before e-commerce went mainstream in India.

Now, the Indian government needs funds. To get some of these funds, it does
something called disinvestment. This is where it sells off stakes in assets it owns in
exchange for money. There’s a target every year. For this year,
the targeted disinvestment is Rs 1,05,000 crore (~ $15 Bn). This is up from Rs
80,000 crore last year.

Oh, also, all the proceeds from an IPO go to the government rather than the

Tax revenues are down. The economy isn’t in great shape. That’s why the IRCTC is
looking more attractive for the government. It has even been pretty ambitious about
it. Take this Economic Times story from back in 2015:

The Indian Railway Catering & Tourism Corporation, which operates one of the
country's biggest e-commerce portals, plans to hire a consultant to help it assess
and increase its valuation, a move seen as the first step to a public listing.
"We are trying to exploit the site. Our growth will come from there. We have been
asked by the government to grow like Flipkart," chairman and managing director AK
Manocha told ET.

Grow like Flipkart.

A government company.

What justifies this? What makes IRCTC so attractive?

In other words…


The best person to answer this question is the IRCTC itself.

Here’s what IRCTC, in its IPO filing prospectus, says:

Under the Catering Policy 2017, we benefit from a monopoly position in many of the
services we provide to our customers. In particular, we are the exclusive provider of
online railway ticketing, catering services and packaged drinking water for trains and
stations. As a result, we do not face some of the pressures experienced by
businesses that operate in more openly competitive industries. This allows us to
make certain operating and strategic decisions without focusing on the impacts of
those decisions vis a vis other competitors.

Monopolies make for a great business model. Investors love monopolies.

Hilariously, IRCTC positions this as a risk. Because it goes on to say, ‘if the
Government were to allow open competition in all or any of these areas, it may
impact our financial results’

No kidding.

This monopoly position has benefited IRCTC enormously. Just look at their revenue
Look at the change in its mix of revenue. IRCTC’s revenue has moved away from
internet ticketing—which is fast becoming a commodity with thin margins, to high-
margin business lines like Catering, License Fees and Tourism. All way up in the
value chain.

Plus even the little things count. For instance, did you know that IRCTC is the only
entity that’s authorised to manufacture and distribute packaged drinking water at all
railway stations and on trains?

Sales from water contribute 10% of IRCTC’s revenue. In fact, IRCTC’s market share
in packaged drinking water is 45%. In India.

(Pause to allow the Indian government to laugh loudly at Softbank)

I could go on, but if you want to know more about IRCTC and how it uses this
monopoly to influence payment companies, you should read Arundhati’s stellar
story here. Really is one of the best out there.

That’s why when IRCTC listed itself for an IPO, it was oversubscribed a whopping
112 times and made it one of the most sought after IPOs in the history of PSU IPOs.

Which made the Indian Railways really unhappy.

Why is Indian Railways unhappy?

I’ll explain, but first, it’s important to understand how pricing is determined at the time
of IPO listing.

Now, my knowledge of corporate finance is woefully inadequate. That’s why I am in

a media startup while my B-school batchmates own sea-facing apartments at
Nepean Sea Road in Mumbai. So I’ll let Matt Levine, Bloomberg Opinion columnist
and writer of the second best newsletter in the world - ‘Money Stuff’, explain it:

The way initial public offering pricing works is that investors want to buy stock in a
new company at a low price, and the company wants to sell it at a high price, and an
investment bank listens to both sides’ arguments and then tells the company what
price it can sell the stock at, and the company generally does what the bank tells it to
do. And then it sells the stock and it usually goes up like 10% or 20% or even more
the next day. This is called the “IPO pop,” and it happens in most IPOs, though of
course not all of them: IPOs are inherently risky investments, and sometimes they go
down, and several very high-profile recent IPOs have “cracked” immediately and
stayed below their IPO prices. But if there is a pop, and there usually is, it suggests
that the investors might have been willing to pay a bit more than they let on, and that
the bankers were maybe a bit conservative in their advice to the company. Over and
over again.

I happen to think that there are good reasons for this system, and that it mostly
works well for companies and their pre-IPO investors. (Which is why it’s been the
almost universal way that companies have gone public for many decades.)
Companies want good relationships with their shareholders over the long run, so it is
nice for them to introduce themselves to the market in a way that makes the market
happy. Early investors tend to hold onto their shares for some time after the IPO, so
they want the stock to trade well.

Now here’s what happened with IRCTC.

The government wanted to raise Rs 645 crore. Instead, it received bids totalling Rs
72,000 crore.

That’s why the Indian Railways is upset. It could have got way more, but the bankers
priced it far too low. As K.R Srivats writes in The Hindu:

Pricing an initial public offering (IPO) is considered an art, for no small reason...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.

Which begs the next question.

Why was IRCTC undervalued?

Look, IPO valuation is more art than science.

But despite that, enough people knew that the IRCTC IPO was vastly undervalued.
Equity Analysts told all their clients about it. Nearly every single recommendation
from any stock broker I could find recommended a solid buy for IRCTC at this price.
Hell, even students knew the IPO was undervalued. Take Pratik Rathi, a 21-year-old
student at BITS Pilani. He runs a blog called Framinc. In it, he mentions that he’s
‘passionate about financial markets’. He even attempted a valuation of IRCTC using
a method called Discounted Cash Flow—pretty standard for valuations.

Here’s his most optimistic scenario.

He concludes:

“The IPO seems to be under priced and investors should subscribe to the IPO. The
investors should hold the company for the long term ( economic moat ) and closely
follow the earnings and risk factors related to the company.”

When IRCTC listed, it received a valuation of Rs 11,700 crore. That’s double what
IRCTC’s bankers expected. And Rs 1,200 crore (~$180 Mn) above most optimistic

You know the last question.

Why was the IRCTC IPO so popular?

Here’s what K.S Badrinarayan writes in The Hindu:

The issue got subscribed 112 times, as all categories of investors, including the
usually conservative category of employees, had bet their money overwhelmingly.

Think about that. Even the most conservative category of investors plowed their
money into IRCTC. From employees. Employees usually exit at the time of an IPO.
Or hold on. They don’t generally fall over each other to buy more of the company.

Why would they do that?

Probably because there was no better place to accumulate savings.

This is telling of a larger force at play around IRCTC's IPO. One that explains the
overwhelming interest that added Rs. 1,200 crore to IRCTC's valuation from all
categories of investors. Equity investments are usually high-risk high-reward, but
what happens when a company like IRCTC with low-risk and high-reward launches
an underpriced IPO? Especially in an environment when even banks can’t be trusted
with savings? It would be like investing in government bonds, with the upside of an
IPO pop.

That’s what makes IRCTC special. Not just the fact that it’s a monopoly, but that it’s
a government-run monopoly.

It wasn’t really an IPO.

It was a lottery to get a piece of India’s most lucrative Provident Fund.

India quietly tests its trade power

This section is from Rohin. Who has an interesting point.

America’s National Basketball Association, the NBA, was the latest international
organization to bow to the uncompromising and unforgiving power of China’s trade.
A single, quickly-deleted tweet in support of Hong Kong’s freedom (the semi-
autonomous city that is part of China has been gripped by widespread protests in
favour of independence since June) from one of the general managers of its sports
teams snowballed into a crisis. A crisis out of which the NBA’s most “woke” players
emerged bereft of spine or principles.

That China successfully uses its economic might to force other countries to kowtow
to its own political policies is a known thing. That India is slowly starting down that
road isn’t.

After Malaysia, one of its strong trading and geopolitical partners, criticised its policy
towards the state of Kashmir at the U.N General Assembly, India seems to be testing
its ability to retaliate via its trade power. India is the world’s largest importer of palm
oil, and Malaysia is the world’s second largest exporter of it. Last year India
imported $1.63 billion worth palm oil and products from Malaysia. Then, after an
import duty cut in January this year, that figure surged to over $2 billion in just the
first 9 months of 2019.

Now, Malaysian palm oil imports to India are tumbling because of expectations that
they will be curbed or discouraged, as a message that there will henceforth be an
economic cost to opposing India’s positions internationally.
And just like Chinese use of trade power is often accompanied with coordinated
citizen action, in India too there was also a social media campaign to

Last Week in Softbank

Since we are discussing IPOs, remember WeWork?

Reports emerged earlier this week that WeWork was fast running out of cash, with
just enough cash in hand to last till Thanksgiving. There was a good chance that the
company would be bankrupt by the end of the year.

WeWork had two options. First, there’s JP Morgan. Which offered WeWork a $5
billion “junk-debt package”.

Second, there’s SoftBank.

As Bloomberg reported,

SoftBank Group Corp. is assembling a rescue financing plan for WeWork that may
value the office-sharing company below $8 billion, according to people familiar with
the discussions.

SoftBank, which with its affiliates already owns a little under one-third of WeWork,
has been in discussions to provide the company with $5 billion of funding in a mix of
equity and debt. The financing would come directly from the Japanese firm, rather
than its Vision Fund, a person said earlier this week. SoftBank would not amass a
majority of voting rights, though its stake would increase, the person said. Part of the
package may include non-voting preferred stock.

$8 Billion dollars.

So let’s get this straight. If this deal goes through, Softbank would have invested
~$15 Billion into a company that’s currently worth...half of that, without majority
voting rights in the company. A company, which, let me remind you, Softbank
believed was worth $65 Billion five weeks ago.