Imagine a group of friends planning to go on a trip. Now we know there would be some hurdles like deciding on expenses or deciding the place, but the most difficult one would be fixing the dates.
It's almost impossible to sync the group on a date on which all are available.
After a lot of discussions when almost everyone would agree on one date; there would be one sample piece of a friend who would spoil the party.
Same is the case of railway stocks.
If we take a look at recent performance of railway sector stocks, we can see that most of the railway stocks and railway infrastructure stocks have rallied in recent months. But bucking the trend is most popular railway stock IRCTC.
On a YoY basis, IRCTC's share price has fallen by 21%. The stock has seen heavy selling in recent days especially.
Why IRCTC is Falling
#1 Offer for Sale (OFS) by Government
A promoter's holding in a company indicates the promoter's trust in the company. When promoters are increasing their stake in a company it shows that something big and profitable is about to happen in the company.
On 15 December 2022, the government of India announced that they will divest a 5% stake from IRCTC via an OFS.
The promoter proposed to sell up to 2.5% of the total issued and paid-up equity share capital, with an option to additionally sell 2.5% of the total issued and paid-up equity share capital.
The offer price has been fixed at Rs 680 per share, which is at a discount compared to the current market price. The offer is already open for subscription.
After the announcement, the share price took a dip on the bourses.
In fact, this is not the first time the government has divested its stake. The government has been continuously and gradually reducing its stake in the company.
When IRCTC was listed in September 2019, the government held a stake of 87.4% which currently stands at 62.4%. Hence, in three years, the government divested a 25% stake in the company.
Experts said the continuous disinvestment in IRCTC by the government has created concerns of a supply overhang, leading to value destruction.
But the government has to do something to meet their fiscal targets…so can't really blame the government for selling stake.
Over the years, the government has sold stakes in multiple companies via OFS to garner amount. This has resulted in temporary fall in the company's share price and similar is the case for IRCTC.
#2 Poor quarterly results
2022 was already a weak year for most of the stocks on the bourses. Sentiment was dampened for IRCTC when its quarterly performance for the quarter ended 30 September 2022 was tepid.
For the said quarter the company reported a total revenue of Rs 831.8 crore (about Rs 8,318 million). It is 5% lower on a quarter-on-quarter basis. A similar effect can be seen in the net profit of the company.
For the quarter that ended 30 September 2022, IRCTC reported a net profit of Rs 2,260 m, which is 8% lower compared to the net profit of Rs 2,455 m reported in the earlier quarter.
Bad quarterly results added an insult to injury for IRCTC and the share price dropped.
#3 Valuations
While all the other reasons hold true, there is one more reason because of why IRCTC has been going down on the bourses. The answer is valuations.
IRCTC is currently trading at a PE ratio of 60 times. A year ago the stock was trading at a PE multiple of 140 times. This is very expensive even for a good stock; hence any long-term investor would refrain from buying the stock at such a high price.
Hence, the demand for the stocks came down in the market because of this the share price has been falling.
To know more about how expensive valuations are pushing down the stock price read our editorial on why other rail stocks are going up but not IRCTC.
The share price had also dipped when the company withdrew its tender to appoint a consultant to monetize its passenger and freight customer data citing concerns over data privacy on non-approval of the Data Protection bill.
Investment Takeaway
After falling from its high price, IRCTC has been trading in a range-bound manner, sending the stock into a consolidation zone.
Once the stock exits from the consolidation zone it could either rally or drop without turning back. Hence, investors should tread carefully.
Currently, it is the railway infrastructure that is all set to boom as demand for setting up railway lines increases. However, the actual impact on the railway and profits of IRCTC will be seen once all the infrastructure is operational.
IRCTC will be in a sweet spot in the future considering the prospects of the railway sector, but the timing of the same cannot be predicted. IRCTC is the sole authority to run trains hence its business will never be out of demand.
It's a classic example of a monopoly stock.
Currently, IRCTC is quite expensive compared to its financials which may be a red sign for investors. If we take a look at the operations of IRCTC we can see that plenty of operations need to be automated.
Hence, IRCTC has both a set of pros and cons. An investor should carefully consider his risk-bearing capacity and investment horizon in mind before making any investment decision.
Happy Investing!
About IRCTC
IRCTC is a mini ratna (category-I) central public sector enterprise under the ministry of railways, the government of India.
IRCTC was incorporated on 27 September 1999 as an extended arm of the Indian Railways to upgrade, professionalize and manage the catering and hospitality services at stations, on trains and other locations and to promote domestic and international tourism through the development of budget hotels, special tour packages, information & commercial publicity and global reservation systems.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
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