IRCTC offer for sale oversubscribed, but stock declines more than 6%

Investors fear supply overhang; Centre has now reduced stake in firm by 25% in 3 years

Shares of state-owned Indian Railway Catering and Tourism Corporation (IRCTC) dropped more than 6 per cent on Thursday after the government launched a share sale to divest another 5 per cent stake in the railway ticketing firm. Experts said the continuous disinvestment in IRCTC by the government has created concerns of supply overhang, leading to value destruction in the much-fancied stock.

During its stock market debut in 2019, the government’s stake in IRCTC stood at 87.4 per cent. In the past three years, the centre has divested 25 per cent stake. After the latest offer for sale (OFS), the centre’s stake is expected to decline to 62.4 per cent, leaving room for further disinvestment.

"The government can avoid OFS. Every time they do, one the stock gets hammered very badly,” observes G Chokkalingm, founder, Equinomics. He urged the government to consider other ways to monetise assets.

On Wednesday, the government set a floor price of Rs 680 per share, a discount of more than 7 per cent to the market rate. The OFS garnered bids for 55 million shares, as against 40 million on offer. Most of the bids came at Rs 681 per share.

Typically, investors dump shares in the secondary market and bid in the OFS to cash in on the arbitrage opportunity.

With the mega share sale of Life Insurance Corporation (LIC) fetching only a fraction of what was earlier envisaged, the government is hard-pressed to look for disinvestment opportunities in the listed space.

Last month, the government sold its entire residual stake (held by Specified Undertaking of Unit Trust of India or SUUTI) in private sector lender Axis Bank to mop up Rs 3,839 crore and earlier it had sold stake in Oil and Natural Gas Corporation worth Rs 3,056 crore via OFS.

"We have seen such exercises destroying value in other PSU stocks too.  And the stocks end up underperforming as there is a perception that whenever the stock rallies there will be an OFS. The government should not do an OFS for two years after they do one,” said Ambareesh Baliga, independent equity analyst.

Shares of IRCTC are currently down more than 40 per cent from their peak of Rs 1,175 (on an adjusted basis) hit in October 2021.

The OFS route has been one of the most popular tools for the government for monetising its stake in listed firms. Besides, the government also has divested stakes using the exchange traded fund (ETF) route, whereby it bundles a few public sector undertakings (PSEs) and disinvests incremental stake in each of them. The CPSE ETF and Bharat 22 ETF are two such examples. The centre also prompts companies to dole out high dividends and conduct share buybacks, often straining their balance sheets.

“One of the key reasons why PSU stocks trade at a huge discount to their private sector peers is the supply overhang. The government at regular intervals floods the market with shares of PSUs. This leads to value destruction. The centre should pledge that they will not sell shares in listed PSUs, which will help unlock value and lead to better realisation for all the stakeholders,” said a fund manager asking not to be named.