Indian Railway Catering and Tourism Corporation, or IRCTC, charges a convenience fee of Rs 15+GST for bookings in non-AC coaches and 30+GST for reservations in AC ones when someone books the ticket online. On Thursday evening last week, the government announced it would take 50% of the total convenience fees collected. The next morning, the shares of IRCTC nosedived, falling as much as 30% in its steepest intraday decline since 2018 listing.
The shares recouped most of their losses and ended 7.5% lower after the government reversed its decision. This, in a way, signalled that the government would keep the interest of minority shareholders in mind while taking policy decisions with respect to listed PSUs.
At present, the government’s 67.4% stake in IRCTC is worth Rs 45,600 crore. Over the past year, the IRCTC stock, a favourite of retail investors, has gained more than 200%, though it is down 30% from all-time high.
IRCTC earned Rs 299 crore in convenience fee in 2020-21. Collection from this segment was lower as online ticket bookings fell 43% last fiscal due to pandemic restrictions. In the non-pandemic year of FY20, it had earned Rs 350 crore in convenience fee. So, the move by the government would have garnered it a revenue of just Rs 150-200 crore. Last year, about 35% of IRCTC’s revenue from operations came from convenience fees but more importantly, the fee contributes significantly to the company’s operating and net profits.
Before 2014, there was no sharing of the service charge between IRCTC and Indian Railways, though the government decided the amount of the charge. The sharing started in 2014 in a ratio of 80:20. The ratio was changed to 50:50 in 2015 but the charge itself remained withdrawn for three years from November 2016 to encourage online bookings after demonetisation. It was restored in September 2019. Raising the service charge is more difficult as that would translate into higher ticket prices.
Although the government managed to arrest the value erosion in the IRCTC stock, the controversy could weigh on the investor sentiment towards PSU stocks, most of whom already trade at a significant discount to their peers. Policy uncertainty remains one of the biggest risk factors when it comes to investing in PSU stocks.
This is not the first time that the government move has worried minority shareholders. It has earlier sucked out cash from large PSUs by way of increased dividends from companies like Coal India, Bharat Petroleum, Indian Oil and NTPC to name a few. To raise money, it has also sold shares at a huge discount to the market rate in the offer for sale (OFS).
In 2012, the government issued a presidential directive to Coal India to force the company to sign fuel supply agreements with power plants. Decisions like these have led to the loss of market value of PSUs. More recently, the oil ministry last week asked state-owned ONGC to give away 60% stake as well as operational control of India’s largest oil and gas producing fields of Bombay High and Bassein to foreign companies with a view to increasing productivity. The two offshore fields account for two-thirds of ONGC’s current oil and gas production. Without these assets, the company will be left with only smaller fields.
Will the IRCTC episode send a wrong signal to investors ahead of the listing of Life Insurance Corporation of India, as the government is known to interfere in PSU affairs? On risks of investing in PSUs and how the government’s adventure with IRCTC might impact investor sentiment, Aditya Shah, chief investment officer, JST Investment, said:
• IRCTC revenue share with government ended in 2016
• New order would have taken away 30% of IRCTC’s revenue, 70% of EBIT
• Valuation would have shrunk dramatically
• Govt pulled out money from PSUs
• Coal India didn’t create much wealth despite being a monopoly
• Markets don’t take violation of minority shareholder rights lightly
• PSU valuations may not come down in bull market
IRCTC saga will not impact LIC valuation
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