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IRCTC IPO: Not enough to repair investor disinterest in PSUs
Why IRCTC’s initial public offering was a missed opportunity for the government
With an oversubscription of 112 times, IRCTC’s stock offer is a showstopper
Better positioning, pricing will be key in maximising value for the exchequer, especially in the proposed disinvestment in Bharat Petroleum, Concor and Shipping Corporation of India

If market buzz is to be believed, the Government is preparing to carry out strategic sales of equity in Container Corporation of India (Concor: about 30 per cent), BPCL (at least 51 per cent if not the entire 53.29 per cent), Shipping Corporation of India (63.75 per cent), North Eastern Electric Power Corporation (100 per cent) and THDC (75 per cent). Now the government could choose to take the public issue route, as it did with Indian Railway Catering and Tourism Corporation’s (IRCTC), to divest its stake (Concor, BPCL and SCI are already listed). However, rather than an IPO, it is widely expected to opt for a strategic stake sale, for reasons elaborated later in this piece.

While it may have under-priced the IRCTC IPO, as it seeks to unlock value in other assets, the overwhelming demand for the rail ticketing platform’s offering will likely embolden the Government to seek a higher share premium or Price Earnings (PE) multiple for strong public sector undertakings.

Read also - IRCTC IPO: Not enough to repair investor disinterest in PSUs

For instance, if Concor commands a price-earnings multiple of 32-33 in the market today, the Government has to maximise its valuation by eyeing, say, a five-to-six-fold increase to the current level given that management control will be ceded. Only then will it it make sense for it to cede control.

The valuation story should also be different for BPCL, as the Government looks to privatise the company by selling a good part of its 53.3 percent stake to a strategic investor. The winning strategic investor will gain 34 million tonnes in refining capacity and access to a 25 per cent share in India’s fuel marketing. These are humongous numbers that cannot be ignored. Pricing will therefore be crucial given that BPCL is currently available at a paltry 18 price-earnings multiple on the stock markets. The PSU deserves a huge control premium and if it handles the sale adeptly, the Government should be able to realise it.

Extracting a premium for the controlling stake is what will distinguish the men from the boys. If the Government does choose to take the strategic sale route — as it most likely will for the proposed Concor, BPCL and Shipping Corporation divestment — it will have to ensure that it gets a premium for the “controlling stake” it may part with.
The importance of pre-bid consultations

It goes without saying that the strategic investor will also need to see the value involved and decide to invest knowing there is much more money to be made. This is now possible, as the government has reportedly allowed pre-bid consultations for strategic share sales. If it manages to extract a premium at the pre-bid stage itself, the government can pat itself on the back.

Pre-bid parleys are the right way to go, say the experts, as they will help narrow the gap between perceived value and real value. This will provide clarity on every aspect of the stake sale, they point out. Indeed, pre-bid consultations, they opine, could have paved the way the process for a strategic stake sale in Air India. In its absence, all such attempts have fallen through.
Lessons from the IRCTC IPO valuation

Capital market experts are unanimous in their view that the government could have easily set a higher price band for the IRCTC issue and these lessons cannot be ignored. It is critical that the Centre focuses on getting higher value for top-quality public sector assets that have a sound business model and strong fundamentals.

In fact, had the mandate to manage the IRCTC IPO gone to a foreign bank, the experts say, it would have unequivocally advised the Government to treat it as an e-commerce play and take the strategic sale route. Indeed, they feel that instead of 12 per cent, as much as 20 per cent could have been offered to a to potential strategic investor, for a much higher price of, say, ₹1,000 per share............BL