Faced with a crisis of falling tax revenues, India’s Narendra Modi government is trying to bridge the shortfall through disinvestments.

As part of the move, the Indian Railway Catering and Tourism Corporation will hit the equity market with a three-day initial public offering starting September 30. The government hopes to rake in nearly Rs 638 crore by selling 20 million shares – amounting to a 12.6% stake – each priced at between Rs 315 and Rs 320, according to the draft red herring prospectus.

The Indian Railways, though, will not receive any proceeds from the IPO of its catering, tourism, and ticketing arm.

“The IPO launch is part of the government’s divestment policy, whereby, it has raised the target from Rs 90,000 crore to Rs 1.05 lakh crore this financial year,” said Sameer Mittal, managing partner at the Delhi-based Sameer Mittal and Associates and chairman of the International Trade Council in India. “The divestment targets have been raised to garner additional revenue and fund projects since the growth in tax revenues in the recent past has been slow.”

The IRCTC IPO is the fourth and the biggest public offer from the Indian Railways stable, following the market debuts of Ircon International, Rail Vikas Nigam, and its infrastructure consultancy arm RITES in the past year-and-a-half.

Prized possession

A Miniratna company, a category of profit-making central public sector units, catering services is IRCTC’s biggest revenue contributor. The company’s revenues rose 25% year-on-year to Rs 1,957 crore in the financial year 2019 and profit increased by 23.5% to Rs272 crore.

IRCTC is also a major enabler of ticketing sales for Indian Railways. Of the average 1.4 million passengers carried each day by Indian Railways in the first five months of this financial year, 73% booked their tickets through IRCTC’s online portal, according to the draft red herring prospectus.

As the supplier of Rail Neer, a packaged drinking water brand, IRCTC operates 10 bottling plants, which have an impressive capacity utilisation of over 80%, the draft red herring prospectus noted. The company is also setting up six new plants.

IRCTC also has a significant footprint in the tourism segment as it offers services such as hotel bookings, cruise, and air tour packages and air ticket bookings.

The central public sector unit is now gearing up for privately operated train travel.

The Delhi-Lucknow Tejas Express, to be flagged off on October 5, will be the first Indian train not to be operated by Indian Railways directly, but by IRCTC. The move is being touted as a step towards privatisation of train operations in India.

IPO expectations

For the Modi government, IRCTC’s IPO will be a litmus test in understanding the strength of the equity market after the recent moves to shore up the economy, said experts.

“Through this IPO, the government wants to kickstart the long-pending fund-raising exercise through the secondary market,” said Umesh Mehta, head of research at SAMCO Securities, a Mumbai-based online stockbroker. “ It wants to test how far it has been successful in reviving the expectations of the capital markets post the corporate tax cuts.”

Analysts are also hoping the IPO will boost investor confidence. This year, only 11 companies have hit the capital markets collecting over Rs 10,000 crore through initial share sales. The total amount raised in 2019 is, therefore, expected to be much lower than the Rs 30,959 crore raised by 24 IPOs last year.

“The amount that will be raised through this IPO is small, compared with the overall disinvestment target set by the government,” said Gopal Agrawal, co-head at Investment Banking Edelweiss Securities, a Mumbai-based banking and financial services company. “However, the government is hoping that the deal will be [a] sentiment booster for the rest of the IPO market.”

With IRCTC, the government is trying to draw more investors to more upcoming public sector IPOs. “When investors see gains coming, only then will they make a beeline for bigger IPOs,” added Mittal.

Experts are optimistic. The company has strong cash flows, high earnings visibility, high return on equity and an asset-light model.

The IRCTC is also offering a discount of Rs 10 per share for retail investors and employees. Out of the total issue size, up to 1,60,000 equity shares are reserved for eligible employees.

“The government is generally known to leave something on the table for the investors and we hope that it’s the case this time as well,” said Agrawal. “With the retail discount, [the] response should be good.”

All of this makes the IRCTC IPO a compelling case for investment, they say.

This article first appeared on Quartz.