IRCTC share price plummeted 15% on Friday morning to hit the lower circuit as the investors reacted to the government’s revenue sharing order that may cut the company’s earnings by as much as 36%.
IRCTC share price recovered some of its losses on Friday morning after Secretary of Department of Invesment and Public Management said that the order to share convenience fee has been withdrawn. However, the stock was still in the red. IRCTC stock had nosedived more than 20% during the initial hours of trade. It was still down around 6% at 1:30 PM trading at Rs 860 per share. Indian Railways Catering and Tourism Corporation (IRCTC) on Thursday announced that the government has asked it to share 50% of the convenience fees revenue with the Ministry of Railways starting 1 November 2021.
“Ministry of Railways has decided to withdraw the decision on IRCTC convenience fee,” DIPAM Secretary’s Twitter handle tweeted on Friday. The revenue sharing could have cut the company’s earnings by as much as 36%, according to some estimates.
IRCTC’s main source of revenue and earnings goes for a toss
Many investors have questioned the revenue sharing order, claiming convenience fee was the main cash cow for IRCTC. “IRCTC to share 50% of revenues earned from convenience fee with Indian Railways from November 1, 2021 would straight away reduce revenues and EBIT by 14% and 36% respectively,” ICICI Direct said in a note. The announcement was made on the same day that IRCTC stock went ex-split. Each IRCTC share was split into five, in an effort to improve liquidity and make the stock accessible to investors.
The move is being seen as a negative one for IRCTC. “Government asking IRCTC to share 50% convenience fee with the Railway Ministry is yet another instance which should warn investors of undue optimism while investing in PSU stocks,” said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
Government hit on IRCTC revenue raises concern on PSU stock investing
IRCTC has been a multi-bagger for IPO investors, but the stock has been under fire recently. Correcting strongly from the highs last week. V K Vijayakumar of Geojit Financial Services believes investors should stay away from PSU stocks, as their objective is not to enhance shareholder wealth. “Enhancing shareholder return is not the objective of PSUs. So, investors have to be careful while chasing PSU stocks, even if they are cheap,” he said.
The move is also being termed as unfair to shareholders. “It is a big negative surprise for the investors of IRCTC where the government asks the company to share half of its convenience fee from internet booking with it. It will lead to an accident in the share of IRCTC but also pull the chain of momentum in the other PSU stocks,” said Santosh Meena, Head of Research, Swastika Investmart. “The sentiments were improving for PSU stocks after a positive attitude by the government but this news may hurt the sentiment badly,” he added.
Other PSU stocks fall too
“Government asking for 50% revenue sharing of convenience fee from IRCTC is unfair to minority shareholders. With this new formula, IRCTC would either make less profits or suffer losses. Investors would stop believing in the government’s disinvestment efforts,” D Muthukrishnan, a Chennai based Wealth Planner said on Twitter.
Along with IRCTC, other PSU stocks were also down in the red on Friday. The BSE PSU index was down 1.32% with IRCTC as the top drag, followed by Indian Bank, down 7%, Rail Vikas Nigam Limited, Bharat Electronics, and Shipping corporation of India.