As SEBI advises investors to be cautious with small cap and mid cap ideas (95 per cent of the IPOs are in that category), one is compelled to look at which other IPO ideas could make sense. Because a healthy primary market where deals are continuously being done is the key hallmark of a well-functioning economy, which is aspiring to grow fast. We have also seen recently that PSU stocks are at an all time high vis-a-vis the level of interest and appreciation and that will fuel government disinvestment agenda.
Against this backdrop, the government should look at listing Indian Railways. At R2.5 lakh crore of revenue, it will be in the top 10 list of the largest companies by revenue and it will be the most unique, given that it is a monopolistic business run by the government only. Also, as a 170-year-old brand and with a planned passenger capacity of 124 billion, it has the largest customer interface in the country. Ownership of the organisation will be a dream for all Indians and, during the last few years, we have seen transformation in railways, which needs to be fuelled further. Further, its highest ever revenue recorded, of R2.4 lakh crore in 2022-23, is 25 per cent higher than the 2021-22 revenue of R1.9 lakh crore.
Notable salient features of Indian Railways include the fact that its freight revenues have increased by 15 per cent to R1,62,000 crore, while the passenger revenues went up by 61 per cent to R63,100 crore. Also, it has a stellar operating ratio of 98.14 per cent. Railways was able to generate R3,200 crore from its internal accruals for investments. The rapid expansion on rail track laying, along with aggressive electrification targets, as well as better and efficient trains like Vande Bharat, is a big shift to make the service more consumer friendly.
The government, over the last decade, has outlaid and spent R16 lakh crore, with the highest of R2.4 lakh crore coming in the current year. Still the amount is woefully short, as we continue to see choked services and unavailability of services to meet the growing need of the economy and the aspiration of a developed nation status. If this outlay remains part of the government budget, it will always be constrained vis-a-vis the need to balance the various budgetary needs and also maintain the fiscal deficit.
Increasing capex spending: The government has budgeted R16 lakh crore since 2011-12 for operation, expansion and modernisation of Indian Railways, at a CAGR ~13 per cent.
Railways is not a company, and it may need reorganisation for creating its P&L and balance sheet like a corporate entity. We had seen that, given the intent, the government could do the same for LIC and, after initial price discovery volatility, the stock has rallied during the last six months in the ongoing PSU appreciation. Railways will be far more complex but not impossible.
Valuation: Indian Railways can command valuation of more than $500 billion (above R40 lakh crore)
Generally, global railway companies have stagnated revenues. Hence, their market capitalisation to revenue is on the lower side, with a median of 6.5x. Indian Railway’s revenue is growing more than 7 per cent CAGR and will grow more than 10 per cent due to capex planned and increase in capacity and focus on ancillary revenues. Hence, we can apply revenue multiple of 12x on forward revenue of R3 lakh crore to Indian Railways. To this, we will add the railways entities, which are already listed and the value of their holding, which comes to R4 lakh crore. Therefore, value of R40 lakh crore +. This will make Indian Railways one of the largest market cap companies and pave the way to become our first trillion dollar market cap stock, as this will be a perfect play on Indian economy and will get a lot of long-term holders.
Going with the flexibility provided by SEBI, an initial dilution of 5 per cent will mean IPO size of Rs.2 lakh crore, will classify it as one of the mega transactions. To share a perspective, the 2021-22 total IPO raised was @ R1.2 lakh crore which, in 2022-23, came down to Rs.42,000 crore.
Railways has good reasons for the premium valuation:
• At 4.86 lakh hectares, it is one of the largest land holders and, as lots of cities have developed around railways stations, these are prime locations.
• At about 5 per cent non-passenger or freight revenue, the railways has huge potential for monetisation. For example, Mumbai Airport shows 60 per cent non-aero revenue for all other services and facilities provided at the airport.
• As travel and tourism are on a big swing and will be key driver of the economy, Indian Railways will be one of the centrestage platforms to capitalise the same.
• India intends to become the manufacturing hub, which will lead to significant increased investment for freight corridors and large growth there.
There will be an argument that railways are a social sector and passengers fare must have an inclusive mindset. We have seen with the telecom experience that, given India’s large numbers, costs can be brought down. I started my career waiting for 10 pm so one could do personal STD calls when the rates used to come down by half but, today, there is no such thought process. And all this has happened with opening of the telecom sector to capital market forces and moved it away from the monopoly of MTNL and BSNL.
Once Indian Railways is able to become participant of the capital market and frees itself from the government resources – at the same fiscal deficit, it will give more flexibility to invest in other parts, which help reduces the income gaps or alternatively the government can reduce the fiscal deficit and improve the overall country rating.
Garg is founder & managing director, and Agarwal is managing director, Equirus