Why LIC should buy 5% in IRCTC for $1 billion

The government is said to be making efforts to improve the valuations of its first and probably only e-commerce venture IRCTC.co.in. “We have been asked to grow like Flipkart,” A K Manocha, managing director of Indian Railway Catering and Tourism Corp (IRCTC), which owns and runs the website, was quoted as saying in The Economic Times Wednesday. 

That seems like a misguided piece of advice – like telling a studious teenager who is doing well academically but pays little attention to his looks to become like a Roadside Romeo who is into weird haircuts, tattoos and, for some strange reason, seems to be popular among the girls.

It has been known for long that IRCTC is the largest e-commerce portal in the country. According to the Economic Times story, its total transaction size is comparable to the gross merchandise value of Flipkart, the largest among the private e-commerce firms.  The number of registered users and traffic IRCTC handles are phenomenal. Some reports say it can handle 1.2 lakh users at a time and issue 7, 200 tickets per minute. On each of those transactions, it makes a risk-free user fee. It also has a neat monopoly as Indian Railways has not allowed competitors in the sector. 

And yet, Manocha does not have the big boys of the private equity world chasing him. Nor is he a social media superstar or even a regular at business award functions. 

That is because Manocha and his bosses have not understood the way fantastic valuations are built in the fairytale world of e-commerce. Revenues and losses don’t matter. 

How does one explain the dogfight over a dotcom that made Rs 50 crore loss on a revenue of Rs 1 crore? How does one explain a six-month-old start-up with no revenue model being bought by a slightly older one for thousands of crores or rupees it never earned?

The trick is in getting an early investor or two. Once they are in, by virtue of their vested interest, they start praising your company to whoever will listen. They tell the start-up beat journalist about their investment and get it written about. 

Then they hire a good public relations company, and before you know it, your company is all over the pink papers giving ESOPs, offering discounts, doing innovation and what not!

Since the government may not be comfortable selling it to some distant PE guy, Manocha should recommend the name of the newest funding partner of his parent ministry — the Life Insurance Corporation of India (LIC). LIC is going to give Rs 1.5 lakh crore or ($25 billion) in the form of IRFC bonds over the next five years.  A billion dollars would be pocket change for the insurance behemoth, which, in any case, already invests in securities of private firms. 

It would be an attractive investment proposition to pick 5% in IRCTC for $1 billion, thus valuing it at a reasonable $20 billion. It may look too much of a standalone number, but it would not look as high when you compare the valuations of some of IRCTC’s loss-making counterparts in the e-commerce world. 

Next, LIC should make sure that the $1 billion goes into IRCTC and not into the hands of a cash-hungry rail ministry or its parent, the Union government. This can be done by ensuring that there is a fresh issue of shares by IRCTC and that it’s not a secondary sale. 

Once the cash is in, the sky is the limit for Manocha and IRCTC. They can make irresistible offers on rail tickets, tie up with hotels, taxi apps, airlines and even roadside paanwalas. Offer impossible-to-refuse deals to each of them and issue long press releases on each of those after these have been covered as exclusive stories. 

By the first anniversary of the investment, if IRCTC’s transaction value is up by 50%, or  about Rs 30,000 crore, and if it still manages to be profitable, it can be ready for a Series B, C, D, E & F funding.  LIC can do a top-up, and then other state-controlled moneybags such as UTI, SBI et al can pitch in.  Meanwhile, analysts can discuss the valuation metrics and go gaga over how IRCTC’s young leadership fostered innovation, took risks and exceeded market expectations. 

Why stop at Flipkart? Even Amazon, Alibaba and Apple would not be far away for IRCTC, if it goes down that track. 

Perhaps, Goldman Sachs can be brought in for the pre-IPO round.  And just like that, a $10 billion IPO with a $100 billion value for IRCTC on the Nasdaq is ready.


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