- Date : 26/11/2021
- Read: 3 mins
Once beyond the reach of many retail investors, IRCTC's stock is now affordable for most.
In August this year, the board of IRCTC (Indian Railway Catering and Tourism Corporation) announced a stock split in a 5:1 ratio, i.e. one IRCTC share would be divided into five shares. In a press statement, IRCTC explained that one share of Rs 10 would be split into five equity shares with a face value of Rs 2 each.
Why did IRCTC decide on a division of equity shares? Has the IRCTC stock become cheaper as a result? And the big question: What does the IRCTC share split mean for you as an investor? Does it benefit you?
Reason for the stock split
A company usually goes for a stock split when it feels its shares have become too expensive for the retail investor. By splitting the stock, its share appears cheaper due to the lower face value of the split stock, which enhances the stock liquidity and tradability. It also increases the number of outstanding shares, even though no additional shares are issued.
This is the reason for the IRCTC share split as well. While announcing the decision on August 12, the company said the move would increase the stock’s liquidity, broaden the shareholder base, and make IRCTC shares more affordable to the small investor.
Before the split on October 29, the record date, one share of IRCTC was trading for around Rs 4000 in the stock market. This was beyond the reach of many retail investors, even after plunging from a record high of Rs 6369 attained on October 19.
Effect of the stock split
The effect of stock split on share price was on expected lines. The share rallied some 16% on October 28 when it began to be traded ex-split. And on November 18 (exactly one month after shooting to a record high), the stock price closed at an affordable Rs 890.70 on the BSE.
IRCTC share split news also seems to have been well received by retail investors (with capital up to Rs 2 lakh), whose numbers had swelled a significant 20.80% over a month till November 2021.
A 5:1 split ratio means the number of IRCTC shares in the market is expected to swell from 25 crores (25,00,00,000) to 125 crores (125,00,00,000).
One stock split price effect is augmented shareholder wealth, and this seems to have been the case here as well. The IRCTC investor’s wealth has doubled - a 100% increase - since the announcement, while the Sensex gained only around 16% in this period.
Related: 25 Stock Market Terms For Beginners
How IRCTC stock split benefits investors?
If the high stock price deterred you from investing in IRCTC, you can afford it now. Do note that the share has not become cheaper but only more affordable. Also, its profit after tax and revenue will not be impacted by the stock split.
You can also take heart from the IRCTC share price history, which is a story of outstanding returns; since listing in October 2019, its shares have surged over 18-fold. The numbers are expected to improve as the economy unlocks further.
On November 1, the company announced a second-quarter profit after tax of Rs 158.5 crore, a 386% year-on-year jump; it was Rs 32.6 crore in the same quarter last year.
However, despite the strong showing, brokerage Prabhudas Lilladher the company’s valuation could suffer because of the recent controversy over the convenience fee charged by IRCTC from clients. Its recommendation: “Hold”, with a TP (take profit) of Rs 779.
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