Why did IRCTC do a stock split?

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You must have heard a lot about IRCTC shares recently because it rapidly increased, the price was near Rs 2000 or it went above Rs 6000. When stock closed in the evening on 27th October its price was Rs 4100. On the very next day, when the stock market opens at 9:15 its price falls down to approx Rs 820.

The reason behind this is Stock Split.

Let’s discuss in this blog what stock split is, why companies used this, and what will happen with IRCTC after stock split.

To begin, understand about the Indian Railway Catering and Tourism Corporation (IRCTC) stock. After the stock went ex-split on October 28, 2021, its shares surged. The business set the record day for the stock split in the ratio of 1:5 on October 29, 2021, which means that if you own 1 share of IRCTC, it will automatically transform into 5 shares. For example, if you own 1 share on October 27, it will automatically expand to 5 shares on October 28. On August 12, 2021, the board of directors of IRCTC approved a stock split.

IRCTC's stock has risen by more than 250 percent in the past year, beating the BSE Sensex's 52 percent gain. IRCTC's stock has risen 1,400 percent in just two years since it was listed in October 2019. Despite this, the stock is currently trading at Rs1,278.60, which is nearly 28% below its adjusted 52-week high.

What is the process of a stock split?

A stock split increases the number of shares in a company; in this situation, the total number of shares will increase fivefold, but the share price will fall. This has no impact on the company's market capitalization. Existing shares fall in value, but their worth stays unchanged. The market capitalization of the company is unaffected by the stock split.

For example, if an investor has 5 shares of IRCTC, the number of shares will increase to 25. Each share's stock rate will drop, but their underlying value will remain the same.

Why is it necessary for companies to split their stock?

The primary goal of a stock split is to lower the cost of ownership for shareholders. It usually happens following a significant price increase in a stock. Even after a significant decrease from its record high of Rs 6,369 on October 19, 2021, IRCTC shares were trading around Rs 4000 before the stock split. IRCTC's stock price was extremely expensive for small investors before the split, but following the split, the share price dropped to roughly Rs 900, making it more appealing to investors. It benefits current investors by raising the number of shares they own, but it also benefits future investors who were unable to invest in the company because of its high price. During a stock split, no additional expenses are imposed. The fundamentals of the company, such as profit, sales, operational costs, and so on, are unaffected by a stock split, as is the company's market cap.

What is the future of the IRCTC?

Going forward, IRCTC's fundamentals are very good, and analysts advocated holding the stock rather than buying it at the previous price (before the stock split) due to greater valuations. The stock has become more appealing to investors as a result of the split. Along with the stock split announcement, an increase in train bookings as the economy improves and more people seek to travel, as well as a decrease in COVID cases, are all encouraging signs for the company. The railway catering company made a net profit of Rs 82.52 crore in the June 2021 quarter, compared to a net loss of Rs 24.60 crore in the same quarter last year. Its operational revenue increased by 85.4 percent year on year to Rs 243.4 crore. Moving forward, the firm's expansion initiatives, such as expanding into the bus, air, and tour and travel planners, might provide a whole new potential chance for the firm to improve its position.

Wrap-Up!

Companies mainly use stock splits when their share prices increase beyond a certain level. In this, the volume of outstanding shares increases, and the price per share decreases. The main purpose of the stock split is to help those investors who are not able to afford expensive shares and provide huge marketability and liquidity in the market.

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