Sunday 19 August 2007

Falling grey market premium spells bad news

The reverberations generated by the subprime shock-waves could have an impact on some of the initial public offerings (IPOs) due to hit the markets in the near future. A look at the latest grey market premium of some of these IPOs reveals that the premium has declined sharply.

Experts said while pricing an issue, usually 20-25% listing gains are left for investors. However, when markets fall, this premium shrinks, with many a stock losing its sheen, thereby making it unattractive. Hence, current market conditions being what they are, experts feel depending solely on the grey market numbers would not be the right thing.

Take, for the instance, the issue of Zylog Systems, which made its debut on the bourses on Friday. Pre-listing, the company was quoting a premium of Rs 200 in the grey market, down from about Rs 250 early this month. The issue price had been fixed at Rs 350 and the stock closed at Rs 431 on BSE. When the stock touched a high of Rs 525 in initial trade, investors were quick to book gains despite the grey market pricing being substantially higher.

In issues like KPR Mills, where the premium was Rs 20 per share in a price band of Rs 225-265 on August 1, is being quoted at a discount in the grey market. The company’s issue price has been fixed at Rs 225 now. Others like SEL Manufacturing, which had a premium of about Rs 4-5 till a few days ago, saw the same shrinking to about Rs 2.

The issue has a price band of Rs 80-90. If the global meltdown continues, investor apathy could spread to more issues.

“Listing successfully and leaving enough gains for the investors help keep the company’s image as a positive one among investors. Investors usually look for a minimum of 20-25% upside on listing. This price is fixed in consultation with institutional investors, pre-markets rounds and based on market feedback,” said Mumbai-based financial services company Keynote Corporate Services’ managing director Vineet Suchanti.

In issues like Asian Granito, the premium has come down from 20% earlier to about 5% now. The recently-listed IVR Prime, which had an issue price of Rs 550, was being quoted at a premium of about Rs 15-20 at the beginning of the month. But the issue closed at Rs 418 on Thursday, after touching a low of Rs 388, much below its issue price. While Puravankara Project’s lowering of price band from Rs 500-525 to Rs 400-450 was more a case of an overpriced issue, it was made further unattractive due to volatile markets.

“There is a large pipeline of issues slated to hit the market in the coming months. If the global markets continue to slide further, the issues that have already closed for subscription could see a decline in premium. Some of the issues could also see a re-pricing,” said a merchant banker.

“Bankers have become more careful while pricing an issue, keeping in mind the probability of a market fall. The recent gains on listing was witness to substantial under-pricing in many issues,” he added.