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Stock Analysis, IPO, Mutual Funds, Bonds & More

Bear grip erodes lofty grey market premium of IPOs

Traders are playing it safe, taking no risks in the portfolio as markets correct.

, ET Bureau|
Updated: Sep 26, 2017, 10.01 AM IST
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Brokers said ICICI Lombard is trading at a discount of Rs 2 to Rs 3 in the grey market.
Brokers said ICICI Lombard is trading at a discount of Rs 2 to Rs 3 in the grey market.
Mumbai: The bearish trend that has gripped the domestic stock market is affecting sentiment for companies that are going to debut soon on Dalal Street. Combined with aggressive pricing and the recent downturn in market sentiment, the grey market premiums of ICICI Lombard General Insurance Company, SBI Life Insurance Company and Prataap Snacks have fallen sharply denting expectations of a strong listing.

Brokers said ICICI Lombard is trading at a discount of Rs 2 to Rs 3 in the grey market as versus a premium of Rs 60 to Rs 65 at its peak, while that of SBI Life is Rs 3 to Rs 4 as against Rs 70 at its highest point.

Snacks maker Prataap Snacks has seen its grey market premium come down sharply to Rs 200-Rs 210 from Rs 400-Rs 420 a few days earlier.

“Investors were putting money as market momentum was up. Now, people don't want to lose money. These IPOs have also been priced very aggressively,“ said a Kolkata-based broker.

Pre-IPO notes by brokerages said that the Rs 8,400-crore IPO of SBI Life is being offered at 4.2 times embedded value, higher than ICICI Prudential's 3.8 times. SBI Life's IPO was priced at Rs 685-Rs 700 a share. ICICI Lombard's Rs 5,700-crore IPO, priced at Rs 651-Rs 661 per share, appears fairly valued at 8 times its 2016-17 book value, analysts had said.

For Prataap Snacks' Rs 482-crore IPO, analysts said that at the higher end of the price band of Rs 930-Rs 938, the issue is valued at a post issue price-to-earnings multiple of 222.4 times on FY17 EPS basis, which is higher than that of listed peers such as DFM Foods and Britannia Industries.

Both ICICI Lombard and SBI Life saw the HNI portion going undersubscribed. SBI saw even its retail portion not being fully subscribed.

Brokers said the disappointing listing performance of ICICI Prudential also played a part in the tepid response from HNIs. ICICI Prudential had listed at Rs 329 on September 29 last year, 1.5% below its issue price of Rs 334. “Insurance is a business where one gains in the long term and that's why only institutions are interested.Short-term triggers are far and few in between. Valuation is definitely not low given that these insurance companies are commanding a premium for branding,“ said Geetanjali Kedia, senior research analyst at advisory firm SPTulsian.com.

There was much fanfare ahead of these insurance IPOs as the sector is underrepresented in the listed space, with bankers marketing them as blue chips that will benefit from the underpenetration of insurance in India.

Macquarie said that foreign investors have found it hard to believe the valuations at which insurance companies are getting listed in India.

“Considering that all these companies are trying to list when the index is at peak valuations and since most of these are AMC-like companies dependent on strong inflows, the margin of safety is very low and hence the FII caution,“ Macquarie said in a note dated Monday.

Kedia said that Indian market has not matured to understand the insurance business fully but understanding of the sector is likely to improve as more and more companies from the sector get listed.

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