How GMP impacted post listing performance of SME IPOs

One of the key factors that has determined the price of the IPO post listing is the grey market price; at least is supposed to be a fairly good indicator. In the Indian markets, the grey market price (GMP) trading normally starts about a few days before the IPO opening and continues all the way to the listing. Since this is not an official market, there are no rules in the GMP market. It is just of willing traders getting together to get a picture of how a particular stock could list. Here we focus on SME IPOs that listed on the NSE and the BSE SME segment in the month of February. The returns in the last column show the actual returns on the stock between the issue price and the current market price on 08ths March.

Data Source: BSE an NSE

In the table above, out of the 7 stocks listed on the IPO SME segment on the NSE and the BSE in February 2023, five have given positive returns while two IPOs have given negative returns. That brings us to the million dollar question, what has driven these returns. While subscription is one factor, it is not everything. The next question nis whether the informal GMP captures the intelligence on post listing stock price performance. But, first let us look at what is GMP all about.

What is GMP all about?

It is well known that there are 2 factors that impact the GMP. Firstly, the stock market conditions have a fairly deep impact on the GMP. This includes the levels of the Nifty and Sensex as well as the general IPO market and macro conditions. Secondly, the extent of subscription for the IPO across the retail, HNI / NII and the QIB segments also has a deep impact on the GMP, since it is indicative of investor interest in the stock. Generally, strong QIB subscription is a trigger for higher GMP. As has been reiterated in the past, GMP is not an official price point. It is just a popular informal price point based on consensus. However, in most cases, the GMP has been observed as a good informal gauge of demand and supply for the IPO. Hence, the GMP does give a broad idea of the likely post-listing performance.

That only means; the GMP tends to be a good mirror of the real stock story, but not exactly the full story. More than the actual price, it is the GMP trend over time that gives insights about which direction the wind is blowing. So, it is the absolute level plus the trend that really matters in this case. GMP (grey market price) is an important indicator, albeit informal, of likely listing price, albeit it cannot be taken at face value In addition, the GMP tends to be relatively dynamic and changes direction with the flow of news and events at extremely short notice. Hence, the best one can do with GMP is observe the trend closely as that gives the best hints on listing status. But there is a more important point to check.

Did GMP trend actually impact post listing returns?

That is the million dollar question. It is not the factors that determine GMP that matters, but whether the GMP trend is actually a good indicator of post listing performance. Check the table below.

In the above table, we look at the full range of GMP from the opening GMP to the closing GMP, the high GMP and the low GMP during the period for which the GMP is available. Here is what we can infer.

• In the case of the top 2 in terms of post listing returns viz. Lead Reclaim and Gayatri Rubber, the GMP has hardly been so decisive as to give any idea that the stock would be among the top gainers for the month. In fact, the GMP structure of Lead Reclaim and Indong Tea are almost the same. Ironically, the former is the top gainer and the latter is the top loser.
   

• The only 2 stocks that gave a strong performance in the GMP market were Earthstahl & Alloys and Shera Energy. However, they ranked third and fourth in terms of post listing returns. For instance, Earthstahl was the only stock where the GMP was consistently at a substantial premium to the issue price.
   

• The only stock that ended with GMP at a discount was Agarwal Float Glass and that IPO has given negative returns post listing. One reason for these anomalies could be that these are SME IPOs where trading is not as widespread and hence short term price performance may not be too relevant.

What is it that broadly emerges from this analysis? GMP is a good indicator of listing price performance. However, GMP is not a very good indicator of the stock will trade post-listing on a sustained basis. That is still about how much the company management and the investment bankers leave on the table via attractive pricing.