Mumbai: Investors who bought shares on the basis of the grading of initial public offerings (IPOs) by rating agencies may be in for a shock.
A Mint analysis of 41 IPOs that have been graded, and their stock price movements, shows no correlation between the two. Stocks of firms whose IPOs received a high grading of 4 and 3 are trading at a discount to their issue prices. And, except in one case, those of firms whose IPOs received the weakest grading of 1 are trading at a premium.
One such now commands a 290% premium to its issue price; another, at least 100%.
So far, only Acme Tele Power Ltd’s IPO has got the highest grading, 5. Rated 5 by Crisil, this is yet to hit the market.
Two firms whose IPOs were graded 4—Wockhardt Hospitals Ltd and Emaar MGF Land Ltd—had to withdraw their public offers because of poor response. IPOs are graded on a 1-5 scale where 1 signifies “poor fundamentals” while 5, denotes “strong fundamentals”. Among the rest, 2 is “below average”, 3, “average” and 4, “above average”.
The mandatory grading of IPOs, by a registered credit rating agency was introduced by the stock market regulator as a mechanism for investor guidance in May 2007. The Securities and Exchange Board of India (Sebi) plans to review the gradings of rating agencies and review the process.
India has four credit rating agencies—Crisil Ltd, Icra Ltd, Credit Analysis and Research Ltd (CARE) and Fitch Ratings India Ltd—and all are involved in grading IPOs.
“Equity is risk capital,” said Naresh Thakkar, managing director of Icra, pointing to the wider slump in the market. Sensex, India’s bellwether equity index, has dropped 22.3% this year. The agencies do not consider valuations as a factor, but only the (firm’s) fundamentals and management (quality), added Thakkar.
Ajay Dwivedi, director of research at Crisil, said the “market will (at some point) re-align” (with the ratings).
Some institutional investors, however, said the reverse would happen. “Grading will align with markets,” said Satish Ramanathan, head of equities at Sundaram BNP Paribas Asset Management Co. “It’s a trial and error exercise for the rating agencies,” Ramanathan added.
CARE, which tops the league having assessed 16 IPOs, graded the IPO of Orbit Corp. at 1, indicating “poor fundamentals”. The stock closed at Rs429.80 on 4 April —290% above its offer price of Rs110. Evinix Accessories, graded 2 by CARE, gained 22% over its offer price.
CARE graded five IPOs at 4, signifying “above average fundamentals”. Four of these stocks were trading below their issue price last Friday while, the fifth one, realtor Emaar MGF, abandoned its plan to hit the market.
Crisil evaluated 14 IPOs and awarded a grade of 4 to three. Two of these stocks are trading below their issue price, with Precision Pipes and Profiles Co. Ltd losing more than 53%. The third stock, that of OnMobile Global Ltd, has, however, gained 27% over its issue price.
Among the five IPOs graded 3 by Icra, stocks of two—Religare Enterprises Ltd and Consolidated Construction Consortium (CCC)—gained 98% and 28%, respectively, from their issue price; those of others were trading at a discount.
The stocks of three firms whose IPOs received the lowest grade from Icra rallied. Icra has not graded any IPO at 4 or 5.
Fitch assessed only two IPOs and graded both at 4. IRB Infrastructure Developers Ltd’s stock is now trading 8% below the issue price while Wockhardt Hospitals never made it to the bourses.
The IPO of Reliance Power Ltd, which raised more than $3 billion, was graded 4 by both Crisil and Icra. The stock is now trading at least 28% below the issue price.
IPO gradings do not impact the decision making of institutional investors. “We get to meet and speak to the management independently,” said Sameer Narayan, vice-president, equities, at ABN Amro Asset Management (India).
However, Crisil’s Dwivedi said rating agencies are in a better position to evaluate a firm as their “grading process runs for five-six weeks”. The intention is to give the right guidance, he added.
Companies bear the expense of IPO grading.
Some of the parameters considered by rating agencies are industry prospects, competitive strengths, and financial position. The issue price is not taken into account.