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Home >Markets >Mark To Market >Relying on grey market premium won’t always yield IPO profits

Investors in India’s initial public offerings (IPOs) thought they had figured a sure-shot way of finding good bets. All they had to do was look at the indicated listing price of an IPO in the grey market and bid accordingly.

Based on this logic, Easy Trip Planners Ltd was considered a sure winner. The grey market indicated a listing price of over 310 apiece, or about 70% higher than the IPO issue price.

So, high net-worth investors (HNIs) were willing to pay a financing fee of over 100 per share and bid for the shares, nearly certain that the price indicated in the grey market will hold when the shares list for trading on stock exchanges. The issue was oversubscribed by as much as 160 times, a record in the domestic market.

To rely or not to rely
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To rely or not to rely

For all that excitement during the book-building process, Easy Trip’s listing has turned out to be a damp squib. Its shares traded at a volume-weighted average price of 210 on listing day, a premium of around 12% over the issue price.

This means losses have been immense for those who borrowed funds to apply for the issue. For others, while they didn’t make the bumper gains they hoped for, at least the trade didn’t result in losses.

For relatively small-sized issues, the grey market prices have been somewhat reliable in the past, and it is now common for media reports to refer to these prices, popularly known as the grey market premium (GMP). But insiders say that this is a highly illiquid market, with immense volatility, and that it’s foolhardy for investors to blindly rely on these prices while deciding on an IPO.

Easy Trip’s listing on Friday is a good wake-up call that investors should primarily pay heed to fundamentals. Easy Trip shares were pricey to start with. Based on FY20 numbers, its market capitalization to revenues ratio works out to around 12.5 times. This is far higher than 7.4 times that Nasdaq-listed MakeMyTrip commands.

True, Easy Trip is profitable and enjoys decent return ratios among the online travel agency (OTA) space. But that is helped by the fact that the company is primarily in the air ticketing sector. This poses high risks of its business getting disrupted by competition. Other OTAs have diversified into other segments such as hotel booking.

Furthermore, with cases of covid-19 rising in the country, it may be a while before the travel industry recovers to its pre-pandemic levels.

“The travel industry, which was significantly impacted due to covid-19, is likely to take a longer time to revive; though recovery is visible and vaccination drive would further propel it," a Motilal Oswal Financial Services Ltd report said on 7 March.

All these factors will have a bearing on how Easy Trip performs on the bourses in the days to come.

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