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Sona Comstar and Shyam Metalics listings question GMP logic

While the gain in Sona Comstar and Shyam Metalics is identical, some HNIs have ended up with massive losses in the latter, while the handful who invested in the Sona Comstar issue are laughing their way to the bank.Premium
While the gain in Sona Comstar and Shyam Metalics is identical, some HNIs have ended up with massive losses in the latter, while the handful who invested in the Sona Comstar issue are laughing their way to the bank.

Investment bankers said that the size of an IPO is among the factors that drive listing premium. HNIs and actors in the grey market tend to be more active in stocks where the issue size is relatively smaller

Investors relying on the grey market for making decisions related to initial public offerings (IPOs) were in for a rude shock on Thursday. Shares of Sona BLW Precision Forgings (Sona Comstar) and Shyam Metalics & Energy listed on Thursday at vastly different prices than what the grey market had indicated.

Sona Comstar shares rose 24% compared to its issue price, far higher than the 1% premium indicated in the grey market.

In sharp contrast, there were high expectations from the Shyam Metalics listing, with the grey market premium (GMP) indicating a listing gain of over 40%. But shares of the company ended the first day of trading only 23% higher.

Size matters
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Size matters

While the gain in Sona Comstar and Shyam Metalics is nearly identical, some high net worth investors (HNIs) have ended up with massive losses in the latter, while the handful who invested in the Sona Comstar issue are laughing their way to the bank.

Based on the high premium indicated by the GMP, HNIs bid for 340 shares of Shyam Metalics for every one share on offer in their allotted category. This meant that the stock had to list at a premium of at least 46% for them to break even after accounting for the financing cost of their bids.

With Sona Comstar, however, HNIs did not bid aggressively, guided by the lower premium in the grey market.

So, there was no question of paying high interest costs. This is another instance this year where the grey market has proved to be an unreliable source of how a stock would list in the secondary markets.

Investment bankers said that the size of an IPO is among the factors that drive listing premium. HNIs and actors in the grey market tend to be more active in stocks where the issue size is relatively smaller.

Being a 5,500-crore issue, a sizable portion or as much as 850 crore of Sona Comstar’s IPO was allotted to HNIs. In the case of Shyam Metalics, the HNI portion was only 136 crore.

Sources say a small allocation for the HNI segment leads to a demand-supply mismatch and higher trading activity in the grey market, which eventually leads to some bearing on the listing premium.

But as pointed above, while the grey market has some bearing on the listing premium, it does not always have the last word. Other factors are also at play. For instance, since the Sona Comstar issue had negligible participation from the HNI segment, the number of investors looking to flip their sales on listing day was considerably lower. This lower selling pressure has been a factor driving part of the listing premium.

In the past year, some of the IPOs that saw big listing gains were in the relatively smaller 600-1,200 crore range. These include Burger King, Indigo Paints and Happiest Minds, among others. Larger issues listed at either a discount or at a much lower premium.

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