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Below average IPOs, Yet they outperform

Monday, October 17, 2011

Manipulations Galore?

IPOs are typically graded from one to five. Thus according to ratings  by CRISIL – a leading IPO rating firm, (others would include CARE and ICRA) a 5/5 rating indicates ‘Strong fundamentals.’ At the other end of the scale, a rating of 1/5 indicates ‘Poor fundamentals.’ A 1/3 indicates Average Fundamentals.   

Jagannadham Thunuguntla, Strategist & Head of Research, SMC Global Securities in an analysis of the IPO sector in FY 12 (January to September period) noted that whether the IPOs have been given a high rating or a low one the only constant has been a loss. “The IPO grading performance in the period Jan to Sep 2011 reveals share price performance of most IPOs have been disappointing irrespective of their grading,” he said.

The IPOs with Grade 5; the highest grade reported a - 6% return. “There was only one IPO in this category, that is, L&T Finance Holdings,” informed Thunuguntla.

But surprisingly the positives came from IPOs with Grade 2 (Below Average fundamentals) which recorded a +16.21% return.

“Yes, this is main concern as most the Grade 2 Stocks have been actively manipulated by the speculators on the day of listing which resulted in investors getting trapped” said Amit Chheda of Inventure Growth and Securities.

“IPO grading does not necessarily decide the fate of any IPO. A good quality company coming out with an IPO at stiff valuations is bound to see its stock price go down and a not-so-good quality company with a rock bottom rating may see its stock price rise,” said Aggarwal of SMC.

“Thus, investors should not base their investment decision purely on the basis of the IPO grading. Having said that, one must not entirely ignore the grading either and should use it as one of the numerous inputs while arriving at investment decision with regards to an IPO,” Aggarwal continued.

“Investor are advised to go in for good stocks with preferably Grade 4-5 status as these are well valued stocks and have good fundamentals,” advised Chheda.

Grade 2/3 IPOs that have outperformed

Company       Price          Appreciation

Chemicals       Rs 213.20    +223%

Rushil Décor    Rs 164.70    +139

Lingerie           Rs 483.10    +109

Birla Pacific
MedSpa          Rs 19.70      +78


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