Higher IPO graded companies enjoy better valuation: CRISIL
Moneylife Digital Team 13 September 2012

Higher IPO graded companies will most likely command higher multiples in the longer run as fundamentals will overrule the quintessential emotions of greed and fear, says a study conducted by the ratings agency


A study by ratings agency CRISIL pointed out that companies with higher initial public offering (IPO) grade command superior valuation driven by stronger fundamentals that may overrule quintessential emotions of greed and fear.
 
“For the period under review, these companies also weathered the business cycles like global financial turmoil in 2008-2009, followed by a slowdown during 2011-2012, better on the back of robust business fundamentals, superior management strength and good governance practices,” CRISIL said in a release.
 
CRISIL Research’s analysis concludes that IPO grades assigned to companies and the P/B multiples at which they trade have a strong correlation. The analysis highlights the premium assigned to companies with strong business fundamentals, superior management strength and governance practices (key factors that determine a company’s IPO grade), it said.
 
According to the study, companies with an IPO grade of 5/5 (indicating strong fundamentals relative to other listed securities in India) enjoyed a median P/B (price to latest book value of the company) of 3.79x vis-à-vis 0.33x and 0.45x for companies with IPO grades of 1/5 and 2/5, respectively. Companies with IPO grades of 4/5 and 3/5 had P/B multiples of 1.49x and 1.00x, respectively. 
 
Similarly, companies with an IPO grade of 5/5 enjoyed a median P/E (price to 12-month trailing earnings per share) multiple of 15.7x vis-a-vis 8.3x for companies with an IPO grade of 2/5. Companies with IPO grades of 3/5 and 4/5 traded at median P/E multiples of 9.0x and 10.6x, respectively. However, the median P/E multiple of 12.7x for companies with IPO grade 1 was an exception as many companies reported extremely low earnings per share (EPS) thereby resulting in high P/E ratio (low EPS = high implied multiples), the ratings agency said.
 
CRISIL Research analysed the performance of these graded companies over a five-year period between May 2007 and June 2012 on the basis of valuation multiples like P/B and P/E.  
 
CRISIL said its analysis confirms that there is a strong correlation between the IPO grades and the valuation multiples commanded by them. Higher IPO graded companies will most likely command higher multiples in the longer run as fundamentals will overrule the quintessential emotions of greed and fear, it added.

 

Comments
Piyush I Shah
1 decade ago
Can one know How Reliance Power got 5/5 grade for its IPO & how it IPO price was justified & there are still more such incidence & cases. Can any one explain!?
PPM
Replied to Piyush I Shah comment 1 decade ago
Ask SEBI chairman and the Finance Minister.
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