Cos with high IPO grades have higher PE multiples: Crisil

Companies which get high grades for their initial public offers have higher price-to-earnings (PE) multiples, rating agency Crisil said today.

Companies with a higher IPO grade of 4/5 (indicating above average fundamentals relative to other listed securities in India) have enjoyed average PE multiples of 25.8x, compared to companies with a lower IPO grade of 1/5 (indicating poor fundamentals) at 14.8x, the agency said.

PE multiple indicates fundamentals of a stock and a company with higher PE would give better returns to investors.

The Crisil Equities' analysis was conducted on 56 graded listed IPOs, which included companies that have been listed for more than 6 months as on December 31, 2009.

"Higher IPO graded companies, typically tend to operate in higher growth industries, have superior management strengths and follow good corporate governance practices. Such characteristics tend to command better valuations, as reflected in higher PE multiples," Crisil Equities Head Chetan Majithia said.

To assess the relation between an IPO grade and its PE multiple, companies with similar grades and their average PE multiple was considered by Crisil for analysis.

While companies with IPO grades of 2/5 were trading at PE multiples of 17.6x, those with a grade of 3/5 traded around 20.9x multiple, Crisil said.

"The market price of a stock can be influenced by factors other than fundamentals, such as liquidity and market sentiments," Majithia added.