Is GMP a good barometer for evaluating an IPO? Here's what experts suggest

Investors usually refer to the GMP before applying for an IPO. However, is it a reliable indicator for evaluating how the IPO will be received by the markets? Here's what experts suggest

Investors typically look at the grey market premium (GMP) of an unlisted stock ahead of its initial public offering (IPO) to gauge how well the issue is likely to be received by the markets, and the price at which it is likely to list in the secondary markets.

 

However, off late, the GMP has not depicted the true picture of how the stock is likely to list in some cases.

 

Take for instance the NTPC Green Energy IPO. Ahead of its listing on Wednesday, November 27, the GMP of the NTPC's 'green arm' had turned nearly flat, indicating that the stock could list closer to the cut-off price of Rs 108 a share. The stock though listed at 3.3 per cent premium over its issue price of Rs 108, and ended the day higher by around 12 per cent. NTPC Green Energy stock continued to gain ground the following day (November 28) even in a weak market.

 

The GMP of Afcons Infrastructure was higher than the cut-off price, indicating that the counter could list at a premium. However, in this case, the converse proved true. The stock listed at a discount to the issue price of Rs 463, despite the GMP indicating a higher start for the scrip in the secondary markets. 

 

Similarly, the unlisted shares of Suraksha Diagnostic were trading flat in the grey market on the eve of its initial public offering (IPO) that opens for subscription on Friday, November 29.

 

So, is the GMP a reliable indicator for evaluating how the IPO will be received by the markets the likely listing price?

 

Independent market expert Ambareesh Baliga is not entirely convinced. While investors aiming for listing gains often look to GMP trends, Baliga believes this should not be the sole basis for decision-making. He pointed out that grey markets are unregulated, making them prone to inaccuracies. As a result, Baliga advises investors to focus on the fundamentals of the company before committing to any public offering.

 

Citing the example of NTPC Green Energy, Baliga noted that despite having a weak GMP, the PSU stock has performed well since its listing. He attributed this success to the company's strong fundamentals.

 

"While GMP may be useful for short-term gains, serious investors should always prioritise the fundamentals over grey market trends before investing in an IPO," Baliga said.

 

Speculative traders may look to GMP for listing gains, however, investors, G Chokkalingam, founder and chief Investment officer at Equinomics Research, said, should always focus on the fundamentals. GMP, Chokkalingam explained, does not reflect the company's fundamentals, but rather the demand and supply of its shares in the grey market, which may influence the listing price. However, post-listing, it is the fundamentals that take precedence.

 

Citing the example of Ola Electric, Chokkalingam noted that while investors made short-term gains based on GMP trends, the company’s shares fell below the IPO allotment price after listing, due to its weak fundamentals.

 

"GMP should not be regarded as an authentic indicator by investors, who should instead evaluate the company’s fundamentals before investing. Speculative traders, on the other hand, may use grey market trends for guidance," said Chokkalingam.