Higher IPO graded companies enjoy better valuation: CRISIL

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.




Piyush I Shah

5 years 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!?



In Reply to Piyush I Shah 5 years ago

Ask SEBI chairman and the Finance Minister.

No stay on Kudankulam plant, SC agrees to examine its safety

While refusing a stay on the fuel loading at KNPP, the apex court said public safer is of prime importance and people living in the vicinity of the plant should know if their lives would be protected

New Delhi: The Supreme Court on Thursday refused to stay loading of fuel for nuclear power plant at Kudankulam but agreed to examine the risk associated to the project, saying safety of people living in its vicinity is of prime concern, reports PTI.
"Public safety is of prime importance. There are poor people living in the vicinity of the plant and they should know that their life would be protected," a bench of justices KS Radhakrishanan and Deepak Misra said while posting the matter for hearing on 20th September.
The bench, which refused to stay the fuel loading after the centre assured the court that commissioning of the plant will take place at least two months, said it would go through the judgements of the Madras High Court and hear the matter.
"We are neither against the plant nor the petitioner but we want to see that recommendations of the Atomic Energy Regulatory Board (AERB) on the safety measures have been implemented," the bench said.
The Centre was represented in full strength with Attorney General GE Vahanvati, Solicitor General Rohinton Nariman and Additional Solicitor General Mohan Parasaran vociferously opposing the plea for staying fuel loading.
The Centre said the plant is "completely safe". Since all the recommendations made by the Board cannot be put in place in one go, it would be implemented in due course within six months to two years, it said.
The court was hearing an appeal by social activist G Sundarrajan against the High Court's decision refusing to impose any restraint against the plant.


Indian consumers cut consumption as they lose confidence in future income

Sluggish job growth means that consumers are likely to downtrade in their consumption. If so, will consumer products companies continue to sport high valuations?  

The urban job squeeze is the biggest problem for marketing managers to increase sales in consumer products in India, says Espirito Santo Securities in its latest market update report. The lack of inclusive growth in the economy poses a structural risk to consumption, which includes spending on low ticket items. At current levels the brokerage firm observes that consumer stocks are priced to perfection and do not discount the brewing storm. The firm has recently turned bearish on the sector overall, and after the recent run-up.


Hit by global economic woes, policy paralysis and a series of political scandals, India is facing one of its worst periods of growth and unemployment, as noted by recent ASSOCHAM surveys on 32 sectors, says Espirito Santo Securities. Hiring has dropped by 20% in Q1FY13 versus Q4FY12; the financial sector that was immune to the 2008 financial crises is now very vulnerable to non-performing assets and hiring in other sunrise sectors are at levels insufficient to absorb the supply of fresh graduates coming into the work force, observes Espirito Santo Securities 

FICCI’s survey suggests a drop in the business confidence index from 60.3 in Q4FY12 to 51.8 in Q1FY13. Indian consumers have become progressively more pessimistic about future prospects over the last two years (as inferred from RBI consumer confidence surveys), following negative real wage inflation (based on an analysis of BSE-200 companies) and a plunge in hiring. The market update report sees risks to overall consumption from: (a) further job losses, (b) delayed hiring in IT and financial services and (c) prolonged job search period post redundancies. 


According to FICCI, the waiting period to find a job has increased from two to three months to 9-10 months, with people also settling for relatively junior positions. Slowing GDP growth, a poor monsoon and sustained inflationary pressure could provide the catalyst to temporarily reverse the virtuous consumption cycle that India has benefitted from in the past decade, i.e. as consumers lose confidence in future income, they decrease consumption. The market update report has highlighted structural risk to consumption and downgraded the consumer sector 

Espirito argues that the negative real wage inflation of BSE-200 companies’ employees and the plunge in the Monster listing primarily reflect urban populations. This is distressing as the majority of sales for the FMCG sector are generated in urban markets. Investors have chosen to hide in the consumer sector and trades are getting crowded. Downtrading in essentials and prolonged delays in discretionary spending will lead companies to take price cuts and increase advertising and sales promotion (A&P), thus affecting the bottomline. The imminent slowdown in the consumer sector may result in ‘defensive sector’ losing its crown, according to Espirito Santo Securities 

The analysts opine that in times of continued uncertainty and concern around corporate governance, investors are playing it safe and focusing on a narrow list of companies in the consumer sector, and flow into those names is causing P/E (price-to-earnings ratio) expansion, rather than an expectation of increases in earnings or any underlying change in the industry to merit a major expansion in the multiple.


Further, according to the analysts, the BSE FMCG index has outperformed the broader market by about 17% YTD (year-to-date), despite starting the year on already high multiples (consensus 12-month forward P/E of 24.6 times). Several companies (like Emami and Godrej Consumer Products) have been top performers, and the P/E rerating has meant the stocks have outperformed the market.


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