Decoding the Accuracy of IPO GMP

India is a market with strong growth in IPO volumes, thanks to its dynamic regulatory framework, robust domestic capital market, and large retail investor base. In 2023, India witnessed as many as 60 mainboard equity public offers, exactly five every month. The figure could have been higher if not for the unsuccessful attempts by Adani Enterprises and PKH Ventures.

Before applying for IPOs, investors typically look into Grey Market Premium (GMP), which is the additional amount investors (mostly HNIs) are willing to pay over the IPO allotment price. As such, IPO premium acts as an effective indicator of the listing price even before the shares are listed on the stock exchange. However, the accuracy of IPO GMP is something nobody will vouch for. Most investors only have vague ideas and approximations.

Usually, the GMP for shares is positive because the demand for shares is high in unofficial markets. However, the GMP can also be negative in some cases. Investors keep an eye on grey premiums before applying, as GMP starts 5-10 days before opening, and in some cases more than that too. While it is well-known that GMP is one of the most referred figures by IPO investors, its accuracy is often under the cloud.

Is GMP accurate for IPOs?

Is grey market premium reliable?

IPO Central analyzed all the mainboard IPOs that were listed in 2023 to find an answer to these questions.

Methodology: Accuracy of IPO GMP in 2023

Excluding the 2 public offers which were withdrawn midway, the India primary markets saw 60 companies getting listed through IPOs within the calendar year 2023. Further, two offers from the pack – Radiant Cash and Yatra Online – had no meaningful activity in the grey market. Therefore, these IPOs have been removed from our analysis.

We analyzed the correlation between Grey Market Premiums and actual listing performance. In a high-correlation scenario, high GMPs should consistently get translated into similar listing gains.

For this, we calculated the average GMP of each of the 58 IPOs in 2023 and calculated the difference between the actual listing price and the indicative listing price according to the median GMP. Since a lot of factors change between subscription and listing, we also took similar readings for the GMP rates a day prior to listing. Both sets are presented in the table below.

Name	IPO Price	Avg GMP	Latest GMP	Listing price	Variance Avg GMP (%)	Variance Latest GMP (%)
Innova Captab	448	143.3	70	541.4	-8.4	4.5
Azad Engineering	524	384.4	300	677.5	-25.4	-17.8
Credo Brands	280	122.8	110	312.2	-22.5	-19.9
RBZ Jewellers	100	4.3	0	105	0.7	5
Happy Forgings	850	374	300	1030.8	-15.8	-10.4
Muthoot Microfin	291	77.5	25	266.15	-27.8	-15.8
Motisons Jewellers	55	84.3	80	103.55	-25.6	-23.3
Suraj Estate	360	49.8	25	334.5	-18.4	-13.1
INOX India	660	438.1	520	939.95	-14.4	-20.3
DOMS Industries	790	411.4	500	1326.05	10.4	2.8
India Shelter Finance	493	165.6	160	544.7	-17.3	-16.6
Tata Technologies	500	342.2	400	1313	55.9	45.9
Flair Writing	304	69.6	90	450.9	20.7	14.4
Fedbank Financial Services	140	8.2	5	140.25	-5.3	-3.3
Gandhar Oil	169	54.6	68	301.4	34.8	27.2
IREDA	32	7.6	10	60	51.5	42.9
ASK Automotive	282	40.3	30	310.1	-3.8	-0.6
Protean eGov	792	108.8	80	883	-2	1.3
ESAF Small Finance Bank	60	18.6	20	69.05	-12.1	-13.7
Honasa Consumer (Mamaearth)	324	18	17	337.1	-1.4	-1.1
Cello World	648	117.3	155	791.7	3.4	-1.4
Blue Jet Healthcare	346	49.5	21	413.4	4.5	12.6
IRM Energy	505	79.8	50	473.15	-19.1	-14.7
Plaza Wires	54	16.8	23	84.2	18.9	9.4
Valiant Laboratories	140	16.7	25	170.25	8.7	3.2
Updater Services	300	7.6	3	283.9	-7.7	-6.3
JSW Infra	119	19.6	30	157.3	13.5	5.6
Manoj Vaibhav Gems	215	11.7	12	215.5	-4.9	-5.1
Sai Silks Kalamandir	222	14.3	13	244.9	3.6	4.2
Signature Global	385	34.4	35	458.55	9.3	9.2
Zaggle Prepaid Ocean Services	164	16.5	10	158.35	-12.3	-9
Samhi Hotels	126	9.5	5	143.4	5.8	9.5
RR Kabel	1,035	154.5	100	1198.05	0.7	5.6
EMS Limited	211	105	100	279.9	-11.4	-10
Jupiter Life Line Hospitals	735	211.9	240	1075.75	13.6	10.3
Ratnaveer Precision Engineering	98	39.1	55	129.35	-5.6	-15.5
Rishabh Instruments	441	61.4	65	443.15	-11.8	-12.4
Vishnu Prakash Punglia	99	55.5	55	145.7	-5.7	-5.4
Aeroflex Industries	108	51.4	70	163.25	2.4	-8.3
Pyramid Technoplast	166	23.5	20	177.65	-6.3	-4.5
TVS Supply Chain Solutions	197	14.3	3	201	-4.9	0.5
Concord Biotech	741	173	110	942.8	3.2	10.8
SBFC Finance	57	37.1	24	92.2	-2	13.8
Yatharth Hospital	300	71.2	80	333.85	-10.1	-12.1
Netweb Technologies	500	347.3	375	910.4	7.5	4
Utkarsh Small Finance Bank	25	14.8	15	48	20.6	20
Senco Gold	317	95.8	130	405.3	-1.8	-9.3
Cyient DLM	265	107.7	130	420.6	12.8	6.5
IdeaForge Technology	672	491.2	520	1294.95	11.3	8.6
HMA Agro	585	16	8	585.7	-2.5	-1.2
IKIO Lighting	285	92.8	90	403.85	6.9	7.7
Nexus Select REIT	100	5.5	4	104.26	-1.2	0.2
Mankind Pharma	1,080	78.1	90	1422.3	22.8	21.6
Avalon Technologies	436	21.9	10	398	-13.1	-10.8
Udayshivakumar Infra	35	11	12	31.5	-31.5	-33
Global Surfaces	140	31.8	12	171.05	-0.5	12.5
Divgi TorqTransfer	590	34.1	20	605.2	-3	-0.8
Sah Polymers	65	9.1	11	89.25	20.4	17.4
Average					0.1	0.4

When we plot the figures on a line chart, we notice that the difference between the listing prices of average and last-day GMPs isn’t substantial and gets canceled out in the large data set.

However, a few IPOs stand out as exceptions. These are Tata Technologies, IREDA, and Udayshivakumar Infra which had a significant variance in listing price from what the grey market was indicating. Tata Technologies had a variance of nearly 46% from the latest GMP, while the figure for IREDA stood at around 43%. On the other hand, Udayshivakumar Infra listed 33% down from GMP indications.

Tata Technologies and IREDA offers were among the biggest IPOs of the year at INR 3,042 and INR 2,150 crore, respectively, and had garnered strong subscriptions. In such cases, panic buying by unsuccessful IPO investors creates such scenarios. Udayshivakumar Infra comes across as a genuine case where the grey market failed to see what was coming, especially as the broader market sentiment was negative at the time of listing.

So How Accurate is IPO Grey Market Price?

The majority of the remaining listings had variances within the 25% range. While this isn’t ideal, investors need to understand that the grey market isn’t and can’t be as efficient as the regulated stock market.

Key Takeaway 1

High subscription can lead to a reverse squeeze situation which can take listing day performance way above what the grey market indicates.

Key Takeaway 2

Investors can do better by discounting GMP of up to 25%. A closer look at the above table reveals several instances where premiums melted after subscription dates.

Overall, IPO grey premiums offer a glimpse into pre-listing demand and can be valuable, but they may not always indicate the actual listing performance of the IPO. In other words, the accuracy of IPO GMP is not up to the mark. Therefore, investors should use GMP as one of the many tools to make informed decisions about investing in IPOs.