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How to interpret the Grey Market Price of LIC ahead of its IPO?

As the LIC IPO gets all set to open for subscription on 04-May, one parameter that is being closely monitored is the grey market price or the GMP. Now there is nothing official about the GMP because it is an informal pricing mechanism and does not have any regulatory sanction. However, the GMP is tracked closely due to the important signals that it gives.

The Grey market premium is typically driven by 5 factors:

  1. Demand for the stock ahead of the IPO
  2. Response to the anchor placement
  3. Broad market-level factors including sentiments and liquidity
  4. Subscription levels of Retail, HNI and QIBs
  5. Funding subscriptions for the IPO.

It is the combination of all these factors that determine the GMP. Typically, the stock starts trading in the grey market about 7-10 days ahead of the IPO opening and goes all the way to the day before the listing of the IPO.

A quick word on the LIC IPO

The LIC IPO is looking to raise Rs.21,008.48 crore via the sale of a 3.5% stake by the government of India in LIC. Hence, the entire IPO is an offer for sale (OFS) of Rs.21,008.48 crore with no new issue component. Typically, the company defines the price band ahead of the IPO and the actual price is discovered via book building. In the case of LIC, the price band has been set in the range of Rs.902 to Rs.949 per share. Incidentally, the anchor placement on 02nd May has been done at the upper price band of Rs.949.

LIC IPO will open for subscription on 04th May 2022 and closes for subscription on 09th May 2022, with both the days being inclusive. The issue will be open for 4 days, considering its size. The stock is scheduled to list on 17th May 2022; which means the basis of allotment, refunds and Demat credits will be complete before that.

How much can you rely on GMP?

At the outset, the GMP does not have any official sanction and is just an informal price at which stocks are traded ahead of the IPO. Therefore, it is just a popular informal price point. However, past experience shows that in most cases, the GMP has proved to be a good informal approximation of demand and supply for the IPO. GMP may not be precise, but that is not the purpose anyway. The idea is to be approximately close to the real story.

Focus on the GMP Trend rather than just the number

More than the actual price, it is the GMP trend over a period of time that really gives insights into which direction the wind is blowing. Here is a quick GMP summary for Life Insurance Corporation (LIC) of India over the last 9 days.

As you can see in the chart above, the GMP trend shows grey market premium started off in a tepid fashion but picked up steam. Over the last 9 days, GMP rallied sharply from Rs.15 per share to the range of Rs.85-90 per share. Needless to say, we have to also wait for the actual subscription numbers to flow in. But, clearly, there is a gradual build-up in the levels of interest in the grey market ahead of the IPO and that can be interpreted as a positive signal.

How to interpret the GMP of LIC to gauge listing price?

Let us assume that the price of LIC gets discovered at the upper end of the price band at Rs.949 per share and that is a reasonable assumption since that is the price of the anchor placement. Now, let us look at the indicative listing price. The likely listing price is being signalled at around Rs. Rs.1,034 (i.e. Rs.949 + Rs.85 GMP per share). You just need to add the grey market premium (GMP) to the upper end of the price band (discovered price).

Let us also look at the GMP in percentage terms. The GMP of Rs.85 as of 03rd May 2022 on a likely upper band pricing for the IPO at Rs.949 per share, translates into a listing premium of 8.96% over the listing price. That presupposes a listing price of Rs.1,034 per share and that is considered a reasonable listing. However, other factors could still impact the stock price between now and the actual listing of LIC IPO on 17th May 2022.

GMP is a good informal indicator of listing price but it does tend to be dynamic. It is a good signal for traders and even for investors. The moral of the story is to focus on the trend of the GMP. As long as that is positive, the IPO is on the right track.

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