InvestorQ : Can you tell me about how the grey market premium or GMP for the LIC IPO panning out?
Mahima Roy made post

Can you tell me about how the grey market premium or GMP for the LIC IPO panning out?

10 months ago

The grey market price or GMP is normally an informal price point for the IPO and does not have any official sanction. However, it is a good lead indicator of how the stock could perform post the listing. Normally, the GMP trading starts about 7-8 days prior to the actual IPO opening and continues till the listing date. Obviously, once the IPO is listed, there is no need for the grey market price.

Typically, the GMP of an IPO is impacted by 2 factors. Firstly, the market conditions have a deep impact on the GMP. If the markets are falling sharply and if the FPIs are selling aggressively, then the GMP is likely to get negatively impacted. Secondly, the extent of subscription also has a deep impact on the GMP as it is indicative of investor enthusiasm in the stock. Normally, higher the subscription, better the GMP pricing.

Let me add a word of caution here. The GMP is just a popular informal price point. However, if you go by the past history, then in most cases, the GMP has proved to be a very solid informal gauge of demand and supply for the IPO. Hence GMP is useful in that it gives a very broad idea of how the listing is likely to be and how the post-listing performance would be. That is why, more than the current GMP, it is the trend of GMP that really matters.

Let us look at how the GMP has moved since it started on 24-April. The grey market premium started on a tepid note but picked up steam. In the last 9 days, the GMP has effectively rallied from Rs.15 per share to the range of Rs.85-90 per share, where it currently quotes at. The moral of the story is that there is a gradual build up in the interest levels in the grey market ahead of the IPO and the solid anchor response should further help.

How do you interpret this GMP of Rs.85 and what does it mean for the price of listing? Assuming that the price of LIC gets discovered at the upper price band of Rs.949 per share, Here is how the likely listing price can be interpreted. The likely listing price is being signalled at around Rs.1,034 (i.e. Rs.949 + Rs.85 GMP per share). The formula is to just add the grey market premium (GMP) to the discovered price to get likely listing price.

One test is the percentage of GMP as share of the IPO price. The GMP of Rs.85 as on 03rd May 2022 on a price of Rs.949 per share, translates into a listing premium of 8.96% over and above the listing price. That translates into a likely listing price of Rs.1,034 per share and that is a reasonable listing, if not a bumper listing. There are other factors that can still impact LIC listing price between now and the actual listing on 17th May 2022.