Higher grade IPO less volatile: Crisil

The analysis covered IPO graded by all the rating agencies between May 2007 and August 2009. The companies with a lower IPO grade of 1/5 (indicating Poor Fundamentals relative to other listed securities in India) exhibited far greater share price volatility than the companies with a higher IPO grade of 4/5 (indicating above average fundamentals).

Asset class

None of IPO Grade 5/5 companies (indicating strong fundamentals) are currently listed on the bourse.

Crisil Equities Head Chetan Majithia said, “For equities as an asset class, beta is the most widely used measure of risk. However, since most of the IPO Graded companies were listed in last year and a half, the shorter time frame would not have reflected true beta. Hence we chose absolute price movement, as well as price movement relative to IPO issue price, as parameters to determine volatility”.

For assessing volatility based on an absolute price movement, Crisil Equities used the ratio of the company’s all time high price to all time low price. The absolute price movement was the highest, that is, twelve times in case of companies with lower IPO grade of 1/5 while the least, five times for companies with better grade of 4/5.

Similarly, companies with high IPO grade of 4/5 were relatively less volatile (103 per cent relative price movement) than companies with lower IPO grade of 1/5 and 2/5 (around 142 and 158 per cent relative price movement respectively).

IPO gradings focus on the fundamentals of a company and are independent of the IPO issue price. Higher IPO Graded companies have higher earnings potential and better fundamentals and therefore are expected to provide better risk adjusted return over different market cycles.