COMMENT: How much should D-Mart list at for HNIs to make a decent profit

D-Mart operator Avenue Supermarts IPO perhaps surpassed the most optimistic in the street with an overall figure of 105x. Retail investors will manage to get some allocation with the oversubscription in this category at 7x. The institutional interest was also evident — oversubscription of 105x.

The most intriguing piece remains to be the non-institutional (HNI/high net worth Individual) category that witnessed 281.5x oversubscription. This category of investors, in the past, have made decent gains by leveraged IPO applications, borrowing money for IPOs that are expected to have a premium listing. The listing gains not only cover the interest cost but also leave enough for a very enticing return on investment.

Since HNIs are often in the lookout to park surplus liquidity in instruments that generate far superior return compared to fixed income (albeit with a higher risk), leveraged IPO application of sought-after companies has emerged as an alternate asset class that has served the interest of the lenders (like the NBFCs) and the borrowers.

With 281x oversubscription will the gains fizzle out?

The smart investors participating in this category usually manage to get funding at attractive rates (rarely more than 10 percent). A simple simulation exercise suggests that for the D Mart listing, the break-even price for the funded subscription trade is close to Rs 450. If the GMP (grey market premium) is any indicator, smart money should make smart gains. While the absolute return on equity in the event of a blockbuster listing is a tiny 0.7 percent, the annualised return, the number that this community tracks closely, is a handsome 37 percent.

The gains are extremely sensitive to interest cost. So if there is 100 bps reduction in interest rates, the break-even listing price for this trade reduces by 3 percent. A good listing can promise annualised return of 47 percent. So, if D-Mart sets the trend with a super-duper listing on 21st March, NBFCs that are active in this business can look forward to better days, as a few more exciting IPOs are lined up in calendar 2017.