Why considering ICRA ratings before investing in IPOs makes sense?
ShareSansar, March 18:
Since the year 2013, Initial Public Offerings (IPO) of over dozen companies have been issued. From May 2013 to February 2015, a total of 15 IPOs have been floated.
Securities Board of Nepal (Sebon), the capital market regulator, made credit rating mandatory for companies wanting to go public with shares worth more than Rs 30 million since February 2013 (Falgun 2069).
According to Credit Rating Agency Regulation, 2068, companies planning to issue ordinary shares, bonds, debentures, rights shares and preference shares of over Rs 30 million must get themselves rated by a rating agency.
As per the data taken from ICRA Nepal’s website, out of the 15 IPOs, 9 IPOs got a rating of ICRA Grade 4, 3 IPOs were assigned ICRA Grade 3, while the remaining three got 3+, 4+ and 5.
ICRA Nepal assigns IPO grading on a scale of IPO Grade 1 through IPO Grade 5, with Grade 1 indicating strong fundamentals and Grade 5 indicating poor fundamentals.
For the Grading categories 2, 3 and 4, the sign of + (plus) added to the Grading symbols indicate their relative position within the Grading categories concerned. Thus, the Grading of 2+, 3+ and 4+ are one notch higher than 2, 3, and 4, respectively.
Ideally a poor rating should have scared away investors from an issue or at least elicited less enthusiastic response than has been witnessed over the years. But mining the available data makes the mismatch between ICRA rating and investors’--both common as well we intuitional—response pretty apparent.
Conclusion: Investors seem to be completely ignoring the rating.
For example, Century Commercial Bank IPO worth Rs 920 million that received a rating of 4+ was oversubscribed 20 times. Likewise, nine other companies were also mostly oversubscribed despite a slightly worse rating of ICRA grade 4 than Century’s 4+.
Both (4 and 4+) ratings indicate below-average fundamentals, putting a question mark on the investment-worthiness of the offer.
But ratings still make sense!
However, relying on ICRA rating seems stunningly worthwhile if we analyze the scenario after shares hit the NEPSE floor.
Analyzing over one dozen IPOs floated over a period of two years, a clear picture emerges that the IPOs with better rating have performed well after they hit the trading floor.
For example, shares of Sana Kisan Bikas Bank Limited, which is among just three companies to receive IPO Grade 3, was last traded at Rs 1,524.
Grade 3, which is the highest rating ICRA has assigned to companies so far, indicates average fundamentals, signaling caution.
Likewise, shares of Sanima Mai Hydropower Limited, whose IPO received Grade 3, is trading at Rs 740, and Rural Microfinance Development Centre Limited that fetched Grade 3+ is changing hands at Rs 725.
On the other hand, Manaslu Bikas Bank that had received Grade 4 is trading at Rs 156, while Ridi Hydropower Development Company Limited which also received the same rating is trading at Rs 487 and Century Commercial Bank Limited which was rated at 4+ is selling at Rs 318.
