Stock Market

D-Mart IPO: Grey market premium soars on RK Damani brand value

Shares of Radhakishan Damani-promoted Avenue Supermarts are quoting at a premium of Rs 175-180 over the expected issue price in the grey market, according to brokers dealing in this unregulated market.


Avenue Supermarts owns the D-Mart chain of around 120 retail stores, most of them in Maharashtra and Karnataka.


Players tracking the issue see it being priced between Rs 300 and Rs 320. The Avenue Supermarts IPO (initial public offering) is expected to hit the market in the second week of March. Merchant banking sources say the firm is looking to raise around Rs 1,800 crore by selling a 10 percent stake, valuing the company at Rs 18,000 crore.


Grey market brokers said the volumes were not huge, mainly due to the steep rise in price, which could potentially result in huge losses depending on which way the stock debuts on listing.


The trades had stopped a week back, but have again resumed, said a broker familiar with this market.


The last issue which had witnessed a hefty premium over its issue price in the grey market was that of Reliance Power . The premium had risen to nearly 100 percent of the issue price at one point. However, Reliance Power shares flopped on listing, causing heavy losses to grey market operators who had bought the stock in huge quantities. Many trades were dishonoured, leading to grey market activities dying down for the next couple of years.


Veteran brokers say that while the grey market is a fairly good indicator of the appetite for an initial public offering, it is prone to manipulation as well.


The first quote in the grey market for an upcoming issue is usually put up by the merchant bankers to the issue, and sets the benchmark.


In the case of Avenue Supermarts, investors appear to be taking a bet more on the Midas touch of ace investor Radhakishan Damani than on the robustness of the company’s business model.


Formerly a small time trader in ball bearings, Radhakishan Damani entered the stock market in the late 80s, when he himself was past 30—unusually late for somebody looking to earn a living in the fiercely competitive and highly unpredictable business.


Damani ploughed the profits from his short term trading bets into creating a long term portfolio of blue-chips — notably multinational corporations in the consumer and pharmaceutical businesses. In March 2015 he briefly made to the Forbes list of top 100 Indian billionaires.


Damani forayed into retailing at the turn of the century, first as a franchisee for the Apna Bazaar chain of stores, before going on to set up about 120 stores.


As of March 31, 2016, Avenue Supermarts had a topline of about Rs 8,600 crore, and a net profit of about Rs 320 crore, translating into an earnings per share of Rs 5.72.


The company’s earnings have been growing at 31 percent compounded for the preceding two years. Extrapolating that, the company is expected to report an earnings per share of roughly Rs 7.6 for this financial year.


An issue price of Rs 320 would mean a price earning multiple of roughly 42 times estimated FY17 earnings. Grey market punters buying the stock at Rs 500 (Rs 320 + Rs 180 premium) are valuing the stock at 66 times FY17 earnings. That may not be unreasonable for a well-managed retail chain, but definitely not cheap.


Grey market punters seem to be betting that given Damani’s track record both as a highly successful stock trader and value investor, the market may not mind valuing his company at a huge premium to other listed peers.