3 days ago
NSE investors hold tight as price surges in grey market
Everyone seems to want a piece of the National Stock Exchange (NSE) even before its anticipated public market debut. The bourse's unlisted shares are in short supply in the private market, having surged 40% since last week to shrink its discount to BSE Ltd.
'NSE shares were trading at a 50% discount to BSE's at least five-six months back," Sanat Mondal, head of private markets at Sanctum Wealth told Mint. 'In the last few weeks, the discount has narrowed in the range of 10-15%."
NSE's privately held shares are trading between ₹2,375 and ₹2,419 apiece. That's 48 times its FY25 earnings, according to UnlistedZone, a private market broker for retail investors. Rival BSE commands a multiple of 64.2 times its FY25 earnings, according to a recent Motilal Oswal Financial Services report.
The market has perceived recent reports of NSE exploring a ₹1,000 crore regulatory settlement with the Securities Exchange Board of India (Sebi) as a step closer to its IPO, said Mondal.
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However, there is still little clarity on when the exchange will make its stock market debut—a major risk associated with unlisted equities, according to experts.
'NSE is trading at a discount to BSE mainly because there is no clarity on its IPO yet," Mondal said. 'Technically, there shouldn't be so much of a discount because, fundamentally, those are similar companies. Even (profit) margin-wise, both are comparable."
With a hold on at least 90% of India's equity volume in cash and derivative segments, NSE dwarfs BSE by size and scale. Hence, it stands to be a key beneficiary of India's ongoing transformation as a saver-to-investor economy, according to a Motilal Oswal Financial Services report from December.
'We foresee 15% revenue and 22% net profit CAGR (compound annual growth rate) over FY24-27, largely led by a 16% CAGR in transaction income, owing to exponential growth in retail volumes," the report said. 'The overall growth will be primarily driven by F&O (futures and options) volumes."
Over 1 lakh shareholders, already
NSE generates over 65% of its total revenue as profit, much of it in cash, which is a strong indicator of its robust business model, said Saurabh Rungta, CIO at Avendus Wealth Management and who himself holds unlisted NSE shares. 'Considering its enduring moat and long growth runway, we believe NSE may have the potential to be a consistent compounder over time, that investors can comfortably hold in their portfolios."
NSE's value proposition is so lucrative, the company already has over 1 lakh unlisted shareholders, up from 39,201 in March, according to Sunil Chandak, founder and director of Gennext Investrade, a Mumbai-based unlisted equity dealing firm.
'Once its ISIN got unfrozen in March, the shares became freely tradable. Moreover, restrictions on minimum lot size were also removed. As a result, retail investors just lapped (NSE's) shares up," Chandak said.
Right now, NSE is being touted as 'India's most valuable unlisted company" in the private market. In fact, Chandak calls NSE 'the stock of India" – a company exemplifying the promise of India's growth story in the coming decades.
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Such exuberance has propelled NSE's market capitalization to ₹5.87 lakh crore, ahead of blue-chip giants such as ITC Ltd and Larson & Toubro Ltd. 'Given its strong unlisted demand, the risk of under-allotment or no allotment is real for retail investors hoping to invest in NSE's inevitable IPO, unless the offering is large," Avendus's Rungta said.
Hence, retail investors are now flocking to the private market to bypass the uncertainty of allotments in IPOs, said Vijay Kuppa, CEO of InCred Money. But even there, the supply of NSE shares has dried up.
Valuation rerating unlikely
Existing investors are now unwilling to sell their shares as they expect the exchange to hit the public markets soon, offering a much better exit at a significantly higher post-IPO price. To be sure, unlisted NSE shares have already returned almost 230% in the last three years, according to UnlistedZone.
As a result, barring the initial listing day gains, experts are not anticipating outsized returns post its IPO. 'The stock has compounded at over 50% CAGR in the last five years, which is unlikely to repeat over the next five. Much of the valuation re-rating has already happened," Avendus's Rungta said.
Moreover, since NSE does not have any promoters and its ownership is widely dispersed, Rungta expects continuous supply pressure from existing shareholders to keep its share price subdued, especially after the lock-in period ends. Sebi's mandate of at least 25% public shareholding in all listed companies will only ensure this outcome, he said.
Beware the hype of unlisted markets
As the listed arena becomes crowded and opportunities to make outsized returns diminish, retail investors are increasingly exploring the private market. It has evolved from an opaque, niche segment into a semi-formal asset class, mainly attracting high net worth individuals (HNIs), family offices and wealth managers.
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The unlisted space offers the allure of owning shares of 'exceptional" companies at cheap valuations with hopes of significant post-IPO price appreciation, said Kuppa from IncredMoney.
New investors might not find NSE easily accessible in the private market today. But the unlisted space is broader than one name, and there are many other interesting companies to explore, depending on their risk appetite and time horizon, Kuppa said.
'Some of the most talked-about companies like OYO, Chennai Super Kings or PharmEasy have been accessible only through the unlisted route for years. Retail investors value the chance to be part of these journeys before the public market does," he added.
However, experts warn retail investors, who are jumping into the private market following NSE's hype, that promises of substantial post-IPO gains may not always come true.
'By the time the lock-in period ends six months after a company's IPO, its shares in the public market might trade at a lower price than in the unlisted market, resulting in losses for investors," Mondal from Sanctum Wealth said.
According to Yatin Singh, CEO of investment banking at Emkay Global Financial Services, NSE should not be the barometer for the private market's success. 'Rather, it is an exception, as it is more liquid than most unlisted companies out there."
Inexperienced retail investors might find it difficult to exit promptly from unlisted shares as the market is more illiquid than public exchanges, said Singh. 'Investments in the unlisted market are generally riskier because the companies usually do not have enough scale, maturity and the guarantee of eventual IPOs. Essentially, investors are unprotected here. Hence, their valuations seem discounted to listed peers," he added.
Unlike listed companies with publicly disclosed financials, unlisted companies often operate without a similar level of transparency, fuelling speculation and exaggeration. That's often reflected in their grey market premiums (GMP), which is used to gauge the demand for an IPO-bound company.
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GMPs typically include the valuation multiples of comparable listed peers, growth projections, valuations in recent fundraising rounds and any notable secondary transactions, said Avendus's Rungta. But hype does play a role.
'In several instances, we've seen unlisted stocks command disproportionately high GMPs, either due to inflated expectations, incorrect or optimistic business projections or simply FOMO," he added.
Singh from Emkay Global warns that GMPs can also be manipulated. 'Promoters can artificially create a perception of high demand for a mediocre company's paper. They can inflate GMPs through some of their own money via unofficial channels and market operators to ensure a decent start to their listed journey," he said.
Retail investors looking to invest in the private market must have access to the right network and due diligence. Else, they can fall prey to exorbitant prices, as there is no parity in prices due to the opaque structure of the market, said Mondal from Sanctum Wealth.
Avendus's Rungta said deal defaults, transfer disputes and miscommunication on fundamentals also plague the private market. 'Combined with lack of transparency, asymmetrical price discovery and the inherent illiquidity, this market is best suited for informed and patient investors and not for momentum-driven bettors."
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