Companies with higher IPO grading enjoy higher price to earnings (PE) multiples, according to a study carried out by CRISIL Equities.

An analysis of 56 graded listed initial public offerings (IPOs) by all the rating agencies found that companies which enjoyed a 4/5 rating (indicating above average fundamentals) have enjoyed average PE multiples of 25.8x, compared to companies with a lower IPO grade of 1/5 (indicating poor fundamentals) at 14.8 times.

Companies with IPO grades of 2/5 and 3/5 were trading at PE multiples of 17.6 times and 20.9 times, respectively.

There are no IPOs graded 5/5 (indicating strong fundamentals) listed on the exchanges.

Since the time IPO grading was made mandatory in May 2007, more than 100 companies have been graded by various rating agencies, out of which 75 companies have been listed. However, CRISIL equities had restricted its analysis to the companies which have been listed for more than 6 months, as on December 31, 2009.

The outcome of the study mirrored results from a similar analysis by CRISIL Equities in May 2009, reinforcing the relationship between higher grades and higher P/E ratios. Mr Chetan Majithia, Head, CRISIL Equities says, 'Higher IPO graded companies, typically tend to operate in higher growth industries, have superior management strengths and follow good corporate governance practices. Such characteristics tend to command better valuations, as reflected in higher PE multiples.'

UNI