GMM Pfaulder’s share sale has important lessons for investors. Their 33% discount and high valuations are not only the things that stand out here. Borrowing data and security lending shows large borrowings occurred in the stock over the past week. GMM Pfaulder was having the moment of their life until Monday. Their shares had risen by about 240% in the previous one year to Rs 5,203 on the NSE. The immediate announcement of a large stake sale by existing shareholders has left a doubt in the mind of the stock market investors. The base price for the offer for sale was set at Rs 3,500 apiece, which is far lower than the prevailing market price. GMM shares have been corrected by 10% in each of the past two trading days, and yet there are no buyers after the correction nearing 20%.
Deepak Jasani (Head of Retail Research), HDFC Securities said that normally an OFS is priced at a small discount to the existing share price. But GMM’S 33% discount is the steepest so far. This needs to be seen in the backdrop of the sharp increase in the stock, Jasani further added. On the basis of Monday’s price, the GMM Pfaulder stock was trading at a multiple of 105 times trailing 12 months’ earnings. The stock’s barely cheap even at the base price of Rs3,500, trading at 70 times trailing earnings.
GMM’s 33% discount in the OFS and high valuations are not only the major points of this story. Securities lending and borrowing (SLB) data shows that a large number of borrowings occurred in the stack over the past week. With the OFS announcement around the brink and the steep ongoing correction in the stock, suspicions builded up. It is just a matter of time that the Securities and Exchange Board of India (SEBI) look into it. The biggest lesson for investors is that there are big risks while going on with the latest trend in the market.
Normally when demand for a low free float stock is high, then valuations keep moving further upwards owing to the short supply of shares. It is of high preference that GMM shares increasing in the market post the OFS, there could be a downfall of prices.