Raising capital through QIP may slow significantly

75% of QIPs deliver negative returns says CRISIL Equities

Most Qualified Institutional Placements (QIP) made in 2009 have returned negative value says a recent study conducted by CRISIL Equities. In fact, 10 out of the 13 QIPs, tracked by the research firm, were trading below their offer price. The total return on investments (as on July 10, 2009) by all QIPs is marginally negative despite significant gains registered from the first QIP of Unitech that has delivered positive return of around 75%. However, excluding the first QIP offer of Unitech, the overall returns of QIP is negative i.e. -12%.

Further analysis of the QIPs indicates that around ¼ of the QIPs are trading 20% below their offer price. In percentage terms, the Bajaj Hindustan QIP declined the highest with its current market price around 28% below the offer price. In absolute terms, Unitech (second tranche of QIP at Rs 81) and HDIL have lost maximum value for QIPs, by more than Rs 4.5 and 3.5 billion respectively. On the positive side, Unitech first QIP of Rs 16.2 billion in April 2009 at an offer price of Rs 38.5 is the largest wealth creator for QIPs with total gains of Rs 12.2 billion.

According to Chetan Majithia, head-CRISIL Equities, “The significant run up in the stock prices before the 2009-10 union budget made QIP deals unattractive as the inherent fundamentals of most companies which queued up for QIP have not changed materially. With the global economic growth concerns still persisting and delayed monsoons, the S&P CNX NIFTY is still trading at a slightly expensive 15 times its FY10 expected earnings. With the recent decline in prices and consequent erosion of the QIP investment value, we expect raising capital through the QIP route may slowdown significantly.”

During 2009, the Indian capital markets witnessed a sudden spurt in the QIPs activity with 13 companies raising funds through the QIP issue. Total amount raised through QIP was Rs 125 billion. Unitech through its two QIP issues (in April and June 2009) raised around Rs 44 billion or 35% of the total QIP amount while the Rs 500 million QIP of Power Trading Corporation was the smallest.

“After declining by around 90% from their peaks during the global meltdown, the prices of the large real estate companies looked relatively attractive. However, not all the companies in the sector offered a sound fundamental value proposition,” feels Majithia.

Among sectors, real estate with five companies raising funds close to Rs 95 billion or 76% of the total amount of QIP was the largest beneficiary.

QIPs provide an easy investment alternative for the institutional investors. The QIP route enables an institutional investor to garner shares of the company at a discount to the market price, and also helps them save on transaction cost. Further, since there is no lock in period for the shares allotted through QIP route, institutional investors’ return through this route can be high if timed appropriately.