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Valuation concerns slow down QIPs

By Ranju Sarkar in New Delhi
July 06, 2009 09:37 IST
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More than 50 companies had rushed to make qualified institutional placements after real estate firms like Unitech and Indiabulls raised money through this route. Now it appears that only some of these companies may be able to raise equity through this route, on rising concerns over valuations and over-supply.

GMR Infrastructure was forced to call off its $500 million QIP on Monday after investors developed cold feet on concerns over valuation. "We have decided to withdraw the QIP in light of the existing market conditions," GMR said in a statement to exchanges.

Even companies which have managed to raise money had to downsize their issues, except for Unitech. This includes real estate firm Sobha Developers, which could raise only $111 million against $300 million targetted initially, while GVK Power, say sources, has managed to raise $125-150 mn against a target of $500 mn.

Investment bankers say GMR had downsized the QIP from $500 mn to $200 mn before calling it off for lack of investor interest. Similarly, construction firm HCC had a mandate to raise Rs 1,500 crore (Rs 15 billion) but could raise only Rs 480 crore (Rs 4.8 billion) through a QIP.

A key concern for investors is valuations. Many of these stocks have gone up two to three times since their all-time lows. Take GMR Infrastructure, which touched a high of Rs 183.50 on June 5, moving up four times since its all-time low of Rs 45.60 touched on October 27, 2008. Though the stock has corrected 35 per cent since then and is trading at Rs 139.95, it has still gone up three times since its all-time low in October.

''There's no change in fundamentals to warrant a valuation which is two-three times higher than the recent lows. Investors will not buy at this level,'' said an M&A head with a leading corporate house, and a former investment banker. Debashish Purohit, head of equity capital markets, DSP Merrill Lynch, said there is liquidity but investors are being selective and would like to come at valuations they are comfortable with.

Investment bankers in the know say GMR Infrastructure was trying to place shares at the Rs 168-170 level when prices started dropping. The stock has since corrected to Rs 140, but there were no takers even at this level. ''GMR had raised money at Rs 220, and carried that baggage as investors lost money,'' pointed out a banker.

Experts say too many issues have come at the same time, and investors are spoilt for choices. Bunching of issues at the same time also leaves investors with little time to analyse offers and, as a result, they are not in a position to decide. Hinduja Group CFO Prabal Banerji says with so much supply, there's investor fatigue in QIPs.

The Sebi floor price is also coming in the way of closing QIP deals. The regulator has set a floor price for QIPs, which is the average of the highest and the lowest prices for the two weeks preceding the board meeting that approved the QIP.

What it means is that companies can sell either at or above the floor price. If the stock price comes down, the QIP can get stuck in the floor price formula. Many companies are facing a problem in doing QIPs, as their current market price is lower than floor price.

Blame this on the volatility in the market, as a result of which a stock price can swing almost 20 per cent in a day. There's another problem: if a company's first week's price is high, then the average price becomes high and companies can get stuck unless its share price constantly goes up after the board meet, and the floor price is met.

Investment bankers say there's an appetite for Indian stocks, given the domestic demand but investors will be cautious in their investments, as markets are recovering from a bearish cycle. ''If a lot of issues come at the same time, investor appetite may get hit. Besides, investors would like to phase out their investments across issues, and time frame,'' said an investment banker with ICICI Securities.

Some of these issues could still happen over the next three to six months. But there's no way India Inc would be able to raise the kind of equity it wanted to raise through QIPs. What's the way out? Companies who are unable to raise equity through QIPs may go in for secondary trades but these would be much smaller in sizes ($50-60 million).

Some companies may consider instruments like non-convertible debentures with warrants. This can help companies bring down the cost of capital, as the option price on warrants can reduce the interest on the NCD by up to 1.5 per cent per annum. As a result, a company can bring down the cost of funds through an NCD to 10.5 per cent, against the 12 per cent it would have otherwise paid on an NCD issue.

The problem with this route is that if a company's share price doesn't perform and the investor chooses not to convert, the company will have to repay the debt. Importantly, this option doesn't allow companies to immediately reduce their debt and gearing. The instrument may find many takers, but for now, Indian companies badly need equity.

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Ranju Sarkar in New Delhi
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