Market crash to send QIP plans into a tailspin

Dip in valuation will stop companies from going ahead.

After a debacle in the once robust primary market, the fund-raising plan of companies through qualified institutional placements (QIP) too will be hit badly following Monday's fall in benchmark equity indices, the worst since the January-end crash.

BEAR ATTACK

Nearly 20 per cent correction in benchmark indices have eroded valuation of companies and hit their fund-raising plans

Market sources said stocks might not witness a runaway rally this year due to mounting global credit concerns

QIPs had become a new mantra to ensure a vibrant onshore private placement

Most of the investment bankers are of the view that companies that had planned QIPs recently may not be able to go ahead with the fund-raising as their valuations have been eroded due to the nearly 20 per cent correction in benchmark indices this calendar year.

In two days, the benchmark Sensex crashed by 1,100 points in the last two trading sessions, bringing down the index to 16,600 levels.

A Murgappan, the executive director of the investment banking division of ICICI Securities, said: "One of the main issues is stock prices of most companies would now be trading at a discount to the certain base price that they had fixed for QIP issues. Therefore, none of the institutions would like to buy a stake in the company at a base price fixed earlier as the valuations have now crashed."

At least 13 companies had announced their plans to raise money through QIP in 2008 alone. Among those that had disclosed the amount of money they planned to raise include Adani Enterprises (Rs 3,000 crore), Batliboi (Rs 100 crore), Shri Lakshmi Cotsyn (Rs 160 crore), Teledata System (Rs 500 crore), Tourism Finance Corporation (Rs 550 crore), Walchandnagar Industries (Rs 550 crore) and Kalindee Rail Nirman Engineering (Rs 150 crore).

Others such as DCW, Mukta Arts, Platinum Corporations, Sintex Industries, Southern Online Bio Technologies and Syndicate Bank, which announced QIP plans, had not disclosed the amount to be collected in their filing with stock exchanges.

Fund-raising through the QIP route was fast gaining ground as an alternative for many small- and mid-cap companies with markets at record highs.

Touted as the best method by which any company can go in for a follow-up offering of any kind, it had become a new mantra to ensure a vibrant onshore private placement equity market.

Most of the companies diluted a minimal stake of 10 to 15 per cent during their public issue so that they could later do private placements to institutions at much higher valuations.

Besides, a lesser dilution of stake ensured a sharp rise in stock price for companies as investors who were not allotted share in the public issue scrambled to buy it from the secondary market pushing the stock price up.

Stock prices of most of these companies, which had moved up by over 200 to 300 per cent in the last one year, have seen a sharp correction of over 100 per cent since stock markets developed a crack on January 18 this year.

Market sources said stocks might not witness a runaway rally this year due to mounting global credit concerns and no major positive triggers on the domestic front.

According to Sujat Khan, managing director, Blue River Capital, a private equity firm, it is now that the valuations have come to more realistic levels after the market crash.

"Some of the companies demanded unrealistic valuations based on their stock prices, which had run up sharply in recent times," he said.

Khan, however, is of the view that companies with some good projects in hand that do not intend to raise money just because they get high valuation would not wait for any sort of rally or euphoria to return in the stock markets.