While valuations and pricing are attractive for companies, equity dilution is key issue for investors.
Rising markets and the short time to market have made qualified institutional placements (QIPs) the preferred equity instrument for listed companies. Companies have raised over Rs 20,000 crore in the current financial year so far, with a fifth coming in October alone. The trend is expected to be strong in the near future. Says Kaustubh Kulkarni, managing director, investment banking, JP Morgan, “The liquidity situation has improved as have the capital markets. Investors are more comfortable now than they were earlier, given that there is more visibility on the business front.”
On the choice of QIPs as the preferred source for raising funds, V Jaya Sankar, executive director and head of Equity Capital Markets, Kotak Investment Banking, says the time to market is the least and the pricing is attractive. Also, QIPs are typically a cheaper source of funds than other options such as private equity. While valuations and pricing are attractive for companies, equity dilution and its impact on earnings are key issues for investors. Analysts say in addition to helping companies reduce debt, the strong demand and expansion are likely to help generate higher returns and aid accretion of earnings over the medium term.
We look at the prospects of companies that have announced or completed their QIP issues in the recent past.
| PROMINENT QIPS | |||
| Date | Size (Rs cr) | Price (Rs) | |
| Aban Offshore |
—
| 4,300 | — |
| Tata Motors | 7-Oct | 3,375 | 1,074 |
| IRB Infra | 29-Sep | 1,200 | — |
| HDIL | 15-Sep | 1,100 | 268 |
| Jet Airways | 28-Aug | 1,850 | — |
| Adani Enterprises | 22-Jul | 4,000 | 536 |
| L&T | 16-Jul | 2,700 | — |
| IDFC | 29-Jun | 2,654 | 168 |
| GMR Infra | 7-Apr | 1,400 | 62 |
| Strides Arcolab | 28-Sep | 455 | 423 |
| Source: NSE, Prime Database | |||
Aban Offshore
Last month, Aban Offshore took its shareholders’ approval to raise funds worth Rs 2,500 crore, though it hasn’t specified any time-frame. After last year’s lull, the offshore market has seen a revival this financial year, led by the relatively high crude oil prices. For Aban though, excessive debt of about Rs 14,000 crore (over seven times its equity) has been a drag on its profits. For instance, while it reported adjusted profits of Rs 312 crore in 2009-10 and Rs 134 crore in the June 2010 quarter, its interest outgo was Rs 976 crore and Rs 227 crore, respectively.
Analysts estimate Aban to generate Rs 2,000 crore in cash flow from operations over the next two years, which along with the QIP (assuming it comes) could partly reduce its debt and boost profits on a lower interest cost. However, the gains would depend on the quantum of equity dilution and pricing.
HDIL
The company is planning to use the capital to fund the second phase of the airport slum-rehabilitation project. The equity issuance would bring down its net debt-to-equity to 0.4 times from 0.53 before the issue. With progress on the rehabilitation project, revenues from the TDR (transfer of development rights, 70 per cent of the sales) route are expected to continue at the rate of 1 million sq ft per quarter. The stock is being quoted at 11 times its fully diluted 2011-12 estimated EPS of Rs 24 and should fetch about 20 per cent from these levels.
Jet Airways
The company plans to raise Rs 1,850 crore to fund its capacity-expansion plans and repay its debt of about Rs 13,500 crore. Analysts are bullish on the sector, which has seen 20 per cent year-on-year growth in passenger traffic in the April-August period. With Jet having a fifth of the market share, it is likely to benefit from this rise in demand. To bring down its costs, the company intends to set up a maintenance, overhaul and repair facility. The stock, which has jumped 13 per cent over the last month, is trading at 7.4 times its 2011-12 earnings estimates and could be considered on dips.
Tata Motors
The company raised Rs 3,320 crore in October to cut debt and fund capital expenditure. RBS estimates its consolidated automotive debt-equity ratio to come down to 1.23 times from 2 times in June 2010. With JLR sales expanding by over 40 per cent in the April-August period and cash flows improving, analysts believe the company may not need to dilute equity further. The stock is up 11 per cent over the month on robust sales and growth prospects. Analysts believe that with a third of the issue, in the form of differential voting rights, the dilution concerns were also eased. A sum-of-the-parts valuation pegs the stock worth at Rs 1,332, signifying a 16 per cent return from these levels.
