Forget IPOs. Focus on these Six Stocks Under QIP Watchlist 

Dear Viewers

Now that the dust has settled on elections with the return on Modi regime, the markets are back in celebration mode.

A leading indicator of this mood is the number of companies that have lined up to go public.

About Rs 300 bn is likely to be raised in the IPO rush over next two months.

Bajaj Housing Finance, Haldiram, Ola Electric, Prestige Estates, Swiggy, Waaree Energy, Vikram Solar, are some of the potential IPOs causing much buzz. Most of these might list at decent premiums.

Some of these may genuinely have a great growth potential. However, I doubt there would be enough margin of safety in valuations.

As Warren Buffett says...

• It's almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller i.e., company insider, to a less-knowledgeable buyer i.e., investors.

With little public history behind these companies, and almost no experience or track record of promoters' attitude towards minority shareholders and their capital allocation acumen, it is indeed tricky to arrive at a fair value for companies going public.

I would rather wait for some time to have some conviction on these businesses before rushing to recommend them at the time of IPO.

As for companies raising funds, there is another kind of offer I'm finding interesting to track.

I'm speaking of QIP or Qualified institutional placement.

Unlike an IPO, the people who participate in this offer are not general public. The only parties eligible to purchase is a select group of persons, called Qualified Institutional Buyers or QIBs. These are accredited institutional investors, as defined by the market regulator.

These investors are lot more experienced and sophisticated than retail investors. Keeping a track of the activity on this front could be a starting point to discover some gems in the markets.

But before we move to that, let's understand what QIP is.

QIP, or qualified institutional placement is a fundraising mechanism for already listed companies.

Herein, a company which is already listed on exchanges, raises capital from the domestic markets by issuing equity shares or securities such as debentures that could be converted into equity.

QIPs were allowed and introduced by regulators so that Indian companies to not have to depend too much on foreign money through global depository receipt or American depository receipts when they need money to run and grow the business.

So why would a company choose to go via QIP instead of let's say, raising money through an FPO i.e, follow on public offer or debt?

Well, QIPs is a quick way to raise capital when a company needs external funds for growth and running the business. In comparison, other modes of raising capital, such as FPO, could be time consuming, costly and require a lot of procedures and guidelines to be followed. The other option, raising debt, comes with its own issues like higher leverage and increased burden of interest expenses.

QIP could be a win win for both companies and institutional investors. The latter may choose this route to invest as they are likely to get a meaningful stake in the business at a discount under QIP, an option which may not be available in case of buying from open markets.

The maximum discount that the regulator allows is 5% on the floor price of the issue. The floor price itself is decided as per a pricing formula that takes into consideration average weekly highs and lows in the preceding weeks.

Now QIBs do not guarantee a gain but as the investors are experienced and sophisticated, a good demand for QIP suggests that they see value in the business at the QIP issue price.

One can assess this demand from the discount or premium offered on QIP from the issue price. If the discount is huge, it suggests a relatively weak demand for the issue. If the QIP offer price is at a premium to the floor price, it suggests high conviction of institutional buyers in the business and the management.

Now there are quite a few companies that have raised money through QIPs in the recent months and years. Here are some names where the current stock price is lower than the price paid by QIBs (qualified institutional buyers), and where fundamentals offer some comfort.

The first is Bajaj Finance, an NBFC which is high on tech integration in the business. In FY24, two of the company's products came under regulatory restrictions on account of deficiencies on Key Fact Statement (KFS) for products related to sanction of loans and disbursals under 'ecom' and 'Insta EMI Card'. Do note that these restrictions have been removed in the month of May 2024, post addressal of issues highlighted by RBI and suggest management's agility and ability to course correct.

The issue price of its QIP in November 2023 was fixed at Rs 7,270 per share, at 3.5% discount to the floor price of Rs 7,534 per share

The stock is trading at Rs 7,285 as I write this. Bajaj Finance is currently in the news for the Bajaj Housing Finance IPO.

The second is PSP Projects, a company in construction space. The company is associated with Surat Diamond Bourse Project, Kashi Vishwanath Dham, Gift City etc. With the completion of Surat Diamond Bourse project, it is now qualified to bid for high value construction projects where the competitive intensity is less. PSP Projects raised a QIP in April this year at an issue price of Rs 670 per share against a floor price of Rs 683 this year. The stock is currently trading at Rs 662.

Axiscades Technologies is another QIP you could keep a track of.

The company is a defence capex beneficiary.It was recently in news for delivery of advance Counter Drone Systems under a Rs 1 bn order from Indian Army. The management estimates addressable opportunity in drones to be at Rs 30 bn over five years in addition to production revenues. The company's revenue in FY24 was 10 bn.

The floor price for Axiscades Technologies, a defence capex beneficiary, was at Rs 697. The issue price for its QIP in Jan 2024 was at a discount at Rs 662. The stock is currently trading at Rs 602.

Happiest Minds is an IT company that created generative AI business unit . The management expecrs revenue growth of 35% to 40% for FY '25 with margin range of 22% to 24% . Over next 7 years, it is targeting a revenue mark of US$ 1 bn, or Rs 83 bn, almost five times the revenue in FY24.

Happiest Minds, raised funds under a QIP at an offer price of Rs 924 last year. The stock is currently trading at Rs 900 per share.

The next is Laxmi Organics, a leading maker of acetic acid derivatives used in specialty and essential chemicals. It is also getting into fluorochemical specialty product. The company is likely to incur capex of Rs 11 bn over FY24-FY26 for which QIP has been raised in October last year, The issue price was Rs 267.2 per share. The floor price was Rs 283.27. The stock is currently trading at Rs 254.

The last stock this discussion Phantom Digital, the SME company associated with visual effects in Bahulbali and RRR,. It raised QIP in December 2023 at an offer price of Rs 413. The floor price was Rs 434. The stock is currently trading at Rs 386.

Check the link below the video to get an update on more such stocks where the stock is trading at a discount to the price paid By qualified institutional buyers.

Do note that no view is implied on these stocks.

If you indeed find a stock that looks good on fundamentals, there is a chance that you could enter these stocks at a price lower than what these sophisticated investors paid.Keep in mind that QIP will lead to increased base of equity shares and to that extent, could lead to some earnings dilution.

Tracking QIPs can be a good starting point to select stocks, especially in a scenario when markets fall. However, the idea is not to blindly copy these trades. With this, I have come to the end of this video.

Hope you find it useful. Let me know your views in the comments section.

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Thanks for watching, Goodbye.