Forget IPOs. These Are The Stocks Where Recent Fundraising Deserves Your Attention 

Dear viewers

Hope you are doing fine.

In the post Covid rally, a multitude of IPOs saw the light of the day. Thousands of demat accounts were opened as retail investors wanted to participate in the emerging new age businesses amidpost Covid rally. Many of such businesses listed at decent premiums to issue price.

Our view on most of these IPOs was avoid. We believed that it was an unpalatable proposition given the fundamentals and 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 insiders to a less-knowledgeable buyer i.e, investors. I totally subscribe to that view.

With the interest rates rising and cheap money getting scarcer, the IPO activity has been muted.

Many of these IPOs have corrected sharply. And yet, do not look attractive from an investment perspective.

In today's video, Im going to cover a different kind of offer through which companies raise money.

The investors who pay this money in return for a stake in the company are lot more experienced and sophisticated than the retail investors. And keeping a track of activity on this front could be a starting point to discover some gems in the markets.

Im speaking of QIBs and QIPs i.e, Qualified institutional placement and qualified institutional buyers.

Towards the end of the video, Ill share some stocks that are currently available at a discount to what the sophisticated investors paid for them.

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

QIP, or qualified institutional placement is a fundraising mechanism. 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 or americal depository receipts) when they need to raise money.

Unlike an IPO, the people who participate in this offer 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.

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

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 may require a lot of procedures and guidelines to be followed.

As for QIP investors, they may choose this way to invest as they are likely to get a stake at a discount under QIP, as against buying shares in the open market. 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 high and low preceding in 2 weeks and 6 weeks of the relevant date. The maximum discount on the issue price is 5% for QIBs.

As a retail investor, you should keep in mind that QIP will lead to increased base of equity shares... and to that extent could lead to some earnings dilution.

While following QIBs does not guarantee a gain, since the investors are experienced and sophisticated, a good demand for QIP suggests that they see value in the business at 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 weak demand for the issue. If there is a premium, it suggests confidence of institutional buyers at a given price in the business.

This does not mean that you should blindly follow these investors and buy such stocks. But it can indeed be a good starting point to select stocks. Especially in a scenario when markets correct. 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 FIIs paid during market downcycles.

Moving on to the stocks bit...

While there are quite a few companies that have raised money through QIPs in last 2 years, in this slide, I have shortlisted the names where the current stock price is lower than the price paid by QIBs, and where fundamentals look comfortable. I have avoided companies with high pledging and debt.

Please note that a negative number in the 5^th column suggests a discount. i.e weak demand for the QIP , while a positive number suggests a premium.

Please do not take this as a Buy or Sell suggestion. Like I said, this is just a tool or starting point and not a substitute of the research.

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Thank you for watching. Goodbye.