The Fundraising in these Stocks Deserves Your Attention

Just recently I wrote to my subscribers about an SME IPO, that witnessed 400x subscription.

The underlying business is two Yamaha showrooms.

The grey market premium was upto 89%. The stock listed flat and has been crashing since.

You would expect investors to be cautious and more mindful of the businesses they are bidding for in IPOs.

But no. As I write this, another SME IPO of a packaging company, is in news for 135 times subscription. Bids worth over Rs 10 bn have been received on an issue size of Rs 80 m. The physical infrastructure shows a dilapidated building.

It's amusing and sad.

The essence of what's happening in this segment is well captured by Jaspal Bhatti, a man ahead of his times, who made a satire on the topic - dressing up a golgappa business to make it palatable to desparate investors hoping to strike it big in the IPO market.

As an experienced and cautious individual, I choose to avoid most IPOs.

However, there are other kinds of fund raising activities that have piqued my interest.

In a recent editorial, I wrote to you about QIPs, or qualified institutional placement.

In case you missed it, you could watch it here.

Today, I'm going to discuss another fundraising activity I believe you should keep a tab on: Preferential allotments.

Like QIPs, it entails less cost and is also a less time consuming way to raise money through an issue of equity or convertible securities to select investors.

The purpose of raising money could be to fund growth or bring down leverage.

It could also help a company bring in strategic partners or smart investors that can offer insights into the business. Even promoters could participate in it.

Unlike an IPO where the existing promoter might be offering his shares for sale, quite a few preferential allotments see good participation by promoters. That is, promoters choose to infuse their personal money in the business.

To put it simply, they further add skin in the game or raise their stake in the business. Such stakes are subject to a lock in period.

The issue price is as per regulatory guidelines, based on the price history in the preceding weeks.

Companies like Sky Gold, Venus Pipes, SJS Enterprises, Affle, Ritco Logistics, RPSG Ventures, Dynamic Cables, Capacite Infraprojects etc have come up with such issues delivering healthy returns.

I'm specifically interested in the businesses where promoters have participated in the preferential issue and where the current stock price is at a discount or closer to the issue price.

So let's discuss some candidates that meet these conditions.

The first is WS Industries where both promoters and non promoters are interested. The minimum issue price is Rs 149 for proposed issue versus a current price of Rs 161. The amount to be raised is Rs 954 m, through equities and warrants.

The company is an infra EPC player that has been associated with projects such as stormwater drain systems in Kovalam, bus terminals in Tamil Nadu, and rural electrification.

The purpose of the fund raise is investment in real estate for setting up warehousing, logistics & industrial park projects, light engineering, electronic factories, and new acquisitions.

Its return ratios stand at 25.2% (ROCE) and 46.9% (ROE). The debt to equity stands at 0.5 times. The stock is trading at a PE of 20.6.

The second is UGRO Capital, a technology enabled small business lending platform with price to book value of 1.51.

The amount to be raised is Rs 13 bn with minimum issue price at Rs 264. The current stock price is Rs 234. The purpose of the fund raise is loan portfolio growth, repayment of debt, and general purposes.

The third is Gensol. The amount to be raised is Rs 9 bn with minimum issue price of Rs 871. The current stock price is Rs 952. The company is in the business of solar consulting and EPC.

The purpose of fund raise is to meet working capital needs and investment in subsidiaries. The stock is trading at a PE ratio of 62 and PEG ratio i.e., price earnings to growth of 1.2.

No view is implied on any of these stocks in this article.

That said, I believe the list of preferential issues where promoters participate could be a good starting point to make a watchlist.

For more such updates, subscribe to Profit Hunter.

Warm regards,


Richa Agarwal
Editor and Research Analyst, Hidden Treasure
Equitymaster Research Private Limited (formerly Equitymaster Agora Research Private Limited) (Research Analyst)