FIIs’ investment in QIPs exceeds secondary market purchases

FIIs’ investment in QIPs exceeds secondary market purchases
The Hindu Business Line, July 20, 2009, Page 1

Interest in realty sector drives investments.

BL Research Bureau

Chennai, July 19 Foreign institutional investors may have poured more money into Qualified Institutional Placements (QIPs) of companies than into the secondary markets, over the past two months.

While QIP offers have raked in Rs 11,900 crore since May, net FII purchases of Indian stocks stand at just Rs 9,500 crore in the same period, according to turnover data from the stock exchanges. What is more, the bulk of QIP money was raised in June and July, a time when FIIs turned net sellers of stocks in the secondary markets.

So what drew institutional investors to the select set of companies issuing QIPs, even as they grew more wary of the Indian stock market? Market players advance reasons ranging from a fancy for the Indian realty sector to the prospect of short-term gains, to explain this preference.

Realty recovery

Realty companies − prominent among them Indiabulls Real Estate, Unitech and Housing Development & Infrastructure Ltd (HDIL) − have together soaked up nearly two-thirds of the above sums raised through QIPs. “Investors see latent demand in the Indian realty sector. There may have been a temporary slowdown; but there is confidence that demand will revive at the right price,” explains one fund manager.

Mr A. Balasubramanian, Chief Information Officer of Birla Sun Life Mutual Fund, believes that the outlook for the realty sector has improved after the slump last year. “There have been signs of residential demand picking up in recent months. In Mumbai for instance, wherever developers have significantly reduced prices, the projects have been sold out quickly,” he says.

However, he believes that the appetite for QIPs has been quite selective. Offers priced at or below prevailing market prices have sailed through, while others have struggled.

But why did institutional investors choose to buy these stocks after such a big run-up in their valuations? One explanation is that investors hoped for some quick gains from significant sops to the infrastructure and housing sectors in the Budget. This is supported by the fact that bulk of the issues were made before July 6 (Budget day).

Hedging their bets?

Other market players assert that the rush for QIPs was driven largely by short-term considerations. The Head of Financial Services with a consulting firm, who did not wish to be named, confided that some QIP investors hedged their bets by taking short positions in the issuers’ stock even as they bought into the offers. Reiterating this point, the Chief Executive Officer of an investment bank points to the selling pressure on some of the stocks immediately after the offers closed.

A recent Credit Rating and Information Services of India Ltd (Crisil) study pointed out that 75 per cent of the QIPs made this year have delivered negative returns to their investors. Stocks of some of the QIP issuers such as Bajaj Hindustan or Network 18 have steadily lost ground from the day the offer closed and now trade over 20 per cent below the offer price.

These market players believe that the record mop-ups by QIPs are not an indication of long-term FII interest in the India story.

“Let us wait for the large initial public offerings (IPOs) that are set to hit the market later this month. It is the response to these offers which will signal genuine investor appetite,” says one fund manager.