In today’s Finshots, we explain why QIPs are hitting record highs in 2024 and how one sector could be driving this boom.

The Story

Imagine this. You run a real estate company, and things are looking up. Buyers are on the hunt, but you’ve got a problem. You’re short on homes to sell, and expansion is on your mind. But expansion needs capital. The bank loan you’re considering comes with high interest rates that would eat into your profits. An IPO? Already done that. So, what do you do next?

Well, there are still a few options left. You could go for a follow-on public offer (FPO) and raise more funds from the general public. But perhaps the quickest and least cumbersome route would be something called Qualified Institutional Placement or QIP.

What’s that, you ask?

Well, simply put, QIP is a smart way for listed companies to raise money by selling shares directly to institutional investors like mutual funds, venture capital firms and insurance companies. So, unlike a traditional IPO, where shares are sold to the general public, a QIP targets only Qualified Institutional Buyers (QIBs) — the big players in the market. Think of it like throwing an exclusive VIP party. No long-winded public offerings, no massive paperwork and no need for regulatory approvals that stretch on forever.

And QIPs are having their moment in the sun right now.

A record-breaking 71 companies have raised over ₹88,600 crores from QIPs in (calendar year) 2024 so far.¹ Not only is that number huge, but it’s also an outlier if you compare it with the QIP track record for the past few years.

This shouldn’t come as a surprise as QIPs tend to thrive when markets are on the upswing. That’s because when stock prices soar in a bullish market, companies can issue fewer shares and still raise significant amounts of money. Compare that to a bearish market where stock prices are under pressure, and you’ll see why it’s more efficient.

Fewer shares also mean less dilution for existing shareholders. In other words, companies get the cash they need while shareholders get to keep a larger slice of the pie. It’s a win-win for everyone.

And 2024 has been all of that, and more. The Indian equity markets have been on a roll, buoyed by strong foreign fund inflows and growing domestic investments.

And that explains why many companies are turning to QIPs to quickly raise funds in this market.

But perhaps what’s interesting this time is that the real estate sector in India is the star of this QIP bonanza.

In Q3 of (calendar year) 2024, the real estate sector was on fire, striking 25 fund-raising deals that raked in a hefty $1.4 billion.² But what really stood out were the QIPs. Just 4 of these deals alone brought in a whopping $940 million. That’s not just impressive, it’s a six-fold jump from what the sector managed with QIPs in the previous quarter.

So, why the sudden scramble for cash?

It’s simple. Real estate is a capital-hungry business. Developers need heaps of funds to buy land, secure permits and get those construction projects rolling.

But here’s the catch. Many real estate companies are sitting on unsold inventory, dragging down their returns on equity (ROE). Just look at big names like Godrej Properties, DLF and Brigade Enterprises. Their 10-year average ROEs are stuck in the single digits, hovering between 3% to 7%. That’s a far cry from the golden era of 2004 to 2009 when real estate ROEs soared past 50%.³

So then what are they doing with all the QIP money now?

Well, they’re diving into high-demand segments, like senior living projects. Non-metro cities are seeing a massive uptick in interest, with demand expected to triple over the next 4-5 years. Take Prestige Estates, for instance. They’ve raised a massive ₹5,000 crores through a QIP, and they’re also going full throttle with senior living developments to cash in on the booming market.⁴

Not just that. Commercial real estate is making a comeback too. Co-working spaces are in high demand, and REITs (Real Estate Investment Trusts) are gaining serious traction. Investors are keen to dip their toes into real estate without owning physical property, making REITs the perfect entry point.

Oh, and if you’re following the stock market, you’ll know that the BSE Realty Index has shot up over 30% this year, outpacing the SENSEX’s 12% returns. And as we just saw, higher valuations mean companies can raise funds while diluting fewer shares. Another win.

Sounds great for the real estate sector, right? But for investors like you and me, QIPs could be a double-edged sword.

On one hand, it signals that a company is optimistic about its growth prospects and is raising capital to fuel that growth. That’s typically a good sign for future stock valuations.

But, on the flip side, issuing new shares can still dilute the value of existing shares in the short term because more shares in the market mean each one represents a smaller chunk of the company.

And just like in other types of fundraising like IPOs, the “why” behind the QIP is crucial.

If a company is using those funds to expand, launch new projects or drive future profitability, it’s typically a smart move. But if the money’s going towards paying off mounting debt without a clear growth plan in sight, that’s when alarm bells should ring. Knowing the endgame is key.

There’s also the question of valuation. Companies often issue QIP shares at a discount to the market price to attract institutional investors, which can cause some short-term volatility in stock prices. But if the company’s long-term growth prospects are solid, the stock price usually recovers.

And don’t forget the promoters. QIPs can also be a way for promoters to quietly reduce their stake in a company without rattling the market. This isn’t always a bad thing. But it’s worth keeping an eye on because if promoters are selling shares, it could be a sign that they’re not as bullish as before in the near term.

So, here’s something interesting to consider. Look at how QIPs from big real estate companies are impacting the industries that support the sector. When real estate companies raise funds for growth, that money doesn’t just stay with them. It flows into the entire ecosystem — industries like construction materials, sustainable building solutions, kitchens and bathware, to name a few. In simple terms, if real estate is booming, these supporting industries are likely to benefit as well. So, it might be worth paying attention to these proxy companies that stand to gain from the rising real estate tide.

So yeah, that’s the long and short of why we’re seeing a lot of QIPs in the markets. They’re giving real estate, as well as other companies the lifeline they need to fuel growth and manage debt.

But the story doesn’t end there because there’s more to it than just raising cash. You’ve got to dig deeper. Take a close look at the company’s financial health, its growth plans and how it’s putting those QIP proceeds to use.

Keep an eye on those key ratios — price-to-earnings (P/E) and debt-to-equity. If the P/E ratio doesn’t quite match up with the company’s earnings, you might want to hold off. And a high debt-to-equity ratio? That could be a red flag, with interest payments potentially eating into profits.

But in a bullish market like 2024, QIPs are more than just a way to raise quick cash. They’re a sign of a company’s confidence in its future. And for the markets, it offers a glimpse into where the capital is flowing and where new growth opportunities are emerging.

So, whether you’re betting on real estate, India’s capex boom or just watching from the sidelines, QIPs are definitely worth your attention.

Until next time…

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Story Sources: Business Standard [1], Economic Times [2][4], Equitymaster [3]

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