A Gem Called J. M.

HDFC Bank is like a Bollywood release with top-billing on a Friday — anything to do with it and the counters get busy. When the bank opted for a Qualified Institutional Placement (QIP) in February 2015, it was a dual-tranche offering — a domestic portion of Rs 2,000 crore and an ADR component of Rs 8,000 crore. It kept the team at J. M. Financial on its toes since it had to work on getting domestic investors interested in the offering within severely crunched timelines.

When the issue finally sailed through, HDFC Bank’s QIP was priced at zero-discount to its then market price; and J. M. Financial had secured more than 30 per cent of the demand for the issue priced at Rs 1,067 per share. Its valuation of 4.1 times price-to-book value of fiscal’16 had topped the market’s average of 2.8 times book-value. Its deals with the HDFC Bank variety (and some more) made J. M. Financial the ‘QIP Dealmaker of the Year’ in BW I-banking Survey 2016 with the Knowledge Support of PwC.

How It Played The Game
At first glance, it might seem QIPs are a cakewalk — issuers have a well-established benchmark in place and investors are familiar with some of the big names involved. But QIP deals do not have the luxury of time. The process for such deals starts after market hours and close before the market opens the next day.

Says Atul Mehra, MD and co-CEO, investment bank­ing at J. M. Financial: “QIPs are more challenging as you need to proactively use research and institutional desks to reach out to investors both Indian and global, in a very short span of time to generate high quality demand.”

Companies that offer QIPs look to infuse cash into the businesses with the lowest possible discount to the current listed price. Also, the noise of the market can distort pricing. Says Mehra: “As a team, we have to be cautious that during the marketing process there is simultaneous trading going in the stock and noise around QIP launch should not affect the market price.”

QIP issuers also look for quality investors. For prospective investors, it has the ability to participate in an issue at a good price. When Bajaj Finance went in for its Rs 1,400-crore QIP in June 2015, J. M. Financial was the sole large banker to the deal and generated overwhelming demand of 2.5 times the offer. The deal cut ice with some long-only investors (GIC and Capital World, among others).

“As the market is made of different kinds of investors, getting the right mix of investors in an issue is also very critical for a successful completion of a transaction,” explains Mehta.

It’s been a tough job. Of the top QIP deal-makers, J. M. Financial managed five in calendar 2015, totalling Rs 13,079 crore, and generated the lion’s share of demand among all deals in a market (QIP) that actually shrunk from the year prior. Domestic QIP issues (24 in 2015) were worth around Rs 23,000 ($Rs 22,450 cr in 2014 in 34 deals), but while the number of QIPs went down from 2014, they still formed the bulk of the equity capital markets in 2015.

On average, the pricing of QIPs were at a discount of about 2.5 per cent to their traded prices. Says Adi Patel, MD and co-CEO, investment banking at J. M. Financial: “The added challenge for us is to market these deals at zero to a very nominal discount to the current market price. In an IPO there is no such challenge.”

QIP sales pitches too are different, as these offerings are not geared to retail investors or HNIs. But, as they are conducted very rapidly, the issue has to be explained to investors in advance, and pitches have to be well made.

Matching the right investors with a QIP can turn tricky as some investors are comfortable investing in certain sectors; others look for a good entry price.

J. M. Financial told us how it pulled it off in 2015. It promises to do more of the same.