Sucheta Dalal :QIPs not a long-term solution for realty says CRISIL
Sucheta Dalal

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QIPs not a long-term solution for realty says CRISIL  

October 13, 2009

Ratings agency CRISIL has said that qualified institutional placement (QIP) issues may have solved the short-term concerns of the real estate sector, but the fundamental errors made in comprehending the principles of the business cycle require urgent and immediate appraisal.

In a report on the QIP issues, the Standard & Poor's unit said the QIPs have improved the liquidity situation of developers and have reduced their gearing while the qualified institutional buyers (QIBs) have also made handsome profits on their investments. However, as demand continues to be significantly below peak levels, valuations for the sector look stretched.

CRISIL said QIPs have helped the industry at large, and a few developers in particular, to come out of severe liquidity troubles, thus enhancing the overall outlook, but the greater need of the hour is the analysis of the reasons that culminated in the liquidity crisis and the blatant disregard for the principles of business cycle displayed by overambitious developers.

The QIP route should not be considered a fund-raising tool, but as the last and undesirable alternative to internal accruals. Nevertheless, as of now, QIPs have helped to grant a significant and much needed, albeit short-term, respite to the real estate industry, CRISIL added.

In majority of recent QIP issues, the amount raised has been used to repay debt, as most developers were being pressurised greatly by banks and institutions to repay their short-term borrowings. Thus, the funds helped them reduce the short-term liquidity pressures, the report said.

Till mid-August 2009, four real estate players have raised funds through QIP- Unitech (two issues), Indiabulls Real Estate, HDIL and Sobha Developers. The promoters of DLF Ltd also offloaded some part of their stake to QIBs, but not through QIP, as the existing equity was diluted and no fresh issues were made.

It said QIPs help developers to enjoy better short-term liquidity position but it comes at the cost of stake dilution, as few investors would gain the ability to influence stock prices.

During the slowdown, dip in sales along with the liquidity crunch forced developers to raise funds by any means to repay debts, maintain focus on long-term plans and to sustain the capital values. And, given the rather tough situation, CRISIL said it believes QIPs have been more beneficial than otherwise to developers.

Post QIP issuances, valuations of major real estate developers have improved significantly. Profit/Earnings (P/E) multiples (based on March-09 earnings per share or EPS) have improved as a result of both sharp rise in equity prices and decline in EPS due to fresh equity issue. In fact, the P/E of a few companies almost bounded to the peaks witnessed during March 2008, due to increasing future expectations. However, the ratings agency has cautioned that the outlook for demand is certainly not as strong as compared with the past.
-Yogesh Sapkale [email protected]

-- Sucheta Dalal