Unlisted firms on investors' radar

Brokers buy stock options from employees of companies planning IPOs.

With the markets on a high, a few investors and brokers are fancying their chances in the unlisted space. Brokers are scouting for companies likely to go public in the near future and have a large number of employees sitting on stock options.

The modus operandi is simple and legal. Brokers and investors first identify companies that are likely to come out with initial public offerings (IPOs) in the future. Thereafter, they enquire about the small fraction of shareholding available with the employees or may be other investors. The share transfer is done with proper contract notes.

Take the instance of Tata Technologies. The shares of the Pune-based Tata Group company, which is into engineering & information technology services, enterprise technology solutions and product distribution & support, are being traded among a group of investors in the unlisted space. The shares, mostly available in the physical form, are changing hands around Rs 450 per share.

Sunil Chandak, a veteran in this field, has been buying Tata Technologies for himself and his close group of investors for quite some time. “Tata Technologies is a subsidiary of Tata Motors and is into high-end automation and designing. Fundamentally, it is a very sound company, with high growth potential. The IPO is expected next year,” he says.

Sesa Industries, an unlisted subsidiary of Sesa Goa, is also witnessing steady growth in the number of investors eyeing its shares. The company is in the midst of being merged with Sesa Goa. The court verdict on the scheme of amalgamation is expected soon. The swap ratio has been fixed at one share of Sesa Goa for every five shares of Sesa Industries.

Future Ventures, which has already filed the draft prospectus for an IPO to raise Rs 750 crore, has also seen a significant number of its shares being traded in the recent past at an average price of Rs 16-17. In this case, investors have bought shares from some entities that were allotted these at par during the early days of the company.

Such investors, especially high networth individuals, also remain on the lookout for companies which are listed on regional stock exchanges (RSEs) and planning to list either on the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE). Listing on the two national exchanges increases visibility, attracting investors in larger numbers.

Government-owned Orissa Minerals Development Company (OMDC) is one such example. The share price of the company, which was listed on the Calcutta Stock Exchange, was around Rs 22,000 before it made its entry on NSE and BSE in August. On Thursday, it closed at Rs 71,000 on NSE.

“OMDC has proved to be a multibagger in just around a year,” says Deepak Mehta, an independent investor. “OMDC, trading between Rs 20,000 and Rs 22,000 a share till a few months back, got listed on BSE and NSE and has been steadily rising since. Prior to OMDC, I had invested in Oil India and Tanla Solutions, and that too proved fruitful. The last few picks from the unlisted space have been good,” says Mehta, who has been investing in unlisted shares for the last few years.

Jitendra Agarwal, an independent analyst, has also been in this business for quite some time. He is buying Metals and Scrap Trading Corporation of India (MSTC), a Mini Ratna Category - I entity. “MSTC is a profit-making public sector unit, with an equity of just 22 million and a reserve of over Rs 400 crore. The last year earnings per share was Rs 391.

The government recently announced that all minerals have to be sold through the e-auction route. MSTC is likely to be a big beneficiary,” says Agarwal. According to him, MSTC is trading around Rs 4,000 a share.

In another instance, Hindustan Vidyut, a company listed on the Delhi Stock Exchange (DSE), has seen an increase in the quantum of trading. The shares, available in the range of Rs 1,400 to Rs 1,500, are rising on the back of the government’s thrust on divestment.

Some other notable unlisted companies which have seen hectic trading in the recent past include Metals and Scrap Trading Corporation of India (MSTC), TCS Eserve, Mohan Meakins, Raj Travels, Nandan Biomatrix, Pilani Investments and Sistema Shyam Teleservices. Shares of exchanges like BSE and DSE have also seen significant trading in the recent past, say brokers.

Experts, however, caution against the pitfalls in this space due to absence of research notes and media reports about corporate actions. “The risk in the unlisted space is higher, but we invest only after a detailed research,” says Mehta. “It is a game of patience. The shares are locked in for a year after the IPO, but the profits are generally worth the wait. We look for stocks with deep value.”