Global Economics

Market Turmoil Takes its Toll on Indian IPOs


IRB Infrastructure Developers manages to buck the recent trend of failed initial public offerings, probably due to its reasonable valuation

IRB Infrastructure Developers has raised Rs9.45 billion ($240 million) from its initial public offering, making it something of a rarity in the Indian primary market these days when several other deals have been withdrawn due to poor demand.

Observers say the infrastructure theme was likely a key reason for the investor interest, but they also note that the IPO was priced at a reasonable valuation compared with its sector peers. When the deal closed on Tuesday last week, investors had asked for 4.3 times the number of shares on offer and according to data on the National Stock Exchange website it was fully covered at the top end of the price range.

However, in light of the current market situation—the benchmark Bombay Sensex index has fallen 16% over the past four weeks and remains highly volatile—IRB decided to fix the price at Rs185 per share, or at the bottom of the Rs185 to Rs220 price range. The company, which is primarily involved in the construction and operation of toll roads (on a Build, Operate, Transfer basis) but also has a relatively new real estate development business, offered 51.06 million shares, or 15.4% of its enlarged share capital. Deutsche Bank was the sole global coordinator and bookrunner, while Kotak Mahindra acted as the co-bookrunning lead manager.

By comparison, both Wockhardt Hospitals and property developer Emaar MGF Land had to call off their respective IPOs due to a lack of demand. The companies and their bookrunners tried to respond to the volatile market situation by lowering the initial price ranges and extending the offering periods, but in the end were unable to overcome the negative sentiment surrounding both the property and hospital sectors.

Wockhardt pulled its offering after the books closed on Thursday, and Emaar MGF, which is a joint venture between Dubai's Emaar Properties PJSC and India's MGF Development, followed suit on Friday even though its offer wasn't due to close until today.

According to official data, Emaar MGF made the decision to cancel after the subscription rate for its $1.37 billion to $1.64 billion offering fell to about 0.4 times on Friday from about 0.8 times on Thursday after a few international investors withdrew their orders. The deal, which would have been the second largest this year after Reliance Power's $3 billion offering, was also up against a significant sell-off of other major Indian property stocks, which seemingly made investors hesitant about the valuation. Over the past few weeks, DLF has fallen from a premium of about 70% to net asset value to around par, while Unitech has dropped from a 50% premium to par or even below, depending on which analyst forecast you trust.

Emaar MGF's short track record—it started commercial operations in India as recently as February 2005—the fact that it has yet to complete its first project and incurred a net operating loss in each of its first two fiscal years likely also made investors cautious about participating in the deal. While virtually everyone is positive about the outlook for the Indian property sector long-term, the listing candidate acknowledged in the preliminary listing document that it will receive limited revenues in the immediate future and as a result, the losses may continue in the short term. In the current volatile market environment, that made it quite a high-risk investment.

Before it kicked off the bookbuilding on February 1, Emaar MGF lowered the price range of its IPO to Rs540 to Rs630, having initially filed the offering with a range between Rs610 and Rs690. It then reduced the bottom end by a further Rs10 to Rs530 when it extended the end of the offering period by five days to February 11. Enam Securities, DSP Merrill Lynch, Citi, Goldman Sachs, HSBC, JPMorgan, Kotak Mahindra and ICICI Securities were the joint bookrunners.

Meanwhile, sources say Wockhardt, which is one of the largest private healthcare services providers in India based on number of hospital beds, failed to distance itself from the poor performance of fellow hospital operator Fortis Healthcare. Fortis listed in April last year and had only just managed to rise above its IPO price when the general market downturn began in January. After a tough couple of weeks it is now once again trading 25% below the IPO price. Wockhardt's subscription period was extended by two days from February 5 to 7 but its $143 million to $165 million offering was still only 0.2 times covered by the time it closed.

Wockhardt initially filed for an offering with an indicated price range of Rs280 to Rs310, but this was lowered by about 16% at the top end of the range and close to 20% at the bottom to Rs225 to Rs260 before the bookbuilding started on January 31. The deal was being arranged by Citi, Kotak Mahindra, ICICI Securities and SBI Capital Markets.

The differing outcomes of these three IPOs clearly show that investors have become more choosy both with regard to sectors and valuations and that the euphoria that surrounded Reliance Power's massively oversubscribed deal in mid-January is clearly gone. Retail investors in particular seem to have lost their nerve entirely. Even on the IRB Infrastructure offering, retail investors asked for slightly less than the 30% set aside for them, while the 60% available for qualified institutional bidders was 6.4 times covered. The non-institutional tranche, which goes primarily to corporate and high-net-worth individuals, was 1.6 times subscribed.

An important test of the investor sentiment will come today when Reliance Power starts trading. The greenfield power generator attracted a record $188 billion worth of orders and priced the deal at the top of the range at Rs450. However, a lot has happened since the offering closed on January 18 and this is the first Indian IPO of size to list this year, making the outcome extra uncertain.

It will be followed a week later by the debut of OnMobile, which raised $121 million in a deal that was close to 11 times covered and led by Deutsche Bank and ICICI Securities. The company, which provides value-added telecommunication software products and services targeted directly to subscribers, fixed the price of its offering at Rs440 per share—close to the top end of the Rs425 to Rs450 range.

IRB Infrastructure's trading debut is currently scheduled for Monday, February 25.

According to a source, the IRB Infrastructure IPO would have been valued at a 15%-20% discount to NAV (based on a sum-of-parts valuation) even at the top end of the price range, which made the bottom-end pricing quite attractive. Adding further to this, the company has a good chance of winning yet another large highway project from the government in the near-term. While IRB has yet to receive a formal letter of confirmation, it has been announced to be the highest bidder for the brownfield project which will involve widening the Surat to Dahisar section of National Highway 8 to six lanes from four. The construction is expected to take two to two and half years, but the company will have a right to 38% (and rising) of the toll revenues on the existing highway straight away.

The source notes that if confirmed, the Surat-Dahisar project will double the company's current construction order book, which amounted to Rs23.2 billion ($585 million) at the end of October last year.

The listing candidate bid for the new highway project together with Deutsche Bank, but according to the listing prospectus, IRB will hold at least 51% of the project if it comes off. Deutsche Bank is also a pre-IPO investor IRB Infrastructure itself, as is Goldman Sachs and Merrill Lynch.

The company is currently involved in 12 BOT highway projects, of which 11 are operational. The twelfth project is still under construction. As of the end of October last year, it had been responsible for the construction or operation and maintenance of approximately 1,200km of Indian highways and roads, including the Mumbai to Pune Expressway.

Meanwhile, its real estate arm is in the process of acquiring land in the Pune district for the development of an integrated township that will include both commercial and residential projects. Having only entered into the real estate business through the purchase of a 66% stake in Aryan Investments and Infrastructure in June last year, this will be the company's first property project. It currently has a reserve of 925 acres of land in the Pune district and intends to acquire an additional 475 acres for the proposed township project.


Steve Ballmer, Power Forward
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