US private equity group Carlyle has raised Rs13.54 billion ($270 million) from the sale of about a quarter of its stake in India’s Housing Development Financing Corp (HDFC). The block trade, which was led on a sole basis by Deutsche Bank, was completed late on Tuesday evening and is the first major equity transaction in the Indian market since L&T Finance Holdings raised $277 million from an initial public offering in late July.
In 2011 as a whole, only $8.6 billion of deals where completed in the Indian equity capital markets, according to Dealogic — a 66% drop from the year before. This may have contributed to the demand for the stock, even though the terms were tight and Carlyle’s remaining stake could become a bit of an overhang now that the firm has shown that it is intending to sell.
“Sentiment has improved a little with regard to India and accounts are looking to bottom-fish,” one source noted. “They are also chasing high-beta markets right now and India is a high-beta market.”
Indeed, after being one of the worst performing stock markets in Asia last year — the benchmark Sensex index lost 25% — it is the best performing so far this year with an 11.9% gain. This has caught the eye of investors who are looking to add more risk. The stock market got some additional support last week when the Indian central bank cut the cash reserve ratio for banks for the first time since 2009, signalling the beginning of a rate cut cycle to combat the wide-spread expectations that global economic growth will slow down this year.
If the market continues to recover, other financial sponsors can be expected to follow suit and take advantage of the share price gains through similar block trades over the next three to six months. We could even see a bit of a rush in the short-term if vendors start to worry that the current gains may not last. According to local media reports, Warburg Pincus yesterday offloaded a 2.4% stake in Kotak Mahindra through a separate block trade to raise about $170 million and a couple of weeks ago there were rumours in the market that the Government of Singapore Investment Corp (GIC) and Temasek were looking to reduce their investments in ICICI Bank.
Other potential sellers include Providence Private Equity, which in late July reduced its stake in mobile phone operator IDEA Cellular to about 7.4% from 9.9% through a $169 million transaction. Sources say it is expected to cut its stake further.
The majority of the buyers of HDFC stock in Tuesday’s placement were long-only global accounts that were already shareholders in the company, including quite a few US-based accounts. There was also a lot of interest from domestic funds. Hedge-funds were less keen, which is perhaps not too surprising since the shares were offered at a discount of just 3% versus the latest close — and that was after the stock had already gained 1.4% during the session. And since you cannot short-sell stocks in India, it is also both difficult and expensive to hedge an investment through a block trade.
However, according to a source, some hedge funds did participate in the transaction on an outright basis. Overall, about 30 accounts came into the deal.
The deal, which accounted for about 10 days’ worth of trading, comprised 20 million shares that were offered at a price between Rs676.90 and Rs697.85 apiece. At the bottom end of the range this translated into a 3% discount, while the top end was equal to Tuesday’s closing price on the National Stock Exchange of India. The price was fixed almost at the bottom, at Rs677 per share, which seems to have been primarily due to a desire to round the price up to an even number. In dollar terms, this would have made little difference for investors.
The deal accounted for about 1.4% of HDFC’s outstanding share capital and reduced Carlyle’s stake to just below 3.9% from 5.2%. Its remaining 57 million shares will be locked up for three months.
The fact that Carlyle was selling came as no big surprise to the market as it made most of its investment in HDFC in 2007 and financial sponsors tend not to hold their investments for more than three to five years. This is the first sale of HDFC stock by Carlyle since it became a shareholder and during that time the share price has gained significantly, making this a highly profitable deal for the firm.
HDFC’s share price did drop down to the placement price in intraday trading yesterday, but recovered to finish just 1.3% lower at Rs688.90 — an indication that the Carlyle shares were placed with investors who weren’t just in it for the short-term gains.
