Citi last night trimmed its stake in India’s Housing Development Finance Corp (HDFC) through the sale of a small self-led block that was well received despite the continued pressure on Asian equity markets.
HDFC, which provides mortgages to individuals and companies as well as construction finance to real estate developers, is viewed as one of India’s top blue-chip companies and, according to a source, investors are quite happy to own it at current price levels. Analysts have reported a sudden rise in interest in the stock among institutional investors in the past few sessions and the deal was said to have found buyers both among high-quality domestic long-only investors, including the big insurance companies, and among some of its existing shareholders based in the US.
This allowed the price to be fixed towards the top end of the offering range at Rs641 per share for a total deal size of Rs10.58 billion ($236.5 million). The shares were initially offered in a range between Rs625 and Rs644 each, which corresponded to a discount between 2.0% and 4.9% versus yesterday’s close of Rs657 on the National Stock Exchange of India. The final price resulted in a discount of 2.4%.
The deal, which comprised 16.5 million shares, was quite small in relative terms, accounting for only 1.4% of the existing share capital and approximately 10 days worth of daily trading volume, based on the activity in the past month. But in terms of keeping the discount tight, it probably also helped that Citi said it was selling the shares, not just to take profit, but as part of efforts to reduce its risk levels ahead of the adoption of Basel III. The proposed guidelines discourage large holdings by banks in other financial institutions and Citi said its intention was to reduce its stake in HDFC below 10%.
Citi first appeared on HDFC’s shareholding roster in the 2005-2006 fiscal year and by mid-2006 it had accumulated a stake of 9.3% to become the company’s largest shareholder. It will retain that position after last night’s sale, which will trim its combined stake to approximately 9.9% from 11.34%. The rest of the shares, which are held through two separate entities — Citigroup Holdings Mauritius and Citigroup Strategic Holdings Mauritius — will be locked up for 90 days.
Although the sale was small relative to Citi’s total holdings, the US bank would have made a decent profit from the divestment. According to share price data on the NSE website, and adjusted for a five-for-one stock split in August last year, HDFC has risen about 195% since the end of June 2006.
The share price gained 0.8% yesterday after falling in six of the previous seven sessions and is currently trading 13.6% below its 2011 closing high of Rs760.35, which it hit in April.
The source said the initial response to the deal was slower than usual for a block trade, but the momentum gradually picked up and when the order books closed after about three and a half hours (except for a few US accounts who wanted more time), the deal was approaching three times covered. As with most accelerated bookbuild transactions in India, the shares could be placed with a maximum of 49 accounts.
As noted, most of the shares went to long-only investors. Hedge funds were not that interested, which is perhaps not too surprising given the ongoing volatility and uncertainty about the short-term direction of global equity markets. With a 10.9% decline in the benchmark Sensex index year-to-date, India is the second worst performing market in Asia behind Shenzhen.
The poor performance in the secondary market is also weighing on the primary market with total ECM volumes down 49% so far this year at only $7.8 billion. The number of deals is down 40% to 55, according to Dealogic. Follow-ons, including blocks, accounted for 81.2% of the total ECM volumes before the HDFC transaction, which is significantly above 65.4% in the same period last year. This suggests that while IPOs remain challenging, issuers and vendors who can move quickly to grab the windows of opportunity as they open up are still able to close deals.
