Gujarat Pipavav IPO confirms non-institutional demand is back

Gujarat Pipavav Port, the operator of a container and bulk cargo port on the west coast of India, has raised Rs5.08 billion ($107 million) from its initial public offering after fixing the price above the mid-point of the range.

The final price of Rs46 per share is also above the Rs45 per share that a group of anchor investors agreed to pay before the main bookbuilding started and means that those investors, which include DSP Blackrock, Goldman Sachs and the government of Singapore, will have to stump up more money than they initially planned. It is unusual that Indian IPOs price above the price indicated by the anchor investor process -- even if the deal is covered across the price range -- and the fact that Gujarat Pipavav chose to do so, is testament to the strong demand.

Overall, the issue was 19.9 times covered, with a healthy 13.2 times subscription ratio from qualified institutional investors. However, it was the portion set aside for non-institutional investors – primarily high-net-worth individuals and corporate treasuries – that really stood out in this offering. Accounting for 11.6% of the total deal, this portion was 85.7 times covered, suggesting confidence in market newcomers may be returning. Of the total non-institutional demand, 63.3% came from corporates, 36.5% from individuals and the remaining 0.2% from others.

The optimism was confirmed by the fact that retail investors subscribed for 9.2 times the shares earmarked for them. Demand from both retail investors and non-institutions has been thin in most IPOs and government sell-downs this year, with these portions frequently undersubscribed. The sentiment started to change with the SKS Microfinance IPO earlier this month, which ended with the non-institutional tranche 18.3 times covered and the retail tranche 2.2 times covered.

Contrary to SKS Microfinance, however, Gujarat Pipavav didn’t offer a discount on the IPO price for retail investors.

“A retail discount had become the norm as a way of getting retail investors to look at the deals, but sentiment has improved substantially and in the future I think it will be possible to get enough interest without it,” said one source, adding that most issuers also prefer to sell their shares to institutional investors, who can be expected to hold them for longer.

Bankers close to the offering cited several reasons for the optimism among non-institutional buyers, the most important being the fact that the past three to five IPOs (some of which were quite small) have performed relatively well and have stayed above issue price. But Gujarat Pipavav’s strong promoters, the good response from high-quality anchor investors and of course the belief that traffic at Indian ports will continue to increase in line with GDP were also key. The company is controlled by APM Terminals, one of the largest container terminal operators in the world and part of Denmark’s AP Moeller Maersk Group. APM Terminals held 57.9% before the IPO, but will see its stake fall to 42% as a result of the listing.

Meanwhile, the company sold the maximum 18% of the issue to 14 anchor investors, which aside from those already mentioned also included companies or funds run by India’s HDFC banks, the Monetary Authority of Singapore, Deutsche Bank, Credit Suisse and Axis bank.

The shift in sentiment bodes well for the number of Indian IPOs in the pipeline, including the high-profile government sell-down of Coal India in October, which is expected to raise about $3 billion.

Gujarat Pipavav offered approximately 110.4 million shares, of which about 89% were new shares. The remaining 11.7 million shares were sold by two pre-IPO shareholders, namely the Infrastructure Fund of India and the India Infrastructure Fund. In total, the deal accounted for just over 25% of the enlarged share capital.

The shares were offered in a range between Rs42 and Rs48 apiece. At the final price, the company is valued at about 2.4-2.7 times its post-issue book value, according to a number of India-based analysts. This puts it at a significant discount to Mundra Port and Special Economic Zone, which became the first private sector port operator in India to go public following a $450 million IPO in November 2008. Mundra, which aside from the port also owns a large parcel of land surrounding the port that has been developed into a special economic zone, is trading at a 2010 price-to-book value of more than 7 times.

The analysts agree that a discount to Mundra is warranted, given the larger scale of the latter, the additional revenues that Mundra receives from the SEZ and its greater profitability. However, they argue that the current discount is too wide and most recommended investors to buy Gujarat Pipavav for the long-term – at the low end of the price band.

“On the back of traction from rising global trade, rapid industrialisation in the state of Gujarat and the strategic location of the port, we believe rise in cargo handling and lower interest costs would prove to be a turnaround case for Gujarat Pipavav,” Anagram analyst Manjit Sheth wrote in a pre-IPO report. “Investors can subscribe to the issue with a long-term horizon.”

Kotak Mahindra Capital and IDFC Capital were the joint bookrunning lead managers.