A specialist provider of IT services to the telecom industry, Tech Mahindra is expected to double its profit growth in coming years, which means it is perhaps not strange that this was the company investors chose for their return to the market. The company's connection with respected conglomerate Mahindra & Mahindra, also helped.
When the bookbuilding closed at the end of business Friday the order book (excluding shares set aside for company employees) was 78.7 times covered, according to people familiar with the offer, which makes it the most sought after new listing this year in terms of subscription ratios. Reliance PetroleumÆs $582 million IPO, which was completed in late April was just over 51 times covered.
With almost all of the orders placed at the top end of the price range, Tech Mahindra was also able to raise the maximum Rs4.65 billion ($100 million) it sought from the ABN AMRO Rothschild and Kotak Mahindra-led offering.
According to sources, the shares were priced at the top of the Rs315 and Rs365 per share indicative range, which values the company at 12.5-12.9 times its earnings for fiscal 2007, depending on which forecast one uses. Other companies in the same sector have come down a bit during the roadshow, reducing Tech MahindraÆs discount slightly. The final price was at ôroughly the same multipleö where similarly sized Patni Computer was trading at the time of pricing, one source notes.
Larger sector peers Infosys Technologies, Tata Consultancy Services, Wipro and HCL Technologies still trade at fiscal 2007 earnings multiples ranging in the low 20s, but none of them are specialising on one industry like Tech Mahindra.
In fiscal 2006, which ended on March 31, Tech Mahindra posted a 130% jump in net profit to Rs2.35 billion ($50 million), following a 61% net profit increase in the previous fiscal year. Based on the syndicate forecasts, the bottom line will grow by close to 50% to $74 million in the current fiscal year.
Observers also argue that the high oversubscription ratio and the general improvement in the Indian stock market make it likely that Tech Mahindra will trade up when it debuts on August 23. If that happens it will not only increase its valuation multiples, but could provide a boost to the entire Indian IPO market where most of this yearÆs newcomers are currently trading below issue price after suffering with the rest of the market during the correction in May and June.
Most of the demand came from institutional investors, in particularly internationally-based ones, who asked for close to 104 times the 6.95 million shares set aside for them (equal to 54.5% of the total issue). Corporates and high-net worth individuals ordered more than 140 times their 1.16 million share portion, while retail investors remained the most cautious, subscribing to about 7.7 times the 3.48 million shares (27.3% of the total) earmarked for them.
In total, the deal drew $7.9 billion worth of demand with some investors said to have put in individual orders that were larger than the entire issue size û in some cases even twice that. The great majority of the orders were placed on the very last day, which is common in the Indian market where both retail and institutional investors have to put down a deposit together with their orders.
Still, the pickup was quite remarkable with the 116 million shares ordered at the end of the second to last day, multiplying to 918 million shares when the book closed.
Tech Mahindra, which was founded as a joint venture between Mahindra & Mahindra and British Telecommunications in 1986, offered a total of 12.75 million shares, or 11% of its enlarged share capital. Of the total, the two controlling shareholders sold 9.6 million shares with BT providing 60% and M&M the other 40%. The remaining 3.8 million shares were new shares issued by the company to raise funds to improve its delivery infrastructure.
The strong interest in IPOs wasnÆt universal, however, as a larger share offer by GMR Infrastructure that was also in the market last week attracted a subscription ratio of only 6.7 times. That issue, which was looking to raise up to $204 million, also saw a lot more price sensitivity with about half of the shares on offer being ordered in the lower end of the Rs210 to Rs250 price range, making it less certain where it will price.
The book was almost three times covered at the top end, while qualified institutional bidders asked for just under 11 times the shares available to them. The final price is due to be determined today.
ôGMR is a story sold on a DCF valuation method, which will see significant growth only from 2008. Tech Mahindra on the other hand is churning out good profits now and that was more interesting to investors,ö says one observer.
GMR is active within construction and operation of power plants and roads, but has recently also been awarded the contract for a new airport at Hyderabad û due to start commercial operations in the first quarter 2008 - as well as a redevelopment and operating contract for the New Delhi airport. Together with an expansion of its current power business, these are expected to be the key drivers of its future growth.
DSP Merrill, Enam Financial Consultants, JM Morgan Stanley and SSKI Corporate Finance are leading the GMR issue.
M&M will still hold 46.41% of Tech Mahindra after the IPO, while BT will hold 32.55%. A company named Mahindra-BT Investment Co, which is also part of the promoter group, will have 8.57% and employees of the company 1.47%
As of the close of trading Friday, the benchmark Bombay Sensex index û while still very volatile - had recovered just over half of the 29.5% loss it suffered between May 11 and the bottom of the correction on June 14 when it ended at 8,929 points. At FridayÆs 10,866 points, it is still off 14% from the record close of 12,671 points on May 11, however, and bankers say many issuers are still unwilling to come to market as they feel share prices are too low compared with those earlier levels.
ôBut this issue shows that there is still a lot of liquidity floating around for the right issue at the right price,ö says one observer.
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