Power Finance Corp (PFC), an Indian government-controlled company that provides financing and advisory services for power projects, has sold approximately Rs45.8 billion ($1 billion) worth of shares after pricing its follow-on public offering at the top end of the range.
The deal will result in about $250 million of gross proceeds for the government, which sold a 5% stake as part of the offering. The rest of the shares were new. Including the dilution, the government’s stake will fall to 73.7% from 89.8%.
The offering was pretty well received, despite a renewed sell-off in financial stocks since early April amid concerns about rising interest rates and the fact that investors have lost money on recent offerings that have traded poorly in the secondary market. However, PFC’s strong market position and its government ownership made investors overlook those issues and the deal was 4.3 times covered when the four-day bookbuilding closed last Friday.
Qualified institutional buyers ordered 6.9 times the amount of shares targeted at them and the retail and high-net-worth tranches were both fully covered — an encouraging sign for a follow-on offering, which don’t typically offer the kind of first-day share-price pop that attracts retail investors to initial public offerings (although, lately, they haven’t seen many of these pops on IPOs either).
The retail tranche accounted for 35% of the net offering (after taking out the 0.12% portion reserved for company employees) and was two times covered. The non-institutional tranche, which primarily targets high-net-worth individuals, accounted for 15% and was 1.2 times covered. The remaining 50% went to QIBs.
Including the employee portion, the deal accounted for 17.4% of the enlarged share capital and comprised 229.6 million shares, of which 75% were new. The rest were secondary and came from the state’s sell-down. The government has set itself a target to raise Rs400 billion ($8.75 billion) from the divestment of state-owned companies in the financial year that ends March 31, 2012. Other planned sales include a stake worth about $2.5 billion in Oil & Natural Gas Corp (ONGC) and a $1.4 billion piece of Steel Authority of India (known by bankers as Sail).
FPC will use the money from the new share sale to increase its capital base to comply with capital adequacy requirements and to meet future capital needs as the business continues to grow.
The shares were offered in a range between Rs193 and Rs203 and, with no sign of price sensitivity in the order book, the final price was set at the top. The price was flagged over the weekend after the company’s board of directors took the decision to recommend the maximum price to the government and confirmed by the government after the market closed yesterday. Retail investors will get their shares at a 5% discount, or at a price of Rs192.85.
The price represents a 5.3% discount versus the closing price of Rs214.45 on May 6, just before the price range was announced, which, according to a source, was the tightest discount on any widely distributed government divestment in the past two years. The share price dipped to Rs210.95 on the first day after the announcement of the range and remained quite volatile during the bookbuilding, but gained slightly over the week as a whole. As a result, the discount versus the latest close at the time of pricing was a slightly wider at 6%. The share price also gained another 0.9% to Rs217.75 yesterday.
However, FPC’s share price has fallen 43% from its high of Rs380.60 in mid-October last year, while the benchmark Sensex index has come down only about 9% in the same period. FPC has underperformed together with other financial stocks; its closest competitor, Rural Electrification Corp, has slid 45% from its October high, which it reached a couple of days after FPC. REC too is a government-controlled company that provides financing to various transmission, distribution and generation projects in the power sector.
A key reason for the share price drop is the surge in both the headline and core inflation rates since the fourth quarter of last year, which has resulted in a more aggressive monetary policy approach by the central bank. In its monetary policy statement for 2011-12 that was published on May 3, the Reserve Bank of India said that the current elevated rates of inflation — headline inflation reached 9% on an annual basis in March — pose “significant risks to future growth” and bringing them down, even at the cost of some growth in the short-run, will be a priority. The statement was accompanied by a larger-than-expected 50bp hike in the repo rate to 7.25%. The central bank has increased the repo rate nine times since March last year and economists believe more hikes will follow in the next couple of quarters.
In its offering prospectus, FPC noted that “volatility in interest rates affects [its] lending operations and may result in a decline in [its] interest income and net interest margin and adversely affect [its] return on assets and profitability”. Interest income from its lending operations contributed just over 96% of total income both in fiscal 2010 and in the nine months to December 2010.
One source noted that given the headwinds, any other financial stock might have waited a few weeks or even months before launching a deal, but the government wanted to get on with its divestment programme and the bookrunners obviously felt there was enough demand to get a deal done.
With regard to ONGC and Sail, bankers say there is appetite in the market for standalone oil and gas stories, while Sail might be a more difficult sell. According to a government press statement, Sail will be the first of the two and is currently planned to hit the market in June, with ONGC following in July.
Unfortunately there appears to be a mismatch between supply and demand when it comes to new share issues and follow-ons in India at the moment — especially with regard to large deals. While investors are still happy to buy oil and gas, select commodities, consumer stocks, pharmaceuticals, healthcare and select financials, most of the new supply in India is in the infrastructure sector.
The source noted that investors have been buying into the story that cashflows will come in two or five years, but two years have already passed and there is still no visibility, necessary policies are not being implemented and mines are not being cleared by the ministries. As a result, infrastructure, power and utility stocks have taken a beating in the past six to 12 months.
“There is a general slackness in the infrastructure sector, which is keeping people away from this space,” he said.
The FPC transaction was lead managed by Bank of America Merrill Lynch, Goldman Sachs, ICICI and JM Financial.
