Essar Oil sell-down raises $95 million

An undisclosed institutional investor has raised Rs4.5 billion ($95 million) from the sale of shares in Essar Oil. The placement, which was completed yesterday morning Hong Kong time, continues the trend of Indian companies and investors taking advantage of the post-election sentiment to tap the markets.

A total of 30 million shares were on offer at a price between Rs150 and Rs156 apiece, which translates into a discount range of 10.4% to 13.8% versus Monday's closing price on the National Stock Exchange of Rs172.85. The CIti-led deal was priced at the bottom of the indicative range, at Rs150 per share, for the maximum 13.8% discount. At the close of trading yesterday, the share price had traded down marginally to Rs169.

There was an upsize option, which could have brought another 20 million shares into the deal, but with price sensitivity around the bottom of the range, the seller decided to keep its remaining stock. The investor is subject to a 30-day lock-up on the remaining shares.

The book was open for less than three hours on Monday night and closed two-times covered before the US markets opened. More than 20 investors participated in the deal: a mix of long-only funds, hedge funds, and local mutual funds. Most of the demand came from Indian and other Asian accounts, while there was some interest from global investors.

Essar Oil is part of Essar Global, a diversified corporation with interests in steel, energy, communications and shipping. The oil subsidiary has a refinery on the west coast of India and over 1,000 petrol stations across the country. It has plans to increase its exploration activity and refinery capacity and aims to open another 5,000 retail outlets.

In the fourth quarter of the financial year that ended March 31, revenues fell 19.1% quarter-on-quarter to Rs68 billion "driven by lower realisations following falls in crude oil and product prices across the globe", according to a research note released by India Infoline Research recently.

Essar Oil's share price gained 5.8% on the trading day after the fourth-quarter earnings release in mid-May, but this probably had more to do with the news, which had broken a few days earlier, that the Congress Party had won a second consecutive term in office. In the week following the election results, Essar Oil's shares went up by 23.2%, returning to levels not seen since September.

India's Congress Party won almost enough seats for an outright majority and the prospect of five years of stable government brought confidence back to the markets. As a result, May was the best performing month for the benchmark Sensex index since April 1992.

According to a Morgan Stanley research note, the May rally was broad-based with small- and mid-market capitalisation companies outperforming large caps. Industrials was the best-performing sector, while consumer staples was the sector that performed the worst.

Off the back of the strong recovery in equity markets, there has been a spate of equity deals in India. Notable transactions in the past two weeks include a $110 secondary share sale in Suzlon Energy, and a $105 million new share issue by PTC India. And just days before the election, the founders of property developer DLF Limited sold $783 million worth of existing shares. Market observers say that if this market momentum continues, initial public offerings could start to reappear in India.

Although companies are taking advantage of the improved sentiment to issue placements, investors are still wary and demanding hefty discounts. Like Essar Oil, the Suzlon deal was priced at the bottom of the range, resulting in a 7.5% discount; and while PTC India did not go out with a set price range, the shares ended up selling at a 16.2% discount.

Even so, the increased activity is good news for Indian businesses, which are once again able to tap the equity markets for their funding requirements. It's also good news for Citi, which aside from organising the Essar Oil trade, has also been involved in many of the other recent Indian placements.