India's Axis Bank boosts capital with $720 million QIP/GDR sale

Axis Bank, the third largest private bank in India, late Thursday managed to complete the combined qualified institutional placement (QIP) of common shares and the sale of global depositary receipts (GDRs) that it had received shareholder approval for a week earlier. The fundraising, which totalled $720 million after the deal was upsized, will boost Axis's tier-1 capital.

Axis, which was previously known as UTI Bank, offered to sell $600 million worth of shares and GDRs, with an option to increase the sale by $120 million in case of demand. There was no formal split between the two instruments, allowing the allocation to be determined depending on the level of demand. Given that domestic accounts are not allowed to buy GDRs, a source said the demand was "heavily weighted" towards the QIP and the allocation was expected to recognise that.

The shares account for close to 11% of the outstanding issued share capital and were offered to investors at a fixed price of Rs906.7 per share (and the equivalent in US dollars for the GDR tranche). This was marginally above the floor price and represented a 1.27% discount versus Thursday's volume-weighted average price. It was 0.6% below the Rs911.85 closing price on the same day.

The sale was jointly arranged by Deutsche Bank, Goldman Sachs and J.P. Morgan and follows an impressive run in Axis's share price this year, with the stock having more than tripled from its 2009 low of Rs281.40 in early March. However, investors didn't seem too worried either about that or the fact that the fundraising is likely to lead to a sharp dilution in near-term return-on-equity. In a research note issued following the shareholders' approval of the share sale, an analyst at Ambit Capital Research projected ROE will drop to 17.7% in fiscal 2010 (which ends in March that year) post the sale, from an earlier estimate of 21.2%.

The analyst said the capital raising warrants a "quick and aggressive capital deployment" and estimated that Axis would need to grow its loan book by at least 40% to restore its ROE ratios by fiscal 2011. Given the weak credit environment, which is leading to fewer deployment opportunities, this may be difficult to achieve and as a result, the capital raising could put near-term pressure on the stock, he said.

Such concerns didn't pan out straight away though with Axis's share price gaining 0.2% on Friday in the wake of the sale.

The deal, which was opened for about four hours in the late evening on Thursday (it closed just after midnight Hong Kong time), attracted a group of mostly Asian investors, with the addition of some "high-quality" institutions out of the US. The buyers included quite a few existing investors.  

The combined QIP and GDR sale is the second largest follow-on by an Indian company this year after non-ferrous metals and mining company Sterlite Industries raised $1.5 billion from the sale of new ADS in the US in July. Looking across Asia it is still the second largest (excluding rights issues) and equal in size to the $720 million sale of shares in Renhe Commercial Holdings, also in July, although only two-thirds of that transaction was made up of new shares. In other words, the Chinese developer and operator of underground shopping malls only raised about $480 million of fresh capital.