Bharat forges international investor base

World''s second largest auto forging company completes concurrent GDR and CB.

Bharat Forge, one of India's largest auto components manufacturers and the world's second largest auto forging company, raised $210 million from a combined GDR and convertible offering on Friday. The Citigroup and JPMorgan led deal was split into a $90 million GDR with a $10 million greenshoe and two $60 million convertibles.

Roadshows for the GDR had started the previous Friday, while the two convertibles were launched on Thursday in Asia - a day when the Indian markets were closed - and priced on Friday. All three transactions had to contend with a weakening Indian equities market and a global equity-linked sector that remains severely depressed. Year-to-date, there have only been three other Indian CB issues.

In addition to this, Bharat Forge's share price has almost tripled since last May. Over the longer-term analysts believe the company will continue to outperform thanks to the global outsourcing trend in auto components. Over the shorter-term, however, some now think it is fully valued.

The GDR was priced at $27.5 per unit, which represents an equivalent discount of 8.3% to the stock's Rs1,200 close on the National Stock Exchange. It closed at Rs1,250 in Mumbai. One unit equals one share.

The order book is said to have closed marginally oversubscribed at 1.4 times, with participation by 20 accounts. By geography, the book split 50% Europe, 40% Asia and 10% US.

The two convertibles fared slightly better, with both order books closing two-and-a-half times covered with 30 investors in each book and a 90% overlap between the two. About five investors participated in both the GDR and convertibles.

The convertible was split into two $60 million tranches. Tranche A was priced at par with a 0.5% coupon, 40% conversion premium, 5.25% yield and redemption price of 126.778%. The five-year deal has no put, but a call option in year two with a 120% hurdle.

This represented the mid-point of the indicative range, which encompassed a conversion premium range of 38% to 43% and a yield of 5% to 5.5%.

Tranche B was priced at par with a 0.5% coupon, 60% conversion premium, 5.75% yield and redemption price of 129.939%. It also has a five-year maturity and no put option. The call option falls in year three and has a 130% hurdle.

Likewise, final pricing has come at the mid point of the indicative range. The conversion premium had been marketed at 58% to 63% and the yield between 5.4% and 5.9%.

Underlying assumptions for tranche A comprise a bond floor of 95%, implied volatility of 27% and theoretical value of 101.3%. This is based on a credit spread of 180bp over Libor, 1% dividend assumption, 5% borrow cost and 30% historic volatility assumption. 100-day volatility currently stands at 34%.

Underlying assumptions for tranche B comprise a bond floor of 97.3%, implied volatility of 27% and theoretical value of 101.3%.

Tranche A was more equity sensitive than tranche B and both have more accommodating terms than either of the two Tata deals, which priced earlier in the year.

Tata Chemicals is a better benchmark for Bharat Forge than Tata Power since it employed a similar credit spread - 170bp over Libor (TC) vs 80bp (TP). Its $150 million deal came to market in late January, but had to be re-priced when investors refused to accept the original terms.

Final terms comprised an issue price of 98.5%, 1% coupon, 50% conversion premium, 4.82% yield and redemption price of 120.89%.

Underlying assumptions comprised a bond floor of 95.01%, implied volatility of 31.5% and theoretical value of 100.5%. This was based on a credit spread of 170bp over Libor and a 33% volatility assumption.

It is currently still bid around its issue price.

Bharat Forge will use proceeds from its new issue to double the forging capacity of its Pune plant from 120,000 annual tonnes to 240,000 over the next two years. The company has also embarked on an aggressive international expansion plan, having purchased German forging company Carl Dan Peddinghaus in 2003.

This enabled Bharat Forge to jump into the number two slot worldwide behind German steel and autoparts giant Thyssen Krupp. At the same time, its exports of heavy vehicle auto components such as crankshafts and axle beams have jumped from 16% of total sales in 2001 to 37% by the end of FY04.

Analysts describe Bharat Forge as one of the leading companies to benefit from the global outsourcing trend in the auto components market. Like the IT services companies before them, India's domestic auto components firms are hoping to take advantage of the country's skilled, but low cost labour base to make their presence felt on the world stage.

In a report published late last year, McKinsey & Co suggested that the Indian auto components industry could grow from sales of $1 billion in 2004 to $25 billion within the coming decade. Bharat Forge registered sales of Rs8 billion ($183 million) in the financial year ended March 31 2004.

Chairman Baba Kalyani has said he expects sales to top $1 billion by 2008.

Over the past year, this optimism has been reflected in the performance of the company's share price, which rose steadily from a low of Rs549 in May 2004 to a high of Rs1,558 in early March. Since then it has trended down with the market.

Analysts say it is currently valued at about 17 to 18 times 2005 earnings compared a valuation of 11 to 12 times for domestic comparable Amtek Auto.

Bharat Forge is said to have chosen the structure it did for its combined transaction because it wants to keep its debt to equity ratio at a 1:1 level. The overall deal equates to roughly 20% of the company's $1.1 billion market capitalization and a heavy 300 days trading. The GDR will dilute existing investors by 8%.

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