Genpact was at the mercy of an unpredictable stock market, as it priced in one of the most turbulent weeks that the US equity markets have experienced in the recent past. When the draft document was filed with the Securities and Exchange Commission (SEC) in mid-May, the Dow Jones Industrial Average was at around 13,300. It continued to rise during the early part of the roadshow, which was launched on July 17, and touched a historical high of 14,000 on July 19.
Then investor panic over the US sub-prime situation set in and the index lost almost 5% in the following week, to close at a low of 13,263 on July 27. It has gained marginally but the general mood continued to be bearish as the index closed at 13,362 on August 1.
The bearishness dampens interest in IPOs, says a banker close to the Genpact deal. ôWhat affected Genpact is largely market volatility. In this type of environment, investors become more cautious and less inclined to put money to work in new issues.ö
Genpact marked the final price at $14, which values the company at around 25 times its 2008 projected earnings, according to syndicate research reports. This compares with a 23x multiple for EXL and 24x multiple for WNS (based on a March 2009 year end), both US-listed India-based outsourcing firms. It is noteworthy that both comparables are much smaller than Genpact, in terms of revenues and market capitalisation.
ôThe market traded down significantly over the marketing period, so the comparable valuations moved down as well,ö adds another specialist, explaining the decision to price below the range. WNS lost as much as 11% while EXL lost around 10%.
Reinforcing the strong fundamentals and story, the deal did manage to garner three times subscription despite the turbulence. The majority of the demand came from the US, followed by Europe and then Asia. Among the investors, many are long-only funds and hedge funds.
A number of accounts, including some high-quality investors, placed orders with limited price sensitivity at $14, $15 and $16, according to an observer close to the deal. Consequently, the leads and the issuer took a decision to price below the range, in the interest of the longer-term price performance of the stock.
ôMarket volatility certainly affected the demand, especially demand from momentum players who might have otherwise come in,ö adds a specialist. öThey tend to disappear in a challenging market so the good news for Genpact is that at the $14 price level thereÆs a collection of first-class names.ö
Genpact offered 35.29 million shares, or 17% of the company, at an indicative price between $16 and $18. Half the deal comprised new shares, while the rest were sold by GE Capital and private equity firms, General Atlantic and Oak Hill. GE CapitalÆs stake will fall to 23.2% from 28.5% post-IPO, while the private equity players will collectively own 51.8%.
The Genpact IPO has been one of the most hotly awaited in the outsourcing sector. Genpact is an early mover in the sector and is the largest Indian player, with 30,000 employees and $613 million of revenues for the last financial year. The company started life as an outsourcing unit of the General Electric group and about 70% of its revenues are still sourced from GE.
Some analysts have questioned whether GenpactÆs revenue profile will change adversely as GE sells down its ownership in the company and stops giving its former wholly-owned subsidiary all its business. But GenpactÆs non-GE revenues at around $185 million are still substantial - and larger than the revenues of many smaller BPO firms. Also, Genpact performs a number of æmission criticalÆ tasks for GE, so it seems unlikely that the US company will stop outsourcing to Genpact in a hurry.
Citi, JPMorgan and Morgan Stanley were joint bookrunners for the offering. There is a greenshoe option to sell an additional 5.29 million new shares, which could increase the maximum deal size by 15% to $568 million and make a slightly bigger dent in the current holdings of these major shareholders.
The company started trading on the NYSE on August 2.