The low-end pricing reflected the fact that many institutional investors were willing to participate only if the valuation was kept towards the cheap end and that non-institutions, retail investors and even the companyÆs own employees shunned the deal altogether.
The tranches earmarked for the latter three categories were all undersubscribed, while institutional investors asked for 10.9 times the shares set aside for them, according to the National Stock Exchange of India website. In total, the deal was 6.7 times covered when the order books closed last Friday.
The issue was arranged by DSP Merrill, Enam Financial Consultants, JM Morgan Stanley and SSKI Corporate Finance.
The response was the opposite to that seen for Tech MahindraÆs IPO which was also in the market last week. The IT service provider for the telecom industry attracted orders for 78.7 times the shares on offer, allowing it to fix the price at the top of the range for the maximum deal size of $100 million. The companyÆs strong earnings growth and the Mahindra name were seen as key buying arguments for that issue.
People close to GMRÆs offer said the fact a large portion of the companyÆs earnings growth lay in the future made it more difficult to value the stock and introduced more uncertainty at a time when the local stock market is just starting to stabilise after the 30% correction two months ago. It also made it more difficult for non-professional investors to understand the offering.
ôIndian investors are used to price-to-earnings valuations, but GMR was valued using a discounted cashflow methodology,ö says one observer. The pre-deal research outlined the future potential, he says, but since restrictions in the Indian market donÆt allow such research to be distributed to non-professional investors and the prospectus carried no specific information about the future, retail and other non-institutional investors had less information to go on when deciding whether to commit money to the deal.
ôBased on that, the undersubscription by retail investors was expected and this deal was always going to be targeted to long-term holders who understand that it is not a momentum play but a stock where you will reap the benefits over time,ö he argues.
GMR has a portfolio of roads and power plants, but has recently also secured two airport contracts and was largely positioned as a play on the expected growth in demand for air traveling in India. The observer noted that almost 40% of the GMRÆs future value is derived from those two contracts, which include the construction and operation of a new airport at Hyderabad û due to start commercial operations in the first quarter 2008 û and the redevelopment and operation of the New Delhi airport.
The company will continue to expand its investments into power plants and roads, however, in the belief that demand for such assets will continue to grow as the Indian economy expands.
The final price of Rs210 per share values GMR at about 95% of its future net asset value, versus 95%-125% for its key comparables, which according to people following the deal consisted mainly of other listed airport operators. There are no other pure infrastructure plays listed in the Indian market as the other companies engaged in the construction of roads and other infrastructure projects do not typically also own or operate the assets.
The indicative price range stretched out to Rs250 per share û a level where the total book was about three times covered and the institutional tranche attracted a subscription ratio of about five times, according to one source.
The IPO was priced at a discount of 22% to the pre-IPO placements in May and June, which saw George SorosÆ Quantum fund, the Punjab National Bank and a Citigroup unit pay Rs270 per share for minority stakes. After the IPO these will account for 0.75%, 0.30% and 1.11% of the company, respectively.
In April, a fund controlled by ICICI Bank also bought a stake that will amount to 2.89% post-IPO for Rs261 per share. The shares were highly sought after during this pre-IPO investment phase which helped drive up the price, according to sources. The deep IPO discount was set to account for the stock market correction that happened after these investments were agreed.
GMR offered 38.14 million new shares, or 11.52% of its enlarged share capital, with a modest 500,000 shares set aside for employees of the group and 30% earmarked for retail investors. At least 60%, or 22.58 million shares, were meant to be sold to qualified institutional buyers, and given the undersubscription of the other tranches, that group will now be allocated a larger part.
Foreign institutional investors ordered 152.3 million shares, while domestic financial institutions and mutual funds put in orders for a combined 95.0 million shares.
One reason that could potentially have kept investors away from the issue was a legal challenge by one of the unsuccessful bidders for the New Delhi airport contract, Reliance Airport Developer, as to how the contract was awarded. The Delhi High Court dismissed the petition in April, but the issue is currently awaiting an appeal hearing.
The yet-to-be resolved case prompted the Consumer Education and Research Centre (CERC) to call upon the stock market regulators to postpone the IPO only days before the bookbuilding was due to start, arguing that these assets were material to the company as nearly one third of the IPO proceeds were due to be invested into the airport project.
The calls for a delay caught the headlines in the Indian press, but the regulators took no action and according to bankers involved in the offering, the issue didnÆt even really come up during the institutional roadshow.
GMR Holdings, a private company owned by its founder and chairman GM Rao, will own 79% of the company after the IPO. Aside from infrastructure, the GMR group is also active in the financial sector through its bank and insurance operations and in the sugar, brewery and metals industries.
The listing date has yet to be determined by the company, but is currently expected to start trading in the final week of August.