Godrej Properties, an Indian property developer, announced yesterday that it was able to raise Rs4.71 billion ($90 million) from its follow-on share sale. The price was fixed at the bottom of the range, but the offering was oversubscribed, which enabled the company to exercise the upsize option in full.
The deal took place last Thursday (March 22) and was the first to be completed under a new mechanism referred to as an institutional placement programme (IPP), which is similar to the offer for sale (OFS) auction that was used to sell shares sales in Oil and Natural Gas Corp in February and software provider Wipro earlier this month.
Both structures were introduced by the regulators in early February to provide Indian companies with a quicker and more transparent way to increase their free-float. The trades don’t require documentation and the floor price is set by the issuer as opposed to calculated based on historical trading prices which can be very restrictive in a flat or falling market. The key difference between the two structures is that the IPP is used for the sale of new shares, while the OFS applies to existing share sales by the promoters.
Having attracted demand for more shares than were on offer, Godrej Properties’ follow-on is the first among the three deals (Godrej, Wipro and ONGC) that can be viewed as successful, hence offering some hope that the new system can be made to work.
The government did raise the funds it targeted from its sell-down in ONGC, but only after other state-owned entities – insurance company LIC in particular – stepped in at the last minute to pick up most of the shares, at an average price that was significantly above the market price at the time. So, although the deal was only 98.3% covered, allowing the government to reduce its stake by 4.9%, the total proceeds of $2.57 billion was slightly above the targeted $2.5 billion.
The Wipro sale, by a trust controlled by Wipro’s founder Azim Premji, was only about 70% covered and after deducting the bids that came in below the undisclosed floor price, the vendor was able to sell only about half the shares on offer for a total deal size of $150 million.
In the case of ONGC, the government’s decision to set the floor price at a premium to the market price was clearly a major reason for the poor demand, while in the case of Wipro, the seller’s decision not to disclose the floor price made investors uncertain about what to bid, which led to a significant portion of the bids coming in too low.
Godrej Properties took a different approach as it chose to offer the new shares within a price range that was set at a slight discount to the market price at the time the deal was announced. This meant that the transaction was similar to an ordinary bookbuilding with one clearing price, although the shares were allocated on a pro-rata basis. By comparison, the ONGC and Wipro deals were done as auctions with multiple clearing prices and investors that bid a higher price got allocated in full, before investors that came in with lower bids.
However, the Godrej Properties deal was still done against a live share price – the order book was open between 10am and 5pm India time last Thursday – so there was still an issue with investors wanting to submit their orders as late as possible, putting a lot of strain on the system in the final 10 to 15 minutes. Since all orders need to be pre-funded, this has caused problems with the checking and confirmation, of a large number of orders in a short amount of time for all three trades using the new OFS and IPP structures. Market watchers and bankers say this needs to improve if these offerings are to become popular with private sector companies.
Godrej Properties offered approximately 7.44 million shares as part of the base deal, plus a 10% upsize option that was exercised in full. That meant it sold a total of 8.19 million shares, or 11.7% of the existing share capital.
The shares were offered in a range between Rs575 and Rs620, which translated into a discount between 1.9% and 9.0% versus the close on March 20, which is when the price range was announced. (According to Indian regulations, there has to be a full trading day between the fixing of the price range and the share sale, unless the seller decides not to disclose the floor price. In the latter case, the floor price has to be passed to the regulator in a sealed envelope the evening before the transaction.)
At the time the price range was set, Godrej Properties’ share price had already fallen 5.3% after the company flagged the other deal terms on March 15, making the discount at the wide end very attractive – especially for an Indian deal. However, the share price fell 3% last Thursday when the deal took place, and at the end of the session the stock was at Rs620, resulting in a 0% discount at the top end of the price range. At the bottom, the discount was still 7.3%.
In light of that, it was perhaps no real surprise that the price was fixed at the bottom of the range at Rs575 for the maximum 7.3% discount. Following the successful sale, the share price jumped 5.9% on Friday, but gave up a portion of that yesterday when it fell 2.4% to finish at Rs640.60. The stock is currently up about 5% year-to-date, but is still well below the highs above Rs800 that it reached in July last year.
Godrej Properties is viewed as a good quality company, but a lack of liquidity has been keeping investors away and while the free-float is increasing to 25.4% from 16.6% as a result of this sale, this is likely to remain be a bit of an issue. Based on the average daily trading volume, the deal size accounted for almost 300 days of trading.
One indication that investors are still concerned about the liquidity was the limited participation of hedge funds. According to a source, up to 75% of the demand came from long-only funds, while hedge funds contributed the rest. The deal was anchored by international accounts, which took about 80% of the deal.
Information on the Bombay stock exchange website showed there were bids for approximately 8.7 million shares, meaning the deal, including the upsize option, was about 106% covered.
Godrej Properties has been in business since 1991 and currently has 12 ongoing development projects and a number of forthcoming projects spread across 12 cities in India. As of the end of last year it had completed 31 projects, including 21 residential and 10 commercial projects. The Godrej group is also active within the manufacturing of locks and safes, precision equipment, fabrications, white goods, furniture, machine tools and a range of personal care products, but has identified the real estate sector as one of its key growth businesses.
The company said it will use the proceeds from the share sale to repay existing debt, to acquire land development rights and for general corporate purposes.