HDFC Bank completes rare secondary offering

HDFC brings first follow-on ADR offering from the domestic banking sector.

HDFC Bank raised $260 million after new York's close on Thursday (January 20), becoming only the second Indian company after Infosys to complete a follow-on ADR offering. Under the lead management of Merrill Lynch and Morgan Stanley, the bank priced the deal at $39.26 - parity to the ADR close and at a 12.5% premium to the Indian spot close of Rs510.

If the greenshoe is exercised, the deal size will be bumped up to $300 million. One ADR equals three shares.

In the two days running up to pricing, the ADR premium contracted 6%, making pricing more palatable to institutional investors that had been baulking at the bank's expensive valuation. Since the deal was filed in December, the ADR premium has ranged from 25% to 12.5%, but was still trading up in the low 20% range as the roadshows entered their final leg. During 2004, the premium ranged from a low of zero in March to a high of 40% in January.

The final order book closed three times covered (including the greenshoe), with participation from about 100 accounts. Specialists say about 80% were long only funds and most of these held the stock already.

Because Asian and European investors could buy the ordinary shares, the deal was heavily targeted at the US and distribution statistics shows that 55% was placed with US institutional investors, 20% with US retail investors, 15% into Asia and the remaining 10% into Europe.

New investors are likely to have been put off by the fact that HDFC - dubbed India's Citibank - is one of the most expensive banks to own in the world. During 2004, it practically doubled, rising from a low of Rs286.25 at the beginning of the year to a high of Rs521.30 in the middle of January this year.

Pre money, the bank's ADR was trading on a 2005 price to book multiple of 5.15 times and a 2006 price to book multiple of 4.1 times. The new injection of tier 1 equity will bring the 2006 multiple down to 3.3 times (ADR) and 2.9 times domestic stock.

Tier 1 equity will rise from 10.9% to 13% and analysts say this is more than enough to cushion the bank's expected growth over the next two years. It will slightly depress ROE to 21.8%.

The most obvious comparable is ICICI Bank, the only other Indian bank listed on the New York Stock Exchange and also hoping to complete a follow-on deal. ICICI's ADR was trading Friday on a 2006 price to book multiple of two times and a P/E ratio of 10.2 times. Its ROE currently stands at 18.3%

HDFC's ADR offering will expand ADR float by 51.4% post shoe and will dilute existing investors by 8%. Its parent HDFC group will drop from 24.1% to 22.5%, just above the 20% statutory minimum to retain management control.