HDFC Bank prices ADR at a tight 0.2% discount

The Indian bank attracts strong demand for the follow-on offering, but the ADR price falls in the aftermarket after gaining 6.9% during the roadshow.
HDFC Bank has priced a follow-on offering of American depositary receipts (ADRs) at a tight discount to its market price, allowing it to raise $607.4 million in the latest of a string of Indian equity fund raisings.

The price was set in the early hours of Wednesday morning Hong Kong time at $92.10 per unit, which was equal to TuesdayÆs volume-weighted average price but represented a modest 0.2% discount to the closing price of $92.26 on that day.

The final price resulted in HDFC selling about 6.59 million ADRs, with each unit accounting for three common shares. About 10% of that amount was allocated to retail investors which is a small portion compared to what retail investors usually buy in follow-on offerings by Asian companies in the US. The deal was marketed at an approximate size of $600 million, with no fixed amount of shares. On top of the base deal there is also a 15% greenshoe of 989,176 ADRs that could boost the total deal size to $698.5 million.

Merrill Lynch and UBS were the global coordinators for the offering and joint bookrunners together with Credit Suisse, JPMorgan, Morgan Stanley and Nomura Securities.

In addition to the publicly marketed deal, HDFC Limited, the leading housing finance company in India and HDFCÆs founder and single largest shareholder, bought $300 million worth of shares in the listed company through a preferential share offer. HDFC Limited will hold about 24.7% of the company after the follow-on transaction.

According to sources, the offering attracted more than $2 billion of institutional demand, which means the base deal was at least 3.3 times covered. The demand came from a range of different types of investors, including Middle Eastern accounts, financial specialist funds and new hedge funds that are looking for exposure to India and emerging markets. The interest from both Asia and the US was equally strong, while European investors werenÆt as well represented, one source says.

About one-third of the more than 100 orders also came from existing long-term shareholders, which ought to be the best evidence that the bank is doing a good job and is worth the high valuations that the market is giving it.

Another sign of the good interest and confidence in the stock was the fact that the ADR price gained 6.9% during the five day marketing period. The local shares in India lagged slightly with a 4.5% gain, which resulted in the ADR premium widening to 3.46% from 1.27%. Over the past year the premium has averaged bout 2.8%.

The price of the local shares in Mumbai fell for a third straight day in the wake of the sale yesterday, closing 0.5% lower at 1,194 points. In New York, the ADRs also had a tough day, dropping 3.9% to $88.69 against a 0.4% fall in the Dow Jones Industrial Average index.

HDFC is one of the most highly valued banks in Asia, trading at a price-to-book multiple of about 4.2. However, investors like the lender because of high quality assets and its focus on return on equity and assets without compromising on growth.

ôGood things donÆt come cheap and some investors do have concerns about the valuation, but the bank has historically been able to deliver on both growth and shareholder value,ö one observer notes.

HDFC has increased its assets to Rs1.013 trillion ($25 billion) at the end of the 2007 fiscal year on March 31 from Rs426.8 billion three years earlier. In the same period it has extended its market and geographical penetration from 4.6 million customers in 163 cities to 10 million customers in 316 cities. As of March 2007, customer deposits accounted for 67.3% of its total liabilities, suggesting a disciplined growth strategy and risk management. Its average cost of funds was a low 3.7% during the latest fiscal year.

ôIndiaÆs economic growth is creating a new breed of well-off consumers which are driving demand for a diversified range of banking services,ö notes Hemendra Kothari, chairman of DSP Merrill Lynch, which is the Indian unit of the US-based investment bank.

The bank aims to provide financial services to upper- and middle-income individuals and leading Indian corporations through multiple distribution channels, including 753 branches.

But investors likely also picked up the stock as a proxy for Indian economy in general, which is expected to continue to grow at between 7% and 10% in the coming few years. According to a recent research report the country has one of the lowest consumer credit to GDP ratios globally at 10%. Loan growth, which has been expanding at an average 30% in the past three years, is expected to slow somewhat, but stay at a healthy 20%-22% in fiscal 2008 and 18%-20% in 2009.

HDFCÆs offer followed on the heels of ICICI BankÆs $4.6 billion combined domestic and ADR sale, which priced on June 23. The 50% ADR tranche was said to have been five to six times covered, suggesting more than $10 billion of international demand. Also in the market at the moment is a follow-on GDR offering from UTI Bank, which could raise as much as $680 million based on its current share price, and an initial public offering from state-owned Central Bank of India. The latter deal could total up to $202 million and will see the government cut its 100% stake to 80.2%.

Citi and Goldman Sachs are the arrangers for UTI Bank, while ICICI Securities, Citi, Enam Financial, IDBI Capital Market Services and Kotak Mahindra are joint bookrunners for the Central Bank deal.

Outside the financial sector, other Indian equity deals of size in the past month have included property developers DLF and Indiabulls Real Estate, insurance and healthcare provider Max India, nonferrous metals producer Sterlite Industries and infrastructure financing company Infrastructure Development Finance Company. Together with the completed bank deals, these have raised a combined $10.3 billion of equity from the domestic and international markets.
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