According to one observer some investors that had previously invested in the company, but got out early on, were returning to a stock that has outperformed IndiaÆs already high-flying benchmark index by more than 3.5 times over the past 12 months.
Due to some recent volatility in the share price though, the 26.95 million GDRs û each accounting for one share û were marketed to investors without any indicated price or discount range, leaving it up to investors to determine what they considered fair value.
They were priced early yesterday at $3.71 apiece, which translated into Rs165.3918 per share, or a 5.87% discount to TuesdayÆs close (March 28).
The same Rs165.3918 was used as the reference price for the five-year CBs, which were priced with a yield to maturity of 6.5% and a conversion premium of 50%.
The zero-coupon bonds were issued at par and will redeem at 137.7139% of face value. There is an issuer call after three years and two weeks, subject to a 130% hurdle and HCC also has the option to reset the conversion price at a lower level at each anniversary if the average share price is still below the initial conversion price, should it want to force equity onto its balance sheet earlier.
Because the reference price was already at a discount to the latest closing price, the actual premium worked out to be no more than 41.2%. The share price gained another 3.07% yesterday to Rs181.1, reducing the outstanding conversion premium even further.
And with a bond floor of 95.5% and an implied volatility of 28% (versus the 90-day volatility of about 45%) the offer did look cheap compared with many recent Indian CBs, especially if the 350% share price rally over the past 12 months was to repeat itself.
The underlying assumptions for the bonds included a credit spread of 250bp over Libor û a level where the underwriters offered a combined $20 million of asset swaps û a 1.25% dividend yield and a 5% stock borrow cost.
HCCÆs CB was about three times covered, while the GDRs attracted orders for four times the amount on offer, according to a source familiar with the transaction. Both the CB and the GDRs attracted about 30-50 investors, although a large number of accounts were believed to have participated in both issues.
The success rate following the five-day road show was particularly large in Europe with 70% of the GDRs ending up there. Offshore US accounts took about 20%, while 10% went to Asian investors. The allocation for the CB was said to have been similar.
Several recent issues have traded down or had to be re-offered below par, which has increasingly put investors off high-premium deals. That may have prompted the underwriters to be more careful when pricing the HCC offer.
ôWith a 4.5-point option for a 50% premium, the downside is very limited,ö one investor concludes.
The Reliance Communications Ventures CB, brought to market by Deutsche Bank, last week was priced with a conversion premium of 50%, a yield to maturity of 4.65% and a bond floor of 93%. Those bonds were said the have struggled and Deutsce has not denied suggestions that it is still holding some of the bonds on its books several days after the sale.
The reason for raising part of the funds in the form of straight equity rather than taking full advantage of expected gains in the share price was likely to do with the company needing more equity on its balance sheet to be able to bid for more projects. In India, you need a certain amount of net worth to qualify as a bidder for some projects.
HCC's GDRs and CBs combined will account for 22% of the companyÆs existing share capital if the bonds are fully converted. Each bond is convertible into approximately 17,969.5 shares.
IndiaÆs booming construction sector, which is expected to see about Rs4.7 trillion worth of investments over the next five years, was seen as a key buying incentive for investors.
According to a recent research report by B&K Securities, HCC has the technical expertise and financial prowess to handle large ticket and technically-complex projects across segments like roads, power, irrigation and urban infrastructure.
At the end of last year, the company had an order book of about Rs74.7 billion, of which 51.1% was attributable to the transportation sector, 20.5 % to the power sector and 21.9% to the irrigation and water supply sector.
On Monday this week, the company said it had led a consortium to win a $968 million contract to build a hydro power plant for the provincial government of Jammu & Kashmir. HCC will have a 45% share of the project which is expected to take 7.5 years to complete.
One observer also noted that HCC is ôone of the few available plays in the Indian real estate sectorö and said it was positive that some of the proceeds will go into its property development arm.
For the nine months to December 2005, the company reported a net profit of Rs809.9 million, which was already above the Rs731.4 million earned in the entire fiscal year to March 2005.