Last week, Infrastructure Development Finance Co (IDFC) completed the largest QIP so far, raising Rs21 billion ($519 million) that will be used for further aggressive expansion of its businesses. This was more than twice the Rs10 billion ($240 million) that insurance and healthcare provider Max India raised in June in what was previously ranked as the largest QIP deal.
The potential implication of the increase in QIP sizes is that it may reduce the need for companies to raise capital through global depositary receipts (GDRs), which are more costly and also require the issuer to comply with another set of stock exchange rules. QIPs can be sold to international investors who are registered as qualified buyers in India.
IDFC may have been a little bit of a special case, however, as the government-linked private sector lender is already well-known in the international community and counts high-profile global investors like UBS, Barclays, Goldman Sachs, Morgan Stanley, the International Finance Corporation and Franklin Templeton among its shareholders.
According to sources, several of its existing shareholders also participated in last weekÆs offering, which attracted a total of about 30 investors and ended up being between one and two times covered after just three days of bookbuilding. Asia, including India, Europe and the US were all well represented in terms of demand.
International investors like the company because it offers a broad exposure to IndiaÆs rapidly growing infrastructure sector, both through the provision of financing for various projects, including roads, ports, power plants and telecommunications, and through its own private equity and principal investments.
Observers note that because of its activities on the project finance side, IDFC has good access to investment opportunities. It also knows the market really well and has good relationships both with government entities and with private sector sponsors of infrastructure projects such as Bharti, Tata, Reliance Larsen & Toubro, GMR and the GVK groups, which makes it a good judge of which projects to get into.
Investment in infrastructure in India reached 4.5% of gross domestic product in fiscal 2006, but the government estimates that it will need to rise to 8% of GDP in 2008 to 2012 to meet the demand from an economy that has been expanding at a pace of more than 8% in the past two fiscal years.
To achieve this, the government is seeking to attract more private sector investment into the sector and has identified: roads, rail, air and water transport; power generation, transmission and distribution; and water supply, irrigation and storage as key development areas.
The strong performance of IDFCÆs share price is one indication of the optimism among investors about the ongoing infrastructure developments in India. The stock is up 58% so far this year and as of last Friday it had climbed 260% since the initial public offering at Rs34 per share in July 2005. The latter is well above the 97% gain recorded by MumbaiÆs benchmark Sensex index in the same period.
IDFC offered approximately 164.5 million new shares in a range between Rs125 to Rs135 apiece. When the deal was launched on July 2 the price range straddled the latest Mumbai close of Rs131.50 but after reaching an all time high of Rs135.80 during the second day of bookbuilding, the share prices reversed directions. By the time the deal closed on July 4 the price had fallen to Rs129.75 and the placement price was fixed towards the bottom of the range at Rs127 for a 2.1% discount.
The book contained very little price sensitivity, however, and many of the participating investors took a long term view on the stock and came in with large orders, one source says. Two accounts in particular were said to have provided good momentum after they each requested a sizeable portion of the deal early on during the bookbuilding.
Even so, the share price continued to drop in the two days immediately after the offering, closing at Rs122.80 on Friday.
Contrary to other QIPs, the bookrunners were able to market the IDFC offering to more than 49 accounts, which would have helped in terms of reaching the right investor base. It would also have made them more comfortable about launching a deal at a potential size of more than $500 million. The exemption from the usual investor limit has to do with the fact that IDFC is a finance company, according to people familiar with the deal.
This restriction to only 49 accounts suggests that larger capital raising exercises are still likely to be done through GDRs, or American depositary receipts for that matter, although the latter have become a less favoured option among first time issuer after the tightening of disclosure rules that were brought on by the Sarbanes-Oxley act.
Citi and UBS were financial advisers to the company as well as joint bookrunners for the offering together with JM Financial, and Kotak Mahindra.
IDFC was set up in 1997 by a consortium of public and private investors to provide a range of financing solutions and fee-based services to infrastructure projects and their sponsors. It also works closely with government entities and regulators to advise and assist in the formulation of new policies and regulatory frameworks for private investments and public-private partnerships in infrastructure development.
It is involved in investment banking through S S Kantilal Ishwarlal Securities (SSKI) of which it owns two thirds (after increasing its stake from one third last month). This part of the business accounted for only 2.1% of its total net income in the fiscal year to March 2007, however.
The company has grown substantially over the past couple of years and as of March 31 this year its balance sheet had reached Rs178.5 billion ($4.4 billion) û more than double the Rs84.6 billion from two years earlier. In the same period, its total income has expanded to Rs15.7 billion from Rs7.4 billion and its net profit has increased 63% to Rs5.04 billion.
Its gross non-performing assets were a modest 0.2% of total loans at the end of March and its return on average total assets in the 2007 fiscal year amounted to 3.3%.
According to IDFCÆs website, the government owned 23.2% of the company prior to last weekÆs placement.
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