Demand for the smallish-sized deal, which also came on the back of a takeover rumour, was solid and the bonds traded up yesterday to about 101.00-101.125.
A return to profitability early in fiscal 2006 (which ended March 31) was key. Plus there was optimism that the company û IndiaÆs fifth largest cement manufacturer - has left its previous debt problems behind after an extensive restructuring. This had seen the share price go 249% higher in the 12 months before the deal. This year alone, the stock is up 134% and the demand for the CBs suggest investors think there is still room for more.
The bond issue, which was arranged by ABN AMRO Rothschild and Deutsche Bank, was priced with a conversion premium of 30% over TuesdayÆs (May 2) closing price of Rs235.05 on the National Stock Exchange. The premium was offered between 27.5% and 35%. The yield was fixed at the top end of the indicated range of 7.45-7.95%.
The yield was pushed out as the bond floor was set at 94.5%, which was seen to be fair but not overly generous given a credit spread of 410 basis points above Libor, one observer noted.
The pricing also included an implied volatility of 27.8%, versus a 100-day volatility of 53%. The stock borrow cost was assumed at 5% and investors will be fully compensated for a dividend yield above 2% or a distribution of Rs2.5 per share, whichever is greater.
The bonds have a zero coupon, were priced at par and will redeem at 147.7% of face value. They are callable after two years, subject to a 130% hurdle.
They are convertible into common shares or GDRs at a ratio of 14,651.3 shares per bond. If fully converted, the new shares will account for about 5.7% of the existing share capital.
Sources familiar with the issue said the order book was 4.6-4.7 times covered with just over 50 investors participating. Many of them were said to have been high-quality long-only funds or CB specialists.
The majority of the deal, or about 58% was bought by European investors, which was explained by the fact that the deal was launched very late in the Asian day. About 25% was taken up by Asian accounts, while the rest went to offshore US investors, the sources said.
According to analysts, a key argument for buying into the company despite the huge share price run is the strong demand for building materials like cement in Southern India, where India Cements is the largest manufacturer. There is expected to be little new capacity coming on board to meet this surge in demand.
The company has also managed an impressive turnaround in the past year, not least because of cost savings. Its fiscal third quarter results showed a 32% rise in sales on the back of a 23% rise in cement volumes and a 19% increase in prices. EBITDA improved by 55% to Rs468 million ($10.5 million) as margins expanded by 200 basis points and capacity utilisation rose to 87% from 81% a year earlier, suggesting it is on track to return to sustainable profitability.
Analysts project the company will post a modest net profit of about $8 million to $10 million in the year to March 2006 and a further increase to $50 million in fiscal 2007.
The CB issue can be seen as part of its efforts to reduce interest payment costs and follows on from a $100 million issue of Global Depositary Receipts in October last year, which was arranged by the same two banks. That deal was done when the share price stood at Rs100.
Like with the GDR, the CB proceeds will also be partly for capital expenditures. The company has earlier said it needs money to increase its production capacity by 2 million tonnes per annum from about 8.8 million tonnes at present to meet demand.
The takeover rumours, which emerged two weeks ago and suggested that industry giant Grasim Industries was eyeing a stake in India Cements, were denied by the management who said India Cements was not in talks with its larger competitor and was not open to investments from private equity at this stage.
Still, the talk helped push the share price to new record highs and may have added a bit of an M&A premium. Indian cement manufacturers in general are also eagerly watched by their global peers, which are keen to acquire cement manufacturing capacity in the country.
Cement consumption in south India grew 18% in the year to March, which was well ahead of the 11% growth in the rest of the country. Cement manufacturers in this region have also raised prices by about 11%, or Rs20 per 50 kilo bag, in the past two weeks, pushing them to around Rs195 per bag. However, the south of the country continues to lag other domestic regions and the new price is still about 15% below the price in Mumbai.
ôWhile it is no longer cheap, its strong presence in the south gives India Cements the best leverage to benefit from the robust price outlook in the region,ö one analyst said of India Cements in a recent report.
The share price fell 2.4% to Rs229.4 yesterday after the bond sale on the National Stock Exchange. In Mumbai the stock dropped 2.45% to Rs229.10, but is still only 8.3% below the intraday all-time high of Rs250 reached on May 2.
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