India gets a boost with $1.1 billion Power Grid sale

The deal, which included a $260 million sell-down by the government, is priced at the top of the range after being 6.7 times covered.
The Power Grid IPO is India's first big equity capital markets transaction of the past six months
The Power Grid IPO is India's first big equity capital markets transaction of the past six months

Power Grid Corp of India, the country’s largest power transmission company, has fixed the price for its follow-on offering at the top of the indicated range, at Rs90 per share, for a total deal size of Rs69.59 billion ($1.11 billion).

The government, which sold a small portion of its existing holdings as part of the overall sale, will raise approximately $260 million, while the rest is new capital going to the company. The total deal accounted for 17% of the existing share capital, including 13% of new shares and 4% of existing shares coming from the government.

Being the first equity capital markets transaction of size in India in the past six months, the deal attracted quite a lot of demand, with the total deal being 6.7 times covered and the institutional portion attracting orders for more than nine times the number of shares available.

The strong interest may prompt the government to move ahead with the planned stake sales in two other state-owned entities.

According to sources, the first of the two to hit the market will likely be Coal India, which will see the government divest a 5% stake that could be worth more than $1.4 billion based on the current market price. The government currently owns 90% in the coal producer.

The government is also aiming to sell a 10% stake in Indian Oil Corporation to raise about $600 million to $700 million. The managements of both companies have already completed roadshows and since these sell-downs will be done via a so-called offer for sale (OFS) they don’t require a prospectus and can be done fairly quickly.

Indeed, Coal India could launch a deal next week, although some say it is more likely to come early next year so as not to lose out on any potential demand from international funds that may already have closed their books for the year.

The Indian stock markets have staged a recovery in the past three-and-a-half months with a gain of more than 15%, but the capital markets have been slow to follow. So, far this year, there has been only $8.8 billion of ECM transactions in India, which is down 28% from the same period last year and the lowest year-to-date volume since 2003, Dealogic data show.

IPOs have been particularly scarce, accounting for just 3% of the total volume, while the top-three follow-ons all happened in January or February. Only two transactions – the $2.2 billion government sell-down in NTPC and a $1 billion follow-on by Axis Bank – have been above $1 billion.

The Power Grid deal will improve those numbers somewhat. The deal was open for institutional subscription from Tuesday to Thursday last week while retail investors got until Friday to submit their orders.

The total deal comprised approximately 787.1 million shares, including 3 million shares that were reserved for company employees. Fifty percent of the offer to the public (excluding the employee tranche) was offered to qualified institutional bidders (QIBs), 35% were targeted at retail investors and the remaining 15% to high-net-worth individuals and companies.

The shares were offered in a range between Rs85 and Rs90, which at the start of the subscription period represented a discount of 3.8% to 9.2% versus the latest market price of Rs93.60. However, the share price edged up 5.7% while the deal was in the market and when the deal closed on Friday, the discount at the top of the price range had widened to 9%.

In line with that and as the order book grew, most investors who had attached price limits to their orders moved them upwards. In the end, almost all the institutional orders were at the top of the range.

Retail investors were offered the shares at a 5% discount, which at the final price of Rs90 worked out at Rs4.50 per share. The retail portion was close to 2.2 times covered, while the portion targeted at high-net-worth individuals and companies, which at 15% was the smallest of the three public tranches, ended up 9.7 times covered.

Aside from the lack of large equity deals in the past six months, the demand was also underpinned by the fact that analysts generally view Power Grid to be trading at attractive valuations versus its sector peers. The final price of Rs90 translated into an enterprise value-to-Ebitda multiple of about 7.8 to 7.9 times for the fiscal year to march 2014, one source said.

In addition to that, the liquidity in the stock is also expected to improve as the government’s stake falls to 57.9% from 69.4%.

Power Grid is a monopoly when it comes to the transmission of electricity between states and more than 90% of all the power in India flows through its grid network. The company is guaranteed a regulated post-tax equity return of 15.5% per year.

The proceeds from the sale of new shares will mostly go towards capital expenditures for certain identified transmission projects and other general corporate purposes.

The share price gained another 2.4% on Monday to reach Rs101.30, the highest level since late October. Since then it has falllen back somewhat, however. On Wednesday it closed at Rs98.25, which puts the stock 8.2% above the issue price.

The deal was arranged by Citi, ICICI, Kotak Mahindra, SBI Capital and UBS.

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