India stock turbulence hits Air Deccan IPO

Subscription period exended and price range lowered to capture more investors after order book is barely covered by the original deadline.
Deccan Aviation, the operator of Indian low cost airline Air Deccan, has extended the subscription period for its up to $94 million initial public offering by three days to Friday (May 26) in order to give more investors a chance to look at the issue, bankers involved in the sale say.

The bottom of the price range has also been lowered by Rs4, or about 2.8%, because Indian regulations do not allow the subscription period to be extended without a reason. The new range will be Rs146 to Rs175, meaning the issuer is aiming to raise at least Rs3.58 billion ($79 million).

The IPO attracted lukewarm interest for most of the offer period which coincided with a sharp correction in the Indian stock market. Indeed, it was only 15% subscribed as it entered the the final day of bookbuilding according to the original timetable. But against the odds, and likely helped by a modest gain in the local markets on the day, it did manage to scrape together enough orders to be fully covered at the original price range on that last day (Tuesday), according to data on the National Stock Exchange Web site.

The offer is jointly arranged by Enam Financial Consultants and ICICI Securities.

ôThe extension is not due to undersubscription - although I acknowledge that it was only barely covered at about 1.1 times. However, quite a few investors say they just didnÆt have any time to apply to this offering with everything else that was going on in the market,ö says a source familiar with the offering. ôAnd this is not an easy offering as it involves making a futuristic call on the sector,ö he adds.

Indeed, since it launched Air Deccan in August 2003 the company has yet to break even, which made it easy for investors to discard the offer once the market started tumbling. IndiaÆs low-cost airline market is also highly competitive with no fewer than eight carriers fighting for passengers.

However, Air Deccan, which began operations in August 2003, has made a significant breakthrough with regard to operations and had a 14% market share of IndiaÆs aviation market in February. Analysts expect it to turn profitable in the 2007/2008 financial year.

As of the original book closing yesterday, the company had attracted orders for a total 27.26 million shares, or 1.11 times the 24.546 million new shares on offer, with all categories essentially fully covered. However, foreign institutional investors ordered only 7.6 million shares of the 122.7 million available to qualified institutional buyers, or so called QIBs, which contributed to this tranche being only 0.99% filled.

According to sources though, retail investors showed they still have confidence in the market with more than 50,000 of them submitting orders on the last day when the overall market did manage a slight rebound. In total retail investors applied for a combined 10.8 million shares, or 1.26 times the amount of shares earmarked for them.

The benchmark Sensex index fell 11.4% in the four trading days during the Deccan offering, with the listing candidate having opened its books on the very day the index took its initial 6.8% plunge last Thursday. Jet Airways, which is the only other Indian low cost carrier listed in the local markets, dropped 20% in the same period inlcuding a 13.7% loss on Monday alone.

The Sensex rebounded briefly to hit 11,000 points yesterday morning, giving investors time to breathe û and perhaps turn their focus to Deccan. By the end of the session, however, the benchmark had reversed course and closed at 10,573 points.

The low cost airline, which markets itself with the slogan ôSimplifly,ö currently has a fleet of 29 aircraft and makes 226 scheduled flights per day to 52 airports. The aim is to tap into a growing pool of customers that will be able to afford air travel as IndiaÆs economy continues to expand and to connect more Indian cities to one another by air at cost-effective fares.

According to data compiled by the Directorate General of Civil Aviation, the number of airline passengers in India increased at a compound annual growth rate of 15.7% between fiscal 2002 and fiscal 2005, including 26.8% growth in the year to March 31, 2005.

In that same year (ending March 2005), Deccan Aviation, which also operates a private helicopter and airplane chartering service in India, posted a net loss of Rs352.3 million, which grew to Rs1.18 billion ($26 million) in the eight months to November 2005.
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