India's Educomp raises $125 million from QIP

India's Educomp Solutions completed a qualified institutional placement (QIP) before the market opened yesterday, raising Rs6.07 billion ($125 million) that it will use for the continued expansion of its business.

The fixed-price deal, which was launched late on Tuesday evening, followed a wave of QIPs last week. Since then, however, the Indian market has reversed direction amid disappointment over the government's budget for the current fiscal year to March 2010, which was revealed on Monday, and bankers say the sharp drop in individual share prices has meant that many of the companies that were looking to sell shares through QIPs are now trading below their floor prices, or the minimum price at which they are allowed to sell shares under current regulations. This means that they will likely not be able to sell new shares for another 10-11 days until the gains recorded before the sharp drop on Monday fall out of the equation. The floor price is calculated based on the average closing prices in the two weeks before the QIP.

Educomp, which provides computer-based learning aids for students as well as teacher training, didn't escape the sell-off and lost 12.9% on Monday and another 2.4% on Tuesday, but because it had rallied 45.8% in the previous two weeks, it was still holding above the floor price, which on Tuesday worked out at about 1.3% below the closing price. It had to act fast though as it seemed pretty certain that another session would push the market price below the floor price.

Despite the negative sentiment surrounding the share price, the deal was well received by institutional investors and sole bookrunner CLSA was able to use part of the upsize option and increase the size from $100 million to $125 million. At launch investors were told that the deal may be upsized to as much as $150 million.

Educomp sold 1.62 million new shares at a fixed price of Rs3,745, which represented a 1.3% discount to Tuesday's closing price of Rs3,795.9. The placement price was, in other words, equal to the floor price.

The deal attracted a small group of less than 15 high-quality long-only funds, including a few that already own the stock. Most of the buyers were from Asia or the US. The books were kept open into yesterday morning to allow Asian investors who may have missed the late launch the night before a second chance to look at the offering.

However, the well-received deal and the tight discount were unable to halt the slide in the share price, which continued yesterday with another 9.35% slide to Rs3,441.05. This meant the investors who bought the placement were 8.1% in the red after only one trading day. True, the entire Indian market fell by 2.6% yesterday to its first close below 14,000 points since May 26, but Educomp clearly underperformed.

Education companies have been among the hardest hit this week because hopes were high that the budget would include further incentives for private education solution providers and the shares had been snapped up in anticipation, pushing share prices higher. Educomp closed at a fresh 12-month high of Rs4,463.85 last Friday. When the budget failed to deliver on that front, the sector virtually collapsed.

Still, the longer-term prospects for Educomp in particular are highly supportive, according to a source familiar with the company, who pointed to the company's strong brand name, its high earnings growth - CLSA for one expects the bottom line to grow by more than 85% this year and by about 65% in 2010 - and its plan to switch from an asset-heavy model to an asset-light model whereby it will no longer buy land and build schools, but will focus on providing actual education services.

As a result, the source said this may be the final fundraising by the company for some time, which could explain the interest from investors. The shares sold in the QIP accounted for approximately 8.5% of the existing share capital.

The company was founded in 1994 and currently serves 23,000 schools and more than 12 million students and educators across India, North America and Singapore. Two weeks ago it agreed to set up a 50-50 joint venture with Pearson, a UK-based education and information provider that among other things owns the Financial Times and the Penguin publication group, to offer vocational training in India. One focus will be courses to improve English proficiency in the financial services and retail sectors. Under the agreement Pearson will pay $17.5 million to acquire a 50% stake in Educomp's existing vocational training business.