India's Wipro struggles to complete debut ADR offering

IndiaƆs largest company by market capitalization has struggled to complete its debut ADR offering in the face of testing market conditions.

A 16% spike in the company’s share price between the close of books on October 18 and pricing in New York on October 19 left the transaction somewhat in disarray. The situation was further complicated by the fact that few investors believed the sudden surge to be more than a one-day correction and were consequently reluctant to countenance any matching increase in ADR pricing.

Final pricing at $41.375 therefore represented parity to the Rp1,916 underlying close on October 18 and a 16% discount to the following day. In total, some 2.75 million units were sold on a one-for-one basis, with an additional 412,500 share greenshoe also available. Morgan Stanley Dean Witter is lead manager, with Bank of America and Credit Suisse First Boston completing the syndicate.

At these pricing levels, the company raised a total of $113.781 million, about $61.8 million or 35.21% less than it would have done when it first filed with the US SEC in late September. However, while Wipro was unable to fulfill its original pricing targets and some observers queried why it went ahead in such difficult global markets in the first place, others emphasized that the company has at least met its strategic aims and increased its free float.

Indeed, local observers state that the company’s major unresolved problem is its tiny domestic free float. With a market capitalization of $14.6 billion, the company ranks as India’s largest, but with 85% of stock held by promoters, it has proved extremely difficult for institutions to match their weightings against the MSCI index, which it dominates.

Until March, this situation propelled an ever-increasing share price, as the combination of low liquidity and a scrambling for stock by investors resulted in sharp upswings.

As one Bombay-based analyst puts it, “The stock was grossly overvalued at the height of the internet boom and even now, despite the fact that it has lost over 80% of its value since then, it is still richly priced and we believe it will continue to decline over the medium-term.

“Having stood at Rp9,000 at the peak of the market, the stock is now down to Rp2,000, whereas a comparable company like Infosys has come down from about Rp12,000 to Rp6,500,” he adds. “For Wipro, this equated to a price/earnings ratio of 250 times forward earnings then and 85 times forward earnings now. The sector average is about 45 times, so the stock is still expensive.”

With India’s benchmark index touching 17 month lows earlier this week and previous ADR offerings this year from comparable companies, such as Satyam Computers, down 80% in some cases, the transaction was always going to prove an uphill struggle. Observers, however, say that while book building was slow going, there were a couple of anchor orders that underpinned demand and allowed the lead to secure parity pricing prior to the final day’s unexpected upswing.

For Wipro itself, the transaction marks a further step along the road to becoming a world leader in the provision of comprehensive IT services. To the year ended 31 March 2000, the company derived 45% of revenue and 77% of operating income from global IT services and 35% of revenue and 12% of operating income from domestic IT services. The remaining 20% of revenue and 11% of operating income stemmed from its niche operations in consumer care and lighting, which spans toiletries, lighting products and hydrogenated cooking oils.