Infosys brings one of 2005's most successful equity deals

Indian IT giant completes second successful tender and ADR issue.

Infosys Technologies Ltd returned to the ADR market after New York's close on Wednesday (May 25) with a second deal to expand its ADR pool. The transaction used the same format as the group's pioneering issue of August 2003, but was much larger in scale comprising a $938 million issue pre greenshoe compared to a $265 million deal last time round.

Indeed, the transaction represents the largest ever ADR from India, beating ICICI Bank's $405 million transaction in March this year. In a market where there have been few primary deals so far in 2005, the deal was also a blowout success with the international order book closing eight times subscribed, bolstered by heavy demand from Japan.

Bankers conclude the success of the deal stands testament to the pulling power of the Infosys group, whose brand name continues to draw ever wider circles of investor interest despite a premium valuation.

Under the lead management of Citigroup, Deutsche Bank, Goldman Sachs and UBS, Infosys priced 14 million ADR units at $67 each. This equated to a 2.5% discount to the last ADR close on Wednesday and a 34% premium to the stock's Rs2,173 underlying close on the Bombay Stock Exchange earlier the same day.

There is also a two million ADR greenshoe.

The key to the deal is the fact that it lets domestic shareholders cash out of their positions at a premium since they can lock in the difference between the price of the local shares and the ADR, which trades at a premium. No new cash is raised from such deals, but they do benefit the company in question by expanding its ADR float. In this instance the float expanded from 8% to 14% of total shares outstanding.

Locally the group had filed to accept 18 million shares post greenshoe and received subscriptions for 195 million, equating to an 8.2% acceptance ratio. One ADR equals one share.

Chairman N.R Narayana Murthy is said to have had 1.55 million shares accepted into the tender and will reduce his stake by 0.6% to 6%. CEO Nandan Nikekani also sold 1.08 million shares and reduced his stake to 4.2%.

Unlike most previous tender and conversion deals, the ADR premium actually rose over the course of the roadshow period. Specialists attributed this to a short squeeze - as hedge funds became aware they were unlikely to receive adequate allocations from the ADR, they needed to cover their short positions by buying in the secondary market.

At the beginning of roadshows, the premium stood at 31.6%. By the end of roadshows it had hit a high of 38.3% before coming under some short selling pressure to settle at 34%.

On a one-year average basis, however, it is at a low and bankers expect it to trade back to its historical average of 47%. It hit a high of 68% last October.

Back in August 2003, Infosys priced a similar deal at a 27% premium to the local stock and a 3.7% discount to the ADR. At that time, the ADR had been averaging a 52.6% discount.

Order books for the new deal generated a strong response, with an overall oversubscription ratio of eight times. The institutional order book closed five times covered with participation by over 200 accounts., most of which were tier 1 long only funds.

Institutions were allocated 67.5% of the deal, with US retail receiving a further 12.5%. The most novel twist was the inclusion of a dedicated Japanese tranche in the form of a Public Offering Without Listing (POWL) in Japan led by Nomura.

This set a number of new precedents. Firstly, it represented the first Indian offering to be offered to Japanese retail investors and as such it attracted huge demand, with books closing at the $3 billion level, equating to a 15 times oversubscription ratio.

Secondly because it had been structured as a dedicated tranche, it meant that Japanese investors did not get stiffed during the allocation process. Typically if a transaction is heavily oversubscribed, the POWL is the first tranche to get scaled back.

In this instance, however, the 70,000 plus retail investors that applied for stock were allocated 20% of the entire deal. For Infosys, a Japanese tranche was important, as the country is the second fastest growth market for the entire group.

At its current trading level, Infosys is valued at about 22 to 23 times 2005 earnings. Year-to-date the stock is up about 4%, but suffered a dip in April after management released 2006 guidance.

It began to bounce back later in the month, however, after analysts retained their buy recommendations arguing that management had been unnecessarily conservative in their 2006 forecasts for a 28% to 30% increase in net profits on a dollar basis.

Despite increasing competition in the global outsourcing sector, Infosys continues to maintain EBITDA margins in the low 30% mark, nearly double that of US competitors.

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