The domestic offering for an SEC registered ADR opens today (Wednesday) ahead of international roadshows on Monday. Terms for the deal remain the same as May when the company last broached the idea of converting local shares into ADR's, but pulled back from formal roadshows after the stock price plunged just over 30% on the announcement of disappointing four quarter earnings.
Under the terms of its SEC filing, Infosys is hoping to convert two to three million shares into four to six million ADR units, raising $335 million at the top end of the range based on Monday's $55.82 ADR close. Domestic investors have until July 25 to submit shares into the offering, while the ADR is scheduled to price on July 30.
This will follow a fairly intensive 10 day marketing period, with three separate management teams undertaking presentations via the lead management of bookrunners Citigroup, Goldman Sachs and Merrill Lynch.
The transaction represents a first for India, where the central bank released new guidelines towards the end of 2002 allowing local companies to create additional ADRs from existing domestic shares. However, companies are only allowed to expand the ADR freefloat if an offering is open to all shareholders. Prior to this, there was only one-way fungibility, meaning ADR units could be cancelled and converted into local stock, but not vice versa.
As a result, Indian ADR issues tend to trade at a fairly high premium to the underlying local stock, with Infosys averaging a 52.6% premium over the past 12 months. It is currently stands around a 48% level.
For domestic investors, the premium would appear to offer an easy means to realise profits from the tender offering, although the ADR premium seems likely to contract quite sharply in the run up to pricing as the freefloat is fairly small. Indeed, one of the reasons, Infosys is keen to proceed with an offering is to expand its ADR freefloat, which stands at 5% of issued share capital.
The new deal represents 4.5% of the company's issued share capital and should, therefore, double the ADR float. The domestic freefloat stands around the 70% level, with an overall market capitalization of roughly $7.5 billion.
Domestic investors that submit their shares into the offering will be allocated pro rata to the number of shares they submit and overall supply of shares into the offering. Therefore, an investor who offers to sell six shares will only sell three if the book closes two times oversubscribed.
Observers believe that both domestic supply into the offering and international demand for the ADR are likely to be strong. Since the stock's sudden drop in April, when the ADR hit a year-to-date low of $38.51, it has clawed back most of its losses. It is currently up 2.99% on the year.
Last week, the company announced better than expected first quarter results and also increased guidance for the rest of the year. Recording its fifth consecutive quarter of double digit volume growth (11%), Infosys also managed to keep its EBIT margin flat at 29.9%, largely because of additional cost cutting measures.
At the same time, it increased guidance for FY03/04 revenue growth to between $966 million and $982 million, an increase of 28% to 30%, compared to a previous forecast of 23% to 24%.
Analysts say the key question facing Infosys is how to maintain high margins in the face of increasing competition. The company derives 74% of its revenues from the US and uses its low cost base in India to keep margins high. However, analysts believe the EBIT margin will inevitably decline from a 33.5% five-year historical average to global norms, although some say Infosys has been able to avoid low margin business so far because of increasing volume growth.
