Maruti deal set to be blowout success

The size of the Indian domestic privatization will be the biggest for eight years.

The government's long planned sale of a 25% stake in car manufacturer, Maruti is proving to be a success beyond most peoples previous reckoning. Only a couple of months ago there were many sceptics who felt the government would fail to sell the deal at the floor price it had set.

However, on the first day the book opened the deal was already 1.2 times subscribed. According to local bankers this is the first time in Indian capital markets history that a deal has been oversubscribed on the first day. By day two demand had built to $418 million, making the book 2.7 times subscribed.

With approximately $400 million of retail investor financing available from local banks, there are some who reckon that a book of $1 billion could be built by the deal's close on June 19. Moreover, investors can see what a hot deal it is. Indeed, they can view the prices being bid for blocks on the National Stock Exchange website.

The government set out to sell the stake at a minimum floor of Rs115 a share, which would equate to $170 million of proceeds. Maruti is the country's number one car maker and is a joint venture between Suzuki and the government. However, last year the government sold a controlling stake in the company to Suzuki (it currently has 54%) for $218 million. It obtained an underwriting agreement from Suzuki that the Japanese company would buy the 25% the government planned to sell this year at Rs115 a share, should the share sale fail to attract demand beyond that price.

The aim of the equity offering, therefore, was to get a price in excess of Rs115. And currently many of the orders are coming in at the Rs120 level, which equates to the government getting $196 million of proceeds.

The deal is proving a success in part because sentiment has suddenly got a lot better. Poor markets have been replaced by decent rallies and India's market is 8.5 % up this year. Moreover, with the exception of Bharti's offering last year, all Indian IPOs in the past 12 months have seen retail investors make returns of between 100% to 300%, which has brought some much needed confidence back.

For institutional accounts, Maruti is an interesting growth story too. It is the lowest cost car producer in the world, selling models for as little as $600 each (versus a price for a motorbike in India of around $150 to $200). For those in India graduating from a motorbike to their first car, it is likely to be a Maruti they choose. Suzuki has also said that it wants to start marketing Maruti cars in other third world countries, and will use India as both a manufacturing hub and a place to do R&D.

With the current momentum the deal looks set to be a blowout both for retail and institutional accounts. Should the deal come in at $196 million, it will be the largest of its kind in the Indian market for the past eight years.

The bookrunning lead manager of the deal is Kotak Mahindra and co-bookrunning leads are ICICI Securities and (somewhat unusually) a consortium syndicate comprising JM Morgan Stanley and HSBC (which will split the economics).

This being an Indian government deal the fees are obviously dire. The leads will be paid a fee of 0.68%, which means if they price at Rs120 they will make $1.33 million.

There will be follow on business, probably at a more reasonable fee. The government plans to do an international offering for its remaining 21% stake next year.

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