The deal was led by Citigroup Global Markets, which was also one of the five underwriters for the IPO.
The need for additional funds so soon after the Rs6.42 billion ($145 million) IPO was triggered by a strong inflow of new orders since then, which helped investors overcome concerns about the companyÆs appetite for spending and the book was said to have been covered within one hour of launch. The 55% rise in Punj LloydÆs share price since its January 6 trading debut also allowed for a relatively high price for the equity option of the CB.
The five-year bonds, which were issued at par, will pay no coupon, but are redeemable at 125.856% of face value, which will give a yield to maturity of 4.65%. This was equal to the bottom end of the 4.65% to 5.15% yield range initially offered to investors.
There is an issuer call after three years, subject to a 125% hurdle.
The bonds were marketed with a conversion premium between 25% and 30% over ThursdayÆs (March 2) close, and ended up being fixed at 25% for a conversion price of Rs1,362.94. The shares closed at Rs1,090.35 on the Bombay Stock Exchange on Thursday, compared with an IPO price of Rs700.
The bonds are convertible into common shares at any time after July 6, which equals 85 days after the closing date. Each bond will convert into about 3,254 shares.
The deal attracted around 60 investors, who ordered about four times the amount of bonds available. Approximately half the allocation went to hedge funds, while the remainder went to a mixture of dedicated CB funds and traditional equity funds, people familiar with the offer said.
Asian investors took about 50% of the deal, while 20% went to Europe and 30% to offshore US accounts.
The underlying assumptions included a credit spread of 240bp over Libor, with Citigroup providing an asset swap for half the deal size. The dividend yield was assumed at 0.6% and the stock borrow cost at 5%.
This gave a bond floor of only 88%, although the implied volatility was set at 37% which marked a slight premium to an assumed historic volatility of 35%. Given the companyÆs short trading history, the long-term volatility was based on trading for other stocks in the same sector.
ôThe 88% bond floor is quite low so technically the bond was a bit expensive, but the conversion premium is also relatively low compared with many other Indian CBs that are fetching premiums in the 40%-50% range,ö one observer argues. ôThis would have made investors more positive on the deal as it means the stock doesnÆt have to perform as well (to trigger conversion).ö
Bankers also anticipate further share price gains as Punj Lloyd is expected to post strong growth in both revenue and sales in coming years as the Indian construction sector witnesses a boom driven by economic growth. The company is also attempting to gradually move up the value chain from being a construction company to an
EPC (Engineering Procurement and Construction) company.
Meanwhile, high oil prices and recent gas finds in India are expected to increase the demand for new pipelines, while government spending and deregulation initiatives are beginning to attract the private sector, leading to increased investments on infrastructure.
In the 2006-2007 budget that was presented by Indian Finance Minister P. Chidambaram last week, infrastructure was singled out as a key sector with a promise of a 54% increase in spending on roads, ports, airports and power generation in rural areas.
Punj LloydÆs order book tripled to Rs36 billion in September from Rs12bn in April 2005 and on the morning of its stock market trading debut the company announced it had secured another $191 million worth of orders.
The new orders comprised a $58 million pipeline order from Abu Dhabi and road-building orders worth Rs5.94 billion ($133 million) in Rajasthan state. As of February 26, the company had an order backlog of over Rs48.4 billion ($1.1 billion), according to a statement to the Bombay Stock Exchange.
The company derived 43% of its revenues from pipeline construction in the year to March 31, 2005, but it also constructs gas storage terminals and process plants for the hydrocarbon sector and roads. It has a market capitalization of about $1.25 billion, making it the second largest listed construction company in India after Larsen & Toubro.
In a report issued ahead of the IPO, Citigroup projected the company will see revenues rise at a compound annual growth rate 50% in fiscal 2005-2008, while profits will improve at a CAGR of 68%.
To achieve this, the company has budgeted capital expenditures of nearly Rs2 billion ($45 million) per annum over fiscal 2006 (which ends on March 31) to 2008, according to the Citigroup report.
According to the term sheet, the company would used the proceeds from the sale of CBs mainly for ongoing capital expenditures, repayment of international debt, possible acquisitions outside India and investments into Build Operate Transfer projects.