Sterlite pulls off $1.5 billion ADS follow-on

India's largest non-ferrous metals and mining company, Sterlite Industries, yesterday raised $1.5 billion from a follow-on sale of US-listed American depositary shares (ADS) that it will use partly to pay for the development of a commercial power generation business. The deal was timely, not only because it was launched on a day when the Dow Jones index rallied 3.1%, but because India's Prime Minister Manmohan Singh pledged before his re-election in May to boost investments in the power sector to meet the rapidly growing demand for electricity.

It also comes on the back of a surge in the Indian stock market since early March, which after a slight correction over the past six weeks, seemed to be picking up pace again this week.

Sterlite said in a filing to the US regulators after the US market closed on Wednesday that it intended to raise about $1.5 billion at a price that, in keeping with Indian regulations for follow-on share sales, couldn't go below $12.14 per ADS. This didn't leave too much room to incentivise investors through a cheap price, as the ADSs had traded close to or below that level for six of the past seven trading days in the US. However, taking its cue from the rest of the market, Sterlite's share price gained 6.5% on Wednesday, which helped boost interest in the stock.

In the end, the company and its two bookrunners -- J.P. Morgan and Morgan Stanley -- chose to use almost the entire discount available and the placement price was fixed at $12.15, or at a 6.1% discount versus Wednesday's US close. The final price also implied a similar discount versus the company's share price of Rs629.50 ($12.92) on India's National Stock Exchange at the close of trading earlier that same day.

One source noted that, in this case, being able to raise the full size was more important than the discount. And the deal was definitely not small. In fact, it was the largest equity sale in the US by a non-US company this year. Sterlite did have some help, however, as its controlling shareholder -- London-listed Vedanta Resources -- said before launch that it would buy one-third of the shares on offer, or approximately $500 million worth.

It also helped that demand was strong enough that the deal could be priced and allocated before the Indian market opened at noon Hong Kong time yesterday. Had that not been possible, the bookrunners would have had to face the risk that the share price in India might fall through the floor price and reduce the attractiveness of the deal.

Indeed, the stock did just that when it opened. At one point it was down as much as 9.1%, but when the bell rang at the end of the session it had recovered slightly and closed at Rs580.25 - down 7.8% on the day. The share price tumbled even more in the US, finishing Thursday's session 13.5% lower at $11.20, which meant it fell through the closing price in India even. Using the same exchange rate used in the deal calculations, Thursday's closing price of Rs580.25 on the National Stock Exchange is equivalent to $11.90 per ADS.

Based on the final price, Sterlite sold approximately 123.5 million ADSs (each equal to one common share), which corresponded to 17.4% of the company. The deal also includes an overallotment option to sell additional shares corresponding to 15% of the base deal size, excluding the portion bought by Vedanta, should there be sufficient demand to do so over the next 30 trading days.

As is common when it comes to ADS sales, the great majority, or about 60% of the deal, was picked up by US investors, according to sources. The rest was split between Asian and European accounts with a slight overweight towards the former.

Sterlite is one of India's largest producers of aluminium, copper, zinc and lead. It has also been building and managing captive power plants since 1997 and as of the end of May this year had a total power generating capacity of 2,078MW, including six thermal coal-based plants and wind power plants.

In 2006, the company decided to enter into the commercial power generation business and its wholly-owned subsidiary Sterlite Energy has since is invested about $1.7 billion to build a 2,400MW thermal coal-based power facility in the State of Orissa. The project is expected to start commercial production from the third quarter of fiscal 2010 (which ends in March next year) and is scheduled to be fully completed by the second quarter of fiscal 2011. In July last year, Sterlite Energy was also awarded the tender for a project to build a 1,980MW thermal coal-based commercial power plant in the State of Punjab. That project is expected to be completed by April 2013.

Several Indian power companies are expected to take advantage of the recovery in the domestic and global equity markets to raise capital for capacity expansion this year as they position themselves to meet the growing demand for power in India. Among them are Adani Power and Indiabulls Power, which have both announced upcoming initial public offerings.