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Sunday, August 16, 2009

Indian Companies Ride New Waves of Fundraising

The money plant (or the Scindapsus aureus) is a common feature in many Indian households. People believe that this hardy, indoor plant brings them luck. As with money plants, the first green shoots of economic recovery are now bringing luck to Indian Firms: Despite the worldwide credit squeeze, Indian companies are once again finding it easy to raise funds.

In January, signs that funds might soon begin to flow again showed up when Tata Capital went to the market to raise US$100 million by issuing a non-convertible debenture (NCD) with an interest rate of 12%. (NCDs are basically unsecured loans with high interest rates. Unlike convertible debentures, they cannot be converted into company stock.) It was six times oversubscribed. Now Shriram Transport Finance Company has launched a US$100 million NCD issue, with a rate of 11.50%. (The issue is scheduled to close on August 14.) "The current NCD issue will help us enhance our lending capacity," says managing director R. Sridhar. The NCD is not the most popular financing route today, but for Shriram Transport and others, it leaves options open to go to the market with other instruments when the need arises.

Another strategy gaining ground is asset sales. No large banks or companies in India have gone under because of the economic crisis, but several in the fast lane have had to slow down. Those really hard hit -- because they expanded too fast and borrowed to take over companies at home and abroad -- have been selling assets.

India's sixth-largest pharmaceutical company -- Wockhardt -- has been finding it difficult to make ends meet because of short-term debts and a US$140 million foreign currency convertible debenture (FCCB) issue due for redemption in October. When the company issued the FCCB, it assumed that the Indian stock markets would continue experiencing boom times. Any lenders would therefore be likely to convert the FCCBs into shares, leading to an equity dilution while placing no repayment pressure on the company. With the sharp fall, that scenario does not make sense for lenders, who are expected to opt out of conversion and ask for repayment instead. The FCCB conversion price was originally around US$10 per share; Wockhardt is now being quoted at around US$3. (This is true of almost all companies that went in for FCCBs, though not everybody is in such dire straits, if only because their redemption dates are not so close at hand.)

Wockhardt is not waiting haplessly for its October tryst with disaster. Apart from raising funds from banks, it has been selling assets. It sold its veterinary business to French company Vetoquinol for an estimated US$40 million. Two of its best-selling brands -- Protinex and Farex -- have been put on the block; this week, the brands were sold to Abbott Laboratories for US$130 million. Also up for sale are two hospitals from subsidiary Wockhardt Hospitals; French subsidiary Negma; Irish subsidiary Pinewood and real estate in India.

Other companies are following the same route. India's largest real estate company, DLF, has sold its stake in a 50:50 joint venture with the Mumbai-based Ackruti City to a real estate fund for close to US$45 million. It has raised an additional US$200 million by selling off various parcels of land. Buyers are being sought for its wind energy business. Also in the real estate sector, Unitech has been on an asset monetizing spree, disposing of its telecom interests along with its hotels and office spaces.

Unitech has further consolidated its financial position through a qualified institutional placement (QIP), an instrument used to raise fast-track funds from qualified institutional buyers (QIBs). Since QIBs are professional investors and fund houses, not as much time and or as many safeguards are required as would be for an issue to lay investors.

In April, Unitech made its first QIP at 77 cents a share. It raised US$325 million. The shares were sold at an 11% discount to the market price. Since then, the price has moved up to around US$1.60, and the QIBs have made a killing. Unitech has now raised another US$575 million. The end-June QIP -- at around US$1.60 a share -- was closed in a matter of hours with foreign institutional investors picking up more than 90%.

The First Wave: QIPs

Unitech set the QIP ball rolling on what is really the first major wave of India's recent fund-raising jamboree. Indian companies raised US$24 billion in the April-June quarter of 2009, according to data from Delhi-based research firm Prime Database. Of this, 56% was raised in the last week of June, an indicator of the increasing tempo of action.

"QIPs cornered over 96% of the total money mobilized" during that quarter, says Prime Database chairman Prithvi Haldea. Ten QIPs were issued, totaling US$22.5 billion. The leading issuers included Unitech (US$900 million), Indiabulls Real Estate (US$530 million), HDIL (US$330 million), Sobha Developers (US$100 million), Shree Renuka Sugars (US$100 million) and PTC (US$100 million). "India goes QIP crazy," said a headline in the Hong Kong-based Finance Asia magazine.

But the QIP wave seems to be weakening as other instruments are gaining favor. The QIBs don't see a huge bargain any longer. When companies were relatively desperate for funds, they were offering prices that left a lot on the table for buyers. Unitech is a case in point. The first issue gave returns of 100% plus. Will the second issue, at a premium of more than 100% to the first issue, prove as lucrative?

According to a study by rating agency Crisil, most QIPs in 2009 are actually making losses for investors. The study used the prices on July 10, although the markets have improved since then. Still, says Crisil, as of that date, if you leave out the first Unitech issue, the total return on all QIPs was a negative 12%.

"We expect raising capital through the QIP route may slow down significantly," says Chetan Majithia, head of equities at Crisil. "The significant run up in stock prices before the [Union Budget was unveiled] made QIP deals unattractive, as the inherent fundamentals of most companies which queued up for QIPs have not changed materially." The total amount raised through QIPs in 2009 so far is over US$30 billion.

Not all QIPs have been successful. GMR Infrastructure received its shareholders' permission to raise up to US$1 billion through this route. According to merchant bankers, it came to the market with an offering of US$500 million, then reduced both the size of the offering and the price in the face of a tepid response, and finally withdrew altogether. "GMR Infrastructure has decided to withdraw the QIP in light of the existing market conditions," the company said in a statement.

However, according to Haldea, several more QIPs -- including Hindalco, Cairn Energy, GVK Power, HDFC, JSW Steel, Essar Oil, Parsvanath and Omaxe -- are waiting in the wings, looking to raise more than US$12 billion. QIPs could become attractive again if the market falls or if companies start offering large discounts, investment experts say.

ADRs and GDRs

The slowdown in the QIP wave does not mean that foreign investors -- who, as in the Unitech issue, were the principal buyers -- have lost interest in India. In fact, the reverse could be true. Indian fundraising has now embarked on its second wave -- through American Depository Receipts (ADRs) and Global Depository Receipts (GDRs). (ADRs are foreign stock stand-ins traded in U.S. exchanges but not counted as foreign stock holdings. A U.S. bank buys the shares on a foreign market and trades a claim on those shares. Many U.S. investors are attracted to ADRs because these securities may meet accounting and reporting standards that are more stringent than those in many other countries. GDRs are similar instruments traded in markets outside of the U.S.)

At a July 11 meeting, Sterlite Industries, part of the London-based Vedanta group, received shareholder approval for a QIP and issuance of ADRs, GDRs and FCCBs. On July 16, it raised US$1.5 billion through an ADS (American Depository Share; there is a small technical difference with an ADR) issue. Parent Vedanta picked up US$500 million of this, which will increase its stake in its Indian subsidiary to 57.5%.

A couple of days later, Tata Steel raised US$500 million in a GDR issue in London. This is the biggest issue on the London Stock Exchange (LSE) so far this year and, in fact, exceeds the total raised through all new issues in the first six months on the London bourse. "We have brought in quality investors," says Koushik Chatterjee, group CFO, Tata Steel. Adds managing director B. Muthuraman: "The equity raising exercise and the listing on the LSE marks a significant milestone in the company's capital-raising journey and demonstrates investors' interest in the company's strategic direction."

The very next day, another Tata major -- Tata Power -- took the opportunity to tap the same market: The company raised US$335 million in a GDR offering. The target was US$250 million, although the company had shareholder approval to go up to US$500 million. "The response has been pretty good, though I believe the market is very selective in terms of the type of companies to invest in at this point of time," executive director (finance) S. Ramakrishnan told TV channel CNBC-TV18. Why did Tata Power choose the GDR route instead of a QIP? "We felt the GDR caters to a broader range of investors compared to the [QIP] platform, and we were advised that it may be a better approach to take," Ramakrishnan told his interviewer.

Another company which has taken this route is wind-power player Suzlon Energy. The company has just raised US$108 million in GDRs (which will be listed in Luxembourg) and US$90 million in FCCBs. In 2007, Suzlon had raised US$500 million through a QIP. "The GDR is a win-win situation for all," noted a recent headline in The Economic Times regarding the Suzlon issue.

The Next Wave: IPOs

But many companies are more comfortable making issues in the local market. Indian investors are more passive than their foreign counterparts -- the problems at Satyam were first exposed when the ADR-holders revolted, for example. Companies prefer placid shareholders; too much activism is often viewed as counterproductive. So, with a general improvement in investor confidence, another wave of fundraising -- the initial public offering (IPO) -- has commenced.

Timeshare company Mahindra Holidays and Resorts was first off the block in this category in late June. There were fears that its IPO would not get a good response; it was eventually oversubscribed 9.8 times. There were apprehensions that it would list below issue price (as had happened in the last major IPO -- Anil Ambani's Reliance Power). The share rose to a high of 25% above issue price on listing day and ended 6% higher. It is now being traded at a 25% premium. Mahindra Holidays is the first IPO to be listed on the Indian bourses since KSK Energy Ventures on July 14, 2008.

The floodgates may open soon. Adani Power is slated for the end of July. The public sector NHPC is next (in August) and Oil India, another government-owned major, is likely to hit the market in September. These three companies combined are targeting around US$1.2 billion. According to Prime Database, 16 other companies already have received approval from the Securities & Exchange Board of India (Sebi) to raise a similar amount. An additional 16 companies have filed prospectuses with Sebi and are awaiting clearance. This lot could add up to US$600 million.

Then there are the public sector undertakings (PSUs). Finance minister Pranab Mukherjee's budget apparently seemed to slam the gates on PSU disinvestment. But, as Knowledge@Wharton has pointed out (see Budget 2009 Arrives … Not with a Bang But a Whimper), the PSU share sale will likely happen, but without undue fanfare. Now, finance secretary Ashok Chawla has announced that a roadmap for disinvestment is being prepared and will be ready by the middle of August. The budget indicated that US$200 million would be raised in 2009-10; the Economic Survey put the potential target at US$5 billion. The actual figure will be somewhere in between.

Despite the optimistic signs in the fundraising environment, there is a looming tsunami that threatens any momentum: The Budget has projected a deficit of 6.8% of GDP in fiscal 2009-10. To finance this, the government will borrow around US$80 billion from the market. "The government borrowing will put upward pressure on the interest rate," says Rajiv Kumar, director and chief executive of the Delhi-based Indian Council for Research on International Economic Relations. This could squeeze out the private sector. Finance minister Mukherjee is, however, not worried. "We will meet the requirements of the private sector from the market," he told the media after a post-budget meeting with Reserve Bank of India officials. "The government borrowing will be managed in such a manner that there is no starving of the private sector."