Wednesday, 12 December 2018

Enthusiastic response from overseas investors

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Infrastructure and power group Adani raised US$850m in July in the biggest institutional share placement of the year, highlighting the depth of demand for Indian equities and the appeal of the country’s infrastructure sector.

Few share placements in India attract the kind of international attention that was lavished upon Adani Enterprises in July.

Launched at US$500m and capped at the final size of US$850m, the deal drew orders from a who’s who of global investors, becoming the second largest qualified institutional placement on record in India and the biggest for more than two years.

More remarkably, over 93% of the deal went to foreign institutional investors, an unusually high percentage for an Indian issuer - even one so well known.

Foreign funds saw the deal as a way to gain exposure to the Indian growth story: Adani Enterprises is an integrated industry champion with assets in power, ports and coal - all essentials for the country’s continued economic growth.

“India is a growing economy and, in order for it to achieve that growth, power and infrastructure are needed, and that demand will grow irrespective of whether GDP growth is at 8% or 9%. There is no danger of a shortage of demand for the basics like energy and logistics,” said an Indian banker involved in the deal.

The deal also marked the end to a restructuring of the Adani Group that had created a compelling investment case for investors.

Adani Power and Mundra Port are listed separately (Adani listed the power business in August 2009), so bankers were concerned investors would be reluctant to buy into the parent company. The answer to that was, in part, to emphasise Adani Enterprises’ coal business, and that part of the group was a key driver behind many of the overseas orders: Adani is India’s largest private sector coal-mine developer and operator, and also the country’s largest coal trader, and the lack of a separate listing meant investors had not previously been able to participate in that part of the group.

Since Adani first filed for a smaller QIP in May 2009, the group had also restructured to bring Mundra Port under the Adani Enterprises umbrella. The same promoters transferred their 81% holding in Mundra to Adani Enterprises, making the ports business a subsidiary of the group’s flagship. Completed earlier this year, the move meant the QIP offered direct exposure to the ports business, as well as the power and coal trading units, in a single offering.

Adani Enterprises was also included in the MSCI index, effective May 26, further boosting the appeal of the deal to global funds looking to invest in a benchmark Indian stock. The free float had also been very low, again meaning the QIP presented a rare opportunity for funds to invest in big sizes.

The eight banks involved, namely Bank of America Merrill Lynch, Citi, Enam Securities, IDFC Capital, ICICI Securities, Kotak Mahindra, Morgan Stanley and UBS, had been working on the deal for some time before it was finally launched - allowing time for the Mundra merger to be ratified and making for a cooling-off period after a rights issue in April.

An intensive global roadshow in the weeks before the July 20 launch gauged demand and the deal hit the market once the stock rose above the regulator-set floor price. The price at which shares are sold in a QIP is dependent on a regulated floor price, which is based on a two-week rolling average. The Adani deal was launched at a fixed price of Rs536.15, close to the floor level of Rs536.14 and at a discount of just 1.4% to the July 20 close.

“The discount was tight, but the aim was to get investors who bought into the overall growth prospect story rather than what was the price of sale,” said another banker.

The Adani deal was a 144a trade and extensively marketed in the US, adding to the perception that investors there were keen to build their exposure to emerging markets. The strategy clearly worked, and participating investors were quickly rewarded. Adani’s share price closed at Rs674 on the BSE on September 1, 25% above the QIP price.

The deal was more than two times covered at the US$600m base size. US investors were allocated 62.4% of the stock, Asian investors 18.5, Europe 12.6% and Indian investors 6.5%.

Adani Power is expected to become one of India’s leading private power producers, while Mundra is on track to turn into the country’s largest port by fiscal 2015, according to research reports.

Steve Garton

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