L&T Finance’s long-awaited listing reopened the Indian IPO market as the biggest deal of the year. It also provided a well-timed lesson that waiting for markets to stabilise can be frustrating.
L&T Finance, the diversified non-banking finance subsidiary of the Larsen & Toubro conglomerate, showed Indian issuers that timing and commitment – rather than market conditions – are crucial to a successful fundraising in the country’s equity capital markets. In July, L&T raised Rs12.45bn (US$258m) from an IPO launched in difficult markets, but, in retrospect, it seemed to be a sensible move.
When the IPO was first launched into the market in July, it came as bit of a surprise because bookbuilding coincided with the Reserve Bank of India’s decision to hike interest rates by a higher-than-expected 50bp. The overall backdrop of volatile global equity markets and depressed Indian equities added to concerns that the deal would not attract sufficient interest.
The IPO, however, managed to generate a healthy level of oversubscription and became the biggest such exercise in India behind Power Finance Corp’s US$1bn follow-on public offering in mid-May, and the country’s biggest flotation since Moil, formerly Manganese Ore India, listed at the start of December 2010.
“We thought of launching the deal, despite the environment, because we had this IPO planned for a while and saw little merit in postponing it and distracting management’s attention,” said N Sivaraman, senior vice president, financial services at L&T. “The compromises we had to make, in light of the markets, were not significant in terms of valuations.”
The book for the 214m-share public portion of the float was fully covered at the end of July 28, the second day of bookbuilding. Pro-rata allocations and upfront payments mean investors, typically, wait until the last minute to place orders for Indian IPOs.
L&T did not do its fundraising all in one go. It first took in Rs1.53bn on July 26 from the sale of 27.33m shares to three anchor investors – DSP Black Rock and the investment arms of Khazanah and Capital Group. This was in addition to the Rs3.3bn it raised in early July, ahead of the IPO, through a private placement of 60m shares at Rs55 each to Capital International PE Fund. These moves created much-needed momentum for the float when it was opened to the public.
The issuer’s attitude, and its determination to go ahead with the IPO, made the crucial difference.
The management and the promoters were highly convincing, knew exactly what they wanted to achieve and were clear about when they wanted to list the company. This is despite a very negative market environment for financial sector stocks, due to rising interest rates at the time of launch of the IPO. It was basically the conviction of the management that contributed to the success of the IPO even in a very tough environment” said Sanjay Bajaj, head of equity capital markets for India at HSBC. “The result is now there for everyone to see because the stock has outperformed the Sensex and even its peers in the sector since the IPO.”
Bankers said the response was good because the pricing valuations were sensible. Anchor investors bought the shares at Rs56, slightly above the midpoint of the IPO’s marketed price range of Rs51–Rs59. The top of the IPO price band is about 2.3 times fiscal year 2011 book value and about 16.9 times price to earnings estimates for FY2012. The IPO priced at Rs52 and the shares closed at Rs50.70 on September 21.
The valuations, some analysts said, were in line with those of L&T’s peers, although the company’s strong parentage and diversified business – with interests across corporations, retail and infrastructure finance, mutual funds, among others – could have allowed it to seek a slightly higher premium to its peers.
“The strong anchor-investor response to the IPO, despite the RBI rate hike, reflects the confidence in the basic diversified business model of the company, its management and the ability of the business to remain resilient in the face of macro uncertainties,” said Sivaraman. Citigroup, HSBC and JM Financial were joint global co-ordinators, as well as joint bookrunners with Barclays Capital and Credit Suisse for the L&T IPO.
The L&T float also stands out as the only decent-sized IPO out of India since July. No other issuer managed to launch a deal in the weeks that followed L&T’s float, further highlighting the value of the deal’s timing.
There were high hopes that L&T’s listing might open the door for other IPOs to follow, but subsequent floats failed to arrive as market conditions turned dire amidst increasing worries about the European debt crisis. The issuance window has all but closed at least in the near term, and Oil and Natural Gas Corp did those hopes no favours on September 16 when it again delayed its US$2.5bn follow-on public offering.
State-owned and profitable, ONGC was considered the ideal candidate to rekindle further interest in Indian equity offerings. The company had already postponed the offering several times, after first flagging it in March, and had been set to open books on September 20.
