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Saturday, June 23, 2007
Indian Economy - Not Overheating
There is abundant evidence that the Indian economy is not overheating. So stop the presses from broadcasting this now absurd conclusion.
Several international and domestic economists, policymakers, and journalists, and including prominently The Economist, offer one explanation after another to justify their predetermined, ideological (?) and/or confused conclusion that the Indian economy is overheating, and/or that the rupee is mismanaged (read that it should be allowed to appreciate). The list of distinguished economists (both Indian and foreign) within and outside India is large; can they all individually and collectively be in error? I believe so; so bear with me as I go through the arguments offered. At the end, you can’t take both sides and conclude everybody is right; one view is “right”, the other “wrong” even within the bounds of two-handed economics and multi-faced research.
So here goes. First, what does overheating mean? For most honest brokers, it means an unsustainably high rate of acceleration in economic growth. How does one know that the acceleration is unsustainable? By noting that the rate of inflation has also increased to a high and undesirable (even if sustainable) level. There is a third parameter—trade deficit—whose pattern can also reveal overheating. However, the trade deficit may indicate other factors at work, most importantly the exchange rate. Ordinarily, a rising trade deficit can indicate overheating, but this is often misleading. For example, if one went by the rising trade deficit view, one would be forced to conclude that the US economy was overheating, even as it accelerated to a growth rate below 2 per cent per annum. And, equivalently, one would be forced to conclude that the Chinese economy was spiralling towards a recession as its trade surplus reached beyond 10 per cent of GDP.
Analogously, the rate of growth of credit expansion can also be misleading—it can either mean an overheating economy or an economy moving towards a higher growth path, or an economy becoming more monetised (more transactions in the formal sector). Perhaps the least useful indicator of anything, let alone overheating, is the rate of growth of money supply. In a closed economy, it had meaning, but even the wisest of the overheating aficionados acknowledge that India is not the closed economy it was five years ago, let alone the super-closed economy it was in the late 1980s.
There are three major determinants of growth—investment (capital), labour, and productivity. While the growth rate of employment has accelerated to a long-run average of now close to 2.5 per cent per annum, the unemployment rate has not budged, as labour force growth has also increased to this average (powered by increases in the labour force participation rate of urban women). So no signs of overheating here. Just five years ago, India was saving and investing about 23 per cent of GDP. Since then, the savings rate has increased by at least 10 percentage points and in 2005-06 was more than 32 per cent of GDP and in 2006-07 is likely above 34 per cent (Prime Minister Manmohan Singh, please note: If conspicuousness has increased, it is in the arena of negative consumption, i.e. savings).
But savings do not determine growth, investment does. And the rate of investment is close to 36 per cent plus of GDP, up some 13 percentage points over just a few years ago. This translates into a rate of growth of capital of 10 per cent per annum, compared to a 5 per cent growth rate before. Not too many of the sceptical growth experts have argued, either, that this increase in investment is a spike and therefore unsustainable, nor have they argued that increased investment financed mostly by increased savings is a sign of overheating (not yet, anyway, but who knows what they will say in order to “save” their ideological beliefs).
Simple and conservative calculations suggest that these extra inputs into production will yield an extra growth rate of 2.8 per cent per annum. Take almost any time-period post 1980 and India’s GDP growth rate has been close to 5.6 per cent. Thus, one reaches the conservative conclusion that the expected, sustainable, non-inflationary GDP growth rate in India is 5.6 + 2.8 = 8.4 per cent per annum. These calculations do not factor in the increased productivity growth that comes in from a step jump in investment spending. This is easily at least 1 per cent per annum. So look out for GDP growth above 9.4 per cent to even begin thinking about an overheating India. And forget 7 or even 8 per cent per annum as the non-inflationary trend rate of growth.
What about all the extra inflation, the other favourite of the (confused) naysayers and/or the present government? Isn’t the high inflation we are experiencing a sign of an overheated economy? There are several indicators of inflation available, and one can choose the consumer price index to make the point that for a brief period, supply-side factors (a steep increase in the price of cereals and oil) did cause the inflation rate to jump by 2 percentage points. But these indicators are outdated (in terms of “base” year) and restricted (only sample either industrial workers, or agricultural workers). The GDP deflator is an accurate indicator of trends in inflation. Since 2003, this indicator has not wavered much beyond 4.3 per cent per annum, and in the last problematic year (2006) registered 4.6 per cent. This trend is supported by the WPI—an inflation rate in 2006 equal to that in 2005 at 4.7 per cent per annum. So far this calendar year, seasonally adjusted inflation is running at a 3.5 per cent rate. Overheating, anyone?
Given this freely available data and reality, why do the overheating protagonists blissfully parrot this grossly inaccurate line? Does the hugely increased investment spending not add to any extra GDP growth? As a forecaster, one should always remind people of when one is right—and quietly change one’s opinion when one is wrong. Some quotes of Keynes that will help those in error to correct themselves. “It is better to be roughly right than precisely wrong”. Or “there is no harm in being sometimes wrong—especially if one is promptly found out” and finally, “when facts change, I change my mind. And what do you do, Sir?”
Bio-fuel has top investors powered up
India's fortune-hunters believe their new-found love for biofuel will pay off.
India's well-known investors who are known for their Midas touch have spotted an opportunity in bio-fuel, betting big on ethanol, bio-mass and even bio-fuel equipment makers in India and other parts of the globe.
Billionaires Rakesh Jhunjhunwala, C Sivasankaran, Vinod Khosla, founder of Sun Microsystems, and Nemish Shah, the media-shy joint partner of Enam Financial Services, are investing in bio-fuel makers quietly, expecting that bio-fuel will have a big play in the coming years as the world looks for a viable alternative to the fast depleting oil reserves.
Jhunjhunwala, who is known for his ability to spot a multi-bagger at a very early stage, recently invested in Hyderabad-based bio-fuel firm Nandan Biometrics.
He is also a 10 per cent stakeholder in Praj Industries, which is a bio-fuel technology provider and equipment maker.
“Bhai (as Jhunjhunwala is known in market circles) is bullish on biofuel and the broad alternative energy space. He is looking at several unlisted companies for more investments,” said a source.
Vinod Khosla, the founder of Sun Microsystems and a leading green fuel investor through his Khosla Ventures, holds a minor stake in Praj Industries.
But, Khosla, who is scouting for more investments in India, is playing a high stakes game in Brazil.
He has backed Brazilian Renewable Energy Company (Brenco) and also made investments in Segetis, founded by former Soviet scientists Sergey and Olga Selifonova, to develop renewable chemical products.
C Sivasankaran, who sold his stake in mobile phone company Aircel to Malaysian conglomerate Maxis Communications for over $1 billion, has set up “E85 Inc”, an ethanol producing company in Raleigh, North Carolina, investing $200 million late last year.
“Alternative energy, broadly, is an area which we are excited about as an investment opportunity,” said Rahul Bhasin, managing director, Barings Private Equity, which has invested in Auro Mira Energy, a wind energy company.
Market sources say Nemish Shah, who spotted multi-baggers Sesa Goa and Infosys when everyone was looking the other way in the early 1990s, is also making quiet moves in biofuel companies in India, both listed and unlisted.
Sources say little known IKF Technologies, which is entering bio-fuel production in a big way, has come on his investment radar.
A listed company, IKF Tech recently sought government leases for a total of 150,000 hectares of land in Swaziland, Mozambique and South Africa to cultivate jatropha to produce biofuel.
“There are several factors that can make India successful in the alternative energy space: availability of natural resources, cost-effective engineering and manufacturing talent and high cost of importing traditional fuels,” said Arun Natarajan of Venture Intelligence, a PE tracking firm.
“While I do not see alternative energy posing a threat to sectors that are traditional favourites with investors — like IT & IT-enabled services and manufacturing — any time soon, there is definitely a strong interest in this sector,” he added.
Stocks End Lower on Investor Worries
Wall Street ended a volatile week with a sharp decline Friday as investors again succumbed to nervousness about souring subprime loans and rising interest rates. The Dow Jones industrial average fell more than 185 points.
The steep pullback coming a day after a respectable gain was characteristic of the erratic sessions Wall Street has endured in recent weeks as it dealt with concerns ranging from interest rates to the health of hedge funds to, more recently, the prospects of unfavorable legislation from Washington.
Friday's session, unusually devoid of economic or earnings data, began with a focus on the initial public offering of a stake in the management arm of Blackstone Group LP. The most talked-about IPO since Google Inc. went public saw the buyout shop's stock open well above the $31 a share at which it had been priced late Thursday. The stock rose $4.15, or 13.4 percent, to $35.15. Enthusiasm over Blackstone wasn't broad enough to prop up the markets, however.
The Dow fell 185.58, or 1.37 percent, to 13,360.26. On Thursday, stocks had fluctuated before ending higher, with the Dow recovering 56 points following a 146-point tumble on Wednesday.
Broader stock indicators also dropped sharply Friday. The Standard & Poor's 500 index fell 19.63, or 1.29 percent, to 1,502.56, and the Nasdaq composite index fell 28.00, or 1.07 percent, to 2,588.96.
The week was a rough one on the stock market. The Dow lost 2.1 percent, while the S&P 500 fell 2 percent and Nasdaq lost 1.4 percent.
Stocks, which had risen in the past 13 Fridays, lost ground even as bond yields fell. The yield on the benchmark 10-year Treasury note fell to 5.14 percent from 5.20 percent late Thursday. The dollar fell against most other major currencies, while gold prices rose.
Light, sweet crude rose 49 cents to $69.14 per barrel on the New York Mercantile Exchange.
Investors have been grappling with concerns about whether the economy will heat up and prompt the Federal Reserve to put off cutting, or perhaps even raising, interest rates. Also, concerns about the health of Bear Stearns hedge funds involved with subprime loans, those made to people with poor credit, have weighed on the markets.
In addition, news from Washington has shown some lawmakers are impatient with some of the vast sums Wall Street investors have generated and could look to tamp down big payouts with higher taxes. Several House Democrats on Friday proposed an increase to the taxes paid by those who manage hedge funds and private-equity companies.
Bill Schultz, chief investment officer at McQueen, Ball & Associates, contends the pullback in stocks isn't unexpected given the sizable gains Wall Street has seen. Even with Friday's losses, the Dow is up 7.2 percent for the year, while the S&P 500 is higher by 5.9 percent and the Nasdaq is up 7.2 percent.
"There's a point where you need to see a pause before people get excited again. Do you commit at this point or do you wait for a pullback? There's a sense that maybe we may be a little bit overextended here," he said.
Friday's session brought added volatility for some stocks as the Russell indexes implemented changes, adding and subtracting some names. The changes can stir some unusual trading activity as investments that track the index try to square their holdings with the latest look of an index.
The Russell 2000 index of smaller companies fell 5.06, or 0.60 percent, to 834.75.
Neil Massa, senior trader at MFC Global Investment Management, contends stocks were showing volatility Friday in part because of the rebalancing of the Russell indexes. Even the moves among some smallcap companies can affect larger stocks, he said, as investors jockey for positions.
"I think it spills over and I think this is a little healthy pullback from the highs we've been seeing," he said.
The session comes ahead of a busy week in which the Federal Reserve meets and in which investors will receive several readings on the housing sector and the final report on economic growth in the first quarter with release of the gross domestic product.
In corporate news, Jabil Circuit Inc., a contract electronics manufacturer, rose $1.93, or 9.1 percent, to $23.13 after its fiscal third-quarter profit excluding items such as restructuring costs topped Wall Street's estimate.
Cognos Inc., a software maker and technology consultant, forecast a fiscal second-quarter profit that fell short of Wall Street's expectations. The stock fell 52 cents to $39.10.
Taser International Inc., the stungun maker, rose 80 cents, or 6.3 percent, to $13.43 after a court dismissed a lawsuit alleging the company's product resulted in an accidental death.
Declining issues outnumbered advancers by about 3 to 1 on the New York Stock Exchange, where volume came to a heavy 2.62 billion shares, compared with 1.6 billion traded Thursday.
Overseas, Japan's Nikkei stock average fell 0.28 percent, while the sometimes-volatile Shanghai Composite Exchange fell 3.3 percent. Britain's FTSE 100 fell 0.43 percent, Germany's DAX index fell 0.19 percent, and France's CAC-40 fell 0.11 percent
June series expiry may trigger volatility
The markets behaved along expected lines as the weekend factor spiked the upsides potential as well as the traded volumes. The 4233 support advocated for Friday held as the Nifty spot bounced from the 4242 mark.
Market breadth was marginally negative as the BSE & NSE combined advance decline ratio stood at 1766 : 1863. The capitalisation of the breadth was however positive as the combined exchange figures were Rs 7894 crs : Rs 6719 crs.
The F&O data for previous session indicated a 2.65 per cent increase in net long positions as the bulls ramped up fresh exposure even in the face of the June F&O expiry.
The indices have indicated a key reversal on the charts (the closing is lower than the opening) at a significant high (SiHi) of the current upmove. That the traded volumes on this key reversal day were lower can only be a minor relief as the intraday high at the 4278 levels will now be a hurdle for the bulls to overcome.
Unless the 4278 levels are overcome on high volumes and increased open interest, traders should lay off fresh purchases. The 4242 level will now act as a swing reversal and a consistent trade below this mark will act as a bearish trigger.
The outlook for the markets on Monday is that of caution as bulls are likely to witness some resistance from profit sales and possible short selling if the overseas cues are negative. The impending expiry of the June series will act as a catalyst for higher volatility. Lower risk appetite players are advised to cut back trading exposure in coming future.
Bigger fool theory at work
| While it's nice to talk of how well the Sensex has performed over the last couple of years, the rally is limited to less than a handful of stocks. |
| As celebrations of the index achieving new peaks were going on among the market community and in the popular business media, I was besieged with the problem of my portfolio not improving much in the last couple of years. Like a typical academic from the old school, I started probing the issue further and looking for externalising my failure. The more I poked into the data and facts, the more I was convinced that the last one or two years rally was a shallow one. Increasingly, I realised that there were a couple of things which were clearly visible: one, the index rally was driven by only a few big stocks; and two, the increasing narrowness of even the broad equity markets. |
| I look at both of these points using common market knowledge and simple stock market numbers (instead of relying on sophisticated data mining exercise): |
| Limited big winners in the index: In the last two years, the BSE Sensitive Index has rallied from 6,400 levels to the present day 14,300 levels, an increase of more than 120 per cent in just two years — exemplary performance by any standards. |
| I started looking at the sector wise composition of index and found that the nation’s biggest indicator was skewed towards only a few sectors. For instance, the biggest sectors in the Sensex constituents are finance and banking (20.1 per cent), IT (18.1 per cent), petrochemicals (17.2 per cent) and telecom (10.1 per cent). The rest of the sectors constitute less than 35 per cent of the Sensex. Sadly, a large proportion of the real economy and even listed equity markets are either fully ignored in the index or given very little importance. Some of these include fertiliser, agriculture, media and retailing. |
| I then started digging into the main winners within the index and found that there were only a few big winners. I could clearly see that the Sensex had a few big winners — big enough to ensure that the Sensex reached new heights. In other words, I could easily conclude that the Sensex had an overwhelming number of relative underperformers. Some of the index constituents which have severely underperformed the Sensex included ONGC, Hindustan Lever, Reliance Energy, Ranbaxy, Hero Honda, and Dr. Reddy’s — possibly indicating market participants are not very impressed in their future stories. |
| I turned my attention towards the big winners alone. The list included Reliance Industries, Bharti Airtel, Larsen & Toubro, and ICICI Bank, among others. A cursory number-crunching told me that these four scrips could easily explain a large portion of the index performance in the last two years. To an extent all of them have had interesting stories about their future for the market. For instance, Reliance Industries had enormous value unlocking due to its demerger, sorting of family tree issues, business gains due to increased monopoly in petrochemicals, its Reliance Fresh retail initiative, and its expansion plans in petrochemicals sector. On the same lines, Bharti Airtel and Larsen & Toubro had demerger stories, and have also been unrelenting in their aggressive new initiatives and their expansion plans. While these stories are undeniably value-adding, the enormity of the gains in these big players also suggests that it is highly probable that a large portion of these gains are not explainable. For instance, these could be capital market mis-pricing issues due to large liquidity supply or these could even be temporary bubbles. |
| Increasing shallowness of the markets: I then turned my attention towards the broader equity markets. Being larger, I thought it prudent to look at the average daily business done by the National Stock Exchange. I also included the BSE Mid Cap Index and BSE Small Cap Index as these truly reflect the broad market movements and have a non-institutional investor bias. The table gives the average daily summary of business transactions in the last three consecutive years. It conveys some interesting insights. |
| One can see a positive picture of increase in the number of traded securities both in the cash segment and the futures and options (F&O) market. There is also an increase in the gross F&O activity. While good practices followed by the best global exchanges state that stocks ought to be included in either the index or be allowed to trade in the F&O markets after having a good trading history of more than two to three years, we observe that the number of stocks trading in the Indian F&O markets has more than doubled. Even recently listed stocks with no price history such as Everest Kanto Cylinder, Parasvnath Developers, and Reliance Natural Resources are included in the F&O segment. This behaviour by the intermediaries can be explained by the desire to achieve new heights in business done, overall bull market fever and other stakeholder constraints. I hope the institutional intermediaries have done enough homework on this and would keep the investors’ interests at the highest level. |
| However, the same table also conveys some interesting cues — surprisingly, there is a decrease in the traded value per security both in the cash segment and in the F&O segment in the last one year. In fact, the fall has been quite significant (given increasing liquidity, more online trading, and lowering transaction costs). Add to this the negative returns in the BSE Mid Cap index and BSE Small Cap index during the last one year and one can without a doubt appreciate the increasingly shallow Indian equity markets conveying increasing investor disinterest. |
| Also, an interesting fact has been the lack of any new issues from companies with a size of less than Rs 50 crore. For instance, in the recent past, I have not read about a par value issue (that is, no share premium). The whole story hints at the decreasing interest of both the exchanges and the investing community in creating and/or nurturing smaller-sized firms or broadening the markets. |
| The above discussion reasonably explains the recent capital market gyrations, a lack of portfolio appreciation among large number of investors, and also corroborates the narrowing equity markets. In fact, they do put to question the viability of the short-to-medium term sustainability of the bull run. May be, the bigger fool theory is at work or, may be, the existing buyers have some aces up their sleeves. Whatever the reason, one conclusion can be that the stakeholders involved, especially the institutional intermediaries should consider new and innovative ways of improving the size and quality of Indian capital markets including diversifying the stock index constituents and shifting focus towards attracting higher proportion of the long-term investors instead of just sticking to their existing stale strategies. |
Ram Kumar Kakani
Investment Basics - What is EPS?
ROA, ROE, ROI, PE, EPS… Welcome to the world of financial accounting ratios. Confusing for some and comforting for others, these tools can be highly effective in making investment decisions. Given their simplicity, a number-averse person too can use them. Significant amongst the lot is the concept of earning per share (EPS). Companies are required to report both, the basic and the diluted EPS in their financial reports.
What is EPS?
EPS is a measure to track the profitability and success of a company on a per share basis. It is a significant determinant of the price of a share. Mathematically EPS is the net profit or loss, less preference share dividends, divided by the weighted average number of shares outstanding during a period. The number of outstanding shares could vary owing to the company buying back shares, issuing fresh equity, conversion of debt to equity, etc.
At the same time a company often has other financial instruments floating in the market that could be converted into equity. This potentially convertible equity could dilute your holdings. In order to take these into account, the concept of diluted EPS emerged. The two quoted figures can be quite different and you need to know what your share in the earnings will stand at if all the options of dilution come into effect. Companies report trailing EPS which is the based on earnings of the past year. You will often come across terms such as current and forward EPS, these figures are based on estimated earnings of a company.
How do you use it?
Just the way an investment decision made solely on the price of a stock or NAV of a mutual fund, is deficient, stand alone EPS bears no meaning. It is used, primarily as a tool for comparison. At the same time you can't compare the EPS of companies functioning in different industries. In making an investment decision, one can analyse the rate of change in EPS in the last two quarters and compare this change to the EPS growth rates in the past three to five years. This would indicate if the company is on track in the current fiscal. As a tool for inter firm comparison, EPS gives you an indication of the return on investment made.
Limitation
EPS does not take into account the market price of a stock and its use is limited to gauging the earning consistency of the company. When analysing EPS you must also look at the price earning ratio as well.
Sharekhan Investor's Eye dated June 22, 2007
Tata Motors
Cluster: Apple Green
Recommendation: Buy
Price target: Rs792
Current market price: Rs685
Annual report review
We have analysed the recently released annual report of Tata Motors (TAMO) and present the highlights below.
Key points
- TAMO had a good FY2007, registering a 32.3% growth in its top line and a 37.5% growth in its bottom line. The medium and heavy commercial vehicle (M&HCV) sales volumes picked up splendidly during the year, led by a strong growth in the freight availability and the Supreme Court's ban on the overloading of trucks. The light commercial vehicle (LCV) volumes sustained their growth momentum as Ace continued to do well while passenger car volumes remained strong on the back of good Indica sales.
- The company continued to make progress towards improving its operational efficiencies as its turnover per employee rose to Rs73 lakh against Rs68 lakh in FY2006. The return ratios remained stable with the return on capital employed (RoCE) at 29.9% and return on net worth (RoNW) at 27.1%. The debtor days reduced to 10.5 days while the inventory days too reduced to 33.7 days from 35.8 days.
- The company has a capital expenditure (capex) plan of Rs12,000 crore for the next four years. The funds shall be spent towards new product development and capacity expansion. To part finance the activities, the company has recently announced the issue of five-year foreign currency convertible alternative reference securities (CARS) aggregating to $490 million, including a green-shoe option of $40 million. The same will be convertible at the option of the company into depository receipts or ordinary shares at a price of Rs960.96 per share. At that price, it would lead to a dilution of 5% over its current diluted equity.
- The company maintains its optimism towards the automobile sector, considering the strong macro factors. However the growth during the current year is expected to be lower in comparison to that in the previous year as the same shall be affected due to the higher interest rates and tightening liquidity. As a strategy going forward, the company plans to focus on new product launches and has lined up a number of launches in the next couple of years.
- We maintain our cautious view on the commercial vehicle (CV) industry and believe that the lacklustre trend in sales would continue in the coming months. We expect a revival at the end of the monsoons and with the commencement of the festive season. At the current market price of Rs685, the stock quotes at 10.4x its consolidated FY2009E earnings and at 5.2x its earnings before interest, depreciation, tax and amortisation (EBIDTA). We maintain our Buy recommendation with a price target of Rs792.
Ratnamani Metals & Tubes
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Under review
Current market price: Rs880
Q4FY2007 results: First-cut analysis
Result highlights
- The Q4FY2007 results of Ratnamani Metals & Tubes are above our expectations.
- The company reported strong quarterly results. The revenues for the quarter grew by 95.3% to Rs172.6 crore.
- The operating profit for the quarter grew by 77.6% to Rs34 crore and the operating profit margin (OPM) for the same period declined by 240 basis points to 22.3% from 24.8% in Q4FY2006. The OPM declined due to a higher raw material cost as a percentage of sales. The raw material cost went up by almost 310 basis points to 62.9% from 59.8% in Q4FY2006. Other expenses as a percentage of sales also went up by 110 basis points during the quarter.
- The interest expense for the quarter increased by 111.4% to Rs4.9 crore while the depreciation cost for the quarter increased by 310.1% to Rs6.2 crore.
- The profit before tax grew by 80% to Rs27.6 crore. The net profit for the quarter grew by 38.4% to Rs17.5 crore due to a higher tax rate of 36.7% in this quarter compared with 17.8% in Q4FY2006.
- For the full year, the net sales grew by 79% to Rs571 crore and the net profit grew by 91% to Rs64.2 crore.
- The order book at the end of this quarter stood at Rs500 crore.
- Driven by a strong order book and the increasing demand for its products from its key user industries, which are in capital expansion phase, we believe there is strong visibility of its earnings. At the current market price, the stock is trading at 12.4x its FY2007 earnings per share and 6.9x its FY2007 enterprise value/earnings before interest, depreciation, tax and amortisation. We shall be upgrading our earnings estimates for FY2008 as well as the price target and would be coming out shortly with a detailed update on the company.
Premji, Ambani, Bajaj put stamp on ICICI offer
ICICI Bank’s mega equity offering closed on Friday, with Temasek, SBI, LIC, Dubai Investment and Warburg Pincus emerging as big investors in the issue, which was oversubscribed 12.3 times in the local market and four times in the ADR market. Interestingly, Azim Premji, Mukesh Ambani and Rahul Bajaj have put in Rs 1,000 crore each either directly or through entities controlled by them. Bajaj Auto has a 4.06% holding in the bank.
With this, India’s second-largest bank has raised Rs 17,500 crore, and will further mop up Rs 2,625 crore as greenshoe option. The money raised under the greenshoe option may be used to stabilise the share price if the scrip falls below the issue price. While the offering saw huge interest from institutional investors and even foreign investors who have subscribed through participatory notes (PNs), the bank just about managed to draw enough retail investors to subscribe to shares set aside for them.
Other key investors include Goldman Sachs ($1.5 billion), Deutsche Bank ($1 billion), ABN Amro (over $750 million), BNP Paribas ($440 million), GIC and its subsidiaries ($350 million), besides Government of Singapore Investment Corporation at slightly over $100 million, institutions backed by the Qatar government, and Legatum. In the ADR market, institutions backed by Dubai government have put in around $1 billion.
Bids for 113.34 crore shares were received, against a total of 9.89 crore shares on offer in the price band of Rs 885 to Rs 950. While bids for 3.10 crore shares were received at the cut-off price, most of the bids were in the range of Rs 885 to Rs 930. Further, according to the exchange data, there were not many bids at the higher end of the price band.
The QIB portion in the local markets have seen an oversubcription of around 23 times. The non-QIB portion saw an oversubcription of 6.5 times. The final figures will be available only by Saturday. Incidentally, this comes close on the heel of the mega issue of DLF where retail segment was said to have received bids for only 97% of the reserved shares.
Among the lead managers, clients of Merrill Lynch contributed to around 40% of the overall QIB demand, Enam brought in around 30%, JP Morgan around 20% and Goldman Sachs around 10%. In the retail issue, there was some confusion related to the application forms for existing shareholders. Many small shareholders did not take note of the fact that only a holding of 108 shares (valued at Rs 1 lakh on the particular cut-off date) would entitle them for the slice of the offer reserved for existing retail shareholders.
In fact, in the past couple of years, only Reliance Petroleum (RPL) managed to attract a large number of retail shareholders in its issue. RPL came out with a Rs 8,100 crore IPO in April 2006, where the retail segment was subscribed nearly 15 times. Interestingly, even Cairn India, that came out with an IPO last year worth Rs 5,260 crore, saw its retail and HNI category undersubscribed, according to Prime Database.
ICICI Bank FPO Subscription Details
Qualified Institutional Buyers (QIBs) - 21.6172 times
Non Institutional Investors - 6.1453 times
Retail Individual Investors (RIIs) - 1.0347 times
Eligible Shareholders Reservation - 0.2241 times
OVERALL - 11.50 times
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