Indian ECM bankers keep faith despite rout

Prabhat, which was initially looking to raise Rp5.16bn ($77.65m), trimmed its price range to Rp115-Rp126 a share from Rp140-Rp147 on Tuesday. Bookbuilding, which was scheduled to run from August 28 to September 1, will now continue for an extra three days, and the company will raise just Rp4.58bn if it prices at the top of the revised range.  

The milk and dairy products manufacturer took a knife to its listing after failing to cover books. A dearth of orders during bookbuilding meant Prabhat had only found demand for about a quarter of its deal at the time of writing, with none of the different investor categories covering their portion of the trade.

According to a stock exchange filing, qualified institutional buyers (QIBs) had subscribed for just 0.17x of the shares available to them by the end of Wednesday, and retail 0.06x. The deal saw some participation from high net worth investors, but foreign investors, mutual funds and corporates have so far shunned it.

Prabhat decided to press on with its IPO on August 28 despite a global sell-off in equities triggered by China and the fact it was coming to the market at a significant premium to its industry.

But even with the fresh terms it is too early to tell if Prabhat will prove attractive enough to seal the deal, said a source close to the trade. “We built a good shadow book for the bulk of the IPO but it’s no guarantee and investors will still have to convert their interest into firm bids,” he said.

At the top of its new price range Prabhat will be valued at a 2015 EV/Ebitda of 12.6x and P/E multiple of 34.6x, versus the earlier P/E of as much as 49.83x. There are, however, hardly any comparables for Prabhat and joint global co-ordinators Edelweiss Financial Services and Macquarie are pitching the deal against the broader food processing industry.

Industry-wide valuations are, however, hugely fragmented, with the most expensive stock trading at a P/E of 160x, according to Prabhat's prospectus, and the cheapest at a multiple of 5.2x. As a whole, the industry trades on an average 23.5x P/E. 

As a rough gauge, the bookrunners are steering investors towards two Indian-listed companies, namely Hatsun Agro Product and Heritage Foods, bankers said. Those comparables are trading at wildly different multiples of 113.01x and 29.4x, respectively — also adding to the challenge of finding a reasonable valuation for Prabhat.

SBI Capital Markets is a bookrunning lead manager on the deal.

Prabhat is not the first Indian issuer this year to downsize its IPO. Adlabs Entertainment raised Rp3.70bn in March after pricing at the bottom of a revised range. Like Prabhat, Adlabs too was seen as offering overly aggressive terms, and it launched during a choppy time for Asian markets.

Yet ECM bankers don’t expect Prabhat to cast a pall on the pipeline. “It’s too small to be used as a gauge for upcoming deals,” said the source. “I reckon good quality trades will still be able to get done in the current market, just maybe not at the valuations they want.”

A banker away from the transaction highlighted some key differences between Prabhat and Sadbhav Infrastructure Project — which closed bookbuilding for its Rp4.92bn listing on Wednesday, merely a day after Prabhat’s original planned closing date.

Sadbhav, however, had managed to get past the finish line, despite being only 0.2x covered mid-way during bookbuilding. In the end, it was 1.35x covered.

But the main difference between the two was in the approach to selling. “We left nothing to chance and made sure to secure extra commitments from the anchor investors last week in case demand failed to turn up during the public bookbuild,” said a banker on Sadbhav.

In contrast, Prabhat did not bring any anchor investors on board prior to opening the transaction, which sent a weak signal to the market, reckoned the banker away from the IPO.

“In India the rules are such that bookbuilding is conducted over three days and the price range is set five days before that, so an IPO is effectively exposed to eight or nine days of market risk, which is fine normally but not when markets are volatile,” said a second ECM banker.

But he considers the global sell-off a “passing phase”, and believes the market will find its feet again. “Any decision on an IPO can look good, bad or ugly depending on what happens in those eight days,” he added. “But on the whole new listings have done well this year.”

For one, VRL Logistics has doubled from its issue price to Rp413.45 as at Wednesday, since its listing in April. “It’s the markets, rather than business, that is taking a beating,” said the second banker. “I’d be worried if five out of 10 companies start pulling deals, but that isn’t happening.”