Sterlite raises $2 billion via ADR

Sterlite Industries, the copper and zinc producer controlled by billionaire Anil Agarwal, sold over $2 billion of stock in the US, the biggest overseas share sale by an Indian company.

Sterlite, based in Mumbai, sold 150 million (including a greenshoe option of 19.6 million) American depository receipts (ADRs) at $13.44 a piece, the unit of Vedanta Resources said in a statement to the Bombay Stock Exchange today. One ADR is equal to one local share.

Vedanta Chairman Anil Agarwal said the issue, which was the first listing by any domestic manufacturing company in the US market, showed that the US investors believed in the Indian power story. The proceeds from the issue will be utilised to part-finance the company's plan to set up power plant for an investment of Rs 12,500 crore.

The company's share price more than quadrupled in the past two years as prices of copper, aluminium and zinc reached record highs. Demand for Indian shares lifted the nation's stock market past $1 trillion in value last month and ICICI Bank today sold out its record stock sale in 20 minutes.

"Foreign investors want to invest in India because they believe in the growth story,'' said Sandip Sabharwal, chief investment officer at Mumbai-based J M Financial Mutual Fund.

"There is enough appetite overseas for Indian offerings.''

The country's benchmark Sensitive Index has gained 43 per cent in the past year as the fastest pace of economic growth in almost two decades lured overseas investors. Sterlite's sale may be eclipsed this week if ICICI Bank, the country's biggest lender to consumers, completes a $4.3 billion offer in India and the US.

Property developer DLF last week raised $2.4 billion in the country's biggest initial offering. Lenders, including State Bank of India, HDFC Bank and UTI Bank, plan to raise $3.5 billion stock sale. The dates have yet to be set.

Competing offers would not damp demand for Sterlite shares, said A Balasubramaniam, chief investment officer at Birla Sun Life Asset Management in Mumbai.

The stock trades at 8 times future profit compared with 12 times for BHP Billiton and 13 times for Rio Tinto, the world's biggest mining companies.

"Outlook on metal and mining companies in emerging markets is positive because of the region's growth prospects,'' he said.

"Sterlite's valuation is cheaper than its global peers.''

London-based Vedanta's 79.25 per cent stake in the $7.4 billion company has limited the shares available to foreign investors, which own 7.4 per cent of Sterlite. Vedanta's stake will drop to 63 per cent after the sale.

The offering will "increase visibility and lead to better price discovery,'' said Rakesh Arora, an analyst with Macquarie Securities in a June 15 note to clients. The stock is "under-discovered''. Macquarie is the only overseas broker tracking the company, according to the report.

Sterlite's shares rose 2.9 per cent at close to Rs 559.9 on the Bombay Stock Exchange, valuing the company at $7.7 billion. Vedanta shares gained as much as 1.1 per cent to 1,600 pence and traded at 1,583 pence at 12:25 pm in London.

Some 11.5 million shares were sold to Japanese investors in the offer, managed by Citigroup, Morgan Stanley & Co, Merrill Lynch & Co and Nomura Holdings. The sale overtook Infosys Technologies' $1.6 billion offer last November as the biggest by an Indian company.

The proceeds will be used to finance a 2,400-mw power plant in eastern Orissa that will cost about $1.9 billion, and to buy the government's 29.5 per cent stake in Hindustan Zinc.

The company owns 65 per cent of the zinc producer and is in talks with the government to buy its holding, worth $2 billion at the prevailing market price, according to the sale document.

Sterlite's stock is worth Rs 829, using the sum of parts method, with the zinc business alone making up 70 per cent to the valuation, Macquarie said. The stock's worth Rs 642 even if the additional stake in Hindustan Zinc is excluded, a fifth more than the prevailing market price, according to the brokerage.

The US share sale comes two months after Vedanta agreed to pay $1.4 billion for 71 per cent of Sesa Goa, the country's biggest non-state iron-ore exporter, defeating rivals including Arcelor Mittal. Sesa gave Vedanta its first iron ore mine in India, where steel demand is growing at twice the global average.

Orissa, which holds a quarter of the country's iron ore and coal deposits, has prompted steelmakers, including Arcelor Mittal and Posco, to announce ventures in the state. That may give Sterlite bulk users for the power plant, which may be ready by 2010.

"A foray into the power sector is the next logical step for a group that is expanding aggressively and aims to become a big player in the metals business,'' said Niraj Shah, an analyst at Prabhudas Lilladher, a Mumbai-based brokerage.

The country's economic expansion has caused electricity demand to exceed supply. The nation must add 70,000-mw capacity in the next five years to ease a shortage. China plans to add 95,000 mw this year alone.