Thursday, May 6, 2010

After IPO blues, Essar Energy stock battered ahead of official listing on LSE

S Kalyana Ramanathan / London May 06, 2010

General European economic pessimism blamed, reassurance on India investment plans

Though the Ruias, promoter family behind oil and power major Essar Energy, might have picked an auspicious Friday (May 7) to list the stock on the London Stock Exchange, the first day of conditional trading on Tuesday proved a dampener.

Poor market conditions battered the stock by a 7.3 per cent discount over the original issue price of 420 pence a share. The discounted pricing continued well into the second day of trading today, with the price hovering around 395p a share.

On the first day of conditional trading on Tuesday, when the stock quote is displayed with the WI (meaning “when issued”) suffix, the price dropped by 7.3 per cent to 389.5p a share, even though the primary market index, FTSE 100, fell by only 2.6 per cent. Less than a week before, Essar Energy successfully completed its Initial Public Offering (IPO) by selling 303 million shares at 420p each to institutional investors, raising close to $1.95 billion in the process

Conditional trading started three days ahead of the official listing in the market on Friday. Conditional trading is a unique

rule for stocks that are to be listed on the LSE and is similar to what is called grey market trading in India.


The poor performance of the stock, however, has been attributed to the market condition, triggered by the debt crisis in Greece. The fear that the problem from Athens might spread to other European countries like Spain, Portugal and Ireland dampened overall sentiments, leading to the poor performance of Essar Energy's debut trading.

According to Deepak N Lalwani, Director-India, with London-based stockbroking company Astaire Securities: “Essar Energy was just a victim of market conditions over the sovereign debt crisis in Greece and the fear that it might spread to other European countries.”

The $2-billion issue from Essar Energy did not get off to a great start even before trading started. The stock was originally priced in the range of 450-550 pence a share. But, lukewarm market sentiments pushed the price down to 420p each, to ensure that large institutional buyers would fully subscribe to this mega issue.

The IPO from Essar Energy also took off at a time when smaller issues were getting postponed due to market conditions. UralChem shelved its $642-million London IPO on April 29. Russia’s second-largest maker of nitrogen-based fertiliser said in a statement that its stock “cannot be priced at a level which reflects a fair value of the company” due to “current market conditions”.


The pressure to lower the issue price by nearly seven per cent (on a base price of 450p), however, is not expected to affect the company's investment plans in India. Upon completing the issue, vice chairman Prashant Ruia said the company had hoped to raise at least $2 billion from the issue and it nearly did so. The company further has a 10 per cent greenshoe option, which it may exercise 30 days after official listing, if there is a need to bridge the gap in funding.

Essar Energy plans to increase its power generation from 1,220 Mw to 11,470 Mw in two phases, while the oil refinery capacity is to be increased to 7,50,000 barrels a day by 2013, making it India’s largest single location refinery. Essar is also raising money to carry out exploration and production across its global portfolio of oil & gas blocks in Asia, Africa and Australia.

The stock will be listed on the London Stock Exchange, following which it hopes to get on the coveted FTSE 100 list (of the most highly capitalised companies), that will make it the second company backed by an Indian promoter to be on the list. Currently, Anil Agarwal's Vedanta Resources holds this solitary distinction.

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