about 2 years ago

Housing and Urban Development Corporation (HUDCO) is entering the primary market on Monday 8th May 2017, as the maiden FY18 divestment issue, with an offer for sale (OFS) of 20.41 crore equity shares of Rs. 10 each by the Government of India, in the price band of Rs. 56 to Rs. 60 per share, with Rs. 2 per share discount for retail investors. Representing 10.19% of the post issue paid-up share capital, OFS will raise Rs. 1,210 crore at the upper end of the price band. Issue closes on Thursday, 11th May and it likely to list on the bourses on 19th May.

Wholly owned by the Indian Govt, HUDCO is a Miniratna (Category-I Public Sector Enterprise) long term lender (~8 years) to State Government agencies (90% of Rs. 36,386 crore loan portfolio, as of 31-12-16) and private sector entities (10%) towards urban infrastructure finance (69% of loan book) and housing (31% of loan book), with share of housing having increased from 26%, as of 31-3-14. Average ticket size of loans in both the categories is about Rs. 55 crore. Growth in financial performance has been in mid-single digit - revenue CAGR of 4.4% and PAT CAGR of 5.6% between FY12-16, albeit consistent.

Company’s FY16 consolidated revenues stood at Rs.3,205 crore, on which net interest income (NII) and PAT of Rs.1,298 crore and Rs. 774 crore were earned, respectively, translating into EPS of Rs. 3.87, on equity of Rs. 2,002 crore. FY16 return on assets and return on equity stood at 2.35% and 9.98% respectively. 9MFY17 revenue came in at Rs. 2,613 crore, during which NII and PAT stood at Rs. 1,104 crore and Rs. 497 crore respectively, leading to EPS of Rs. 2.48. 98% of its current Rs. 23,400 crore borrowings are on fixed rate basis, whereas only 20% of its lending is on fixed rate. In the declining interest rate scenario, this has put pressure on margins, as NIMs contracted from 5.18% in FY15 to 4.11% in FY16 and to 4.26% in 9MFY17. Hence, NIMs could be soft going forward too, but are still attractive, on an absolute basis. Networth, as at 31-12-16, stood at Rs. 8,909 crore, leading to BVPS of Rs. 45.

Company’s Capital Adequacy Ratio (CAR) is very high at 63.70% (versus regulatory requirement of 12%), as loans having State Government guarantees (accounting for 75% in this case) carry ‘zero’ risk weight for computing CAR ratio, as per NHB guidelines. Gross NPAs of 6.80% is split as 0.75% for loans to State Govt. agencies (which need to be provided as overdue for 90 days and generally get reversed subsequently; company has not written off any state govt. loan ever in its standalone financials), and 5.98% gross NPAs belonging to the private sector basket, lending to which has consciously been curtailed since March 2013. Company’s net NPAs, at 1.51%, as of 31-12-16, has declined from 2.52%, as of 31-2-14, and its provision coverage ratio of 79% is quite healthy.

At Rs. 60 per share, company’s market cap will be Rs. 12,011 crore, which leads to PE and PBV multiples of 17x and 1.3x, based on FY17E earnings. Based on current year estimates (FY18 expected results), the multiples are 16x and 1.2x respectively, which are very attractive. There are no direct listed peers, as HUDCO does wholesale lending (B2B) vis-à-vis retail lending (B2C) undertaken by listed home loan providers such as HDFC, LIC Housing, PNB Housing and Indiabulls Housing, which are all ruling at PBV multiples of 2.5x and above. Comparison with REC may also not be appropriate, as REC’s loan book of Rs. 2.01 lakh crore is over five-fold HUDCO’s Rs. 36,400 crore besides both catering to different sector profiles within the infrastructure space. Both housing and urban infrastructure sectors in which HUDCO has presence are facing some serious tailwinds, in the form of Govt. impetus via ‘Smart Cities’ and ‘Housing for All by 2022’ projects which provide visible headroom for future growth.

To summarise, Govt. backed lender extending loans to state agencies, where risk of default is near-zero, with adequate capital backing, good quality book and very strong sector tailwinds, is being offered at a price-to-book value multiple of only 1.2 times, which is indeed a no brainer. Retail discount of Rs. 2 per share, seen after a long times, only acts as an additional sweetener!

Very attractive pricing supported by domestic housing boom make this issue a subscribe both from listing gains and long term perspective. Share also hold promise to touch the 3-digit figure over the next 12 months.

Disclosure: No Interest.


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