- Overview: HUDCO is a PSU engaged in providing loans for housing and urban infrastructure projects in India.HUDCO primarily lends to state governments and their agencies.69% of HUDCO’s loan portfolio is in the urban infrastructure segment and the remaining 31% is in the housing finance loan segment. It's revenues, EBITDA and PAT have grown at 4.8%, 4.2% and 6.8% CAGR over FY12-16. Revenues for FY16 were Rs. 3,350 cr. and profit Rs. 810 cr. It has 874 full time employees.
- Key risks: 1) HUDCO has weak growth in a recent environment of shortages and massive demand 2) High GNPA’s and NNPA’s 3) It's a weak institution and performance is unpredictable. Clearly the activities are not commercially driven, so how can investment results be attractive?4) It is far better to own a wonderful business at a fair price than a fair business at a wonderful price”. We feel that HUDCO is an average business available at a good price.
- Opinion: This IPO offering is rated AVOID, and investors may look elsewhere for long term gains.
Here is a note on Housing and Urban Development Corporation Ltd. (HUDCO) IPO.
- This IPO opens8-11th May 2017 with Price bandRs.56-60. Retail gets a discount of Rs. 2/share.
- Shares offered to public are20.40 crore, with FV Rs. 10 and market Lot is 200. The shares are 10.19% of equity and will collect Rs1,224 cr. which is a complete OFS. There is no fresh issue.
- The IPO share quotas for QIB, NIB and retail are in ratio of 50:15:35. This is good for Retail.
- HUDCO is a wholly-owned Govt. of India firm since 46 years that has been providing loans for housing and urban infrastructure projects in India. The promoter’s100% stake will fall to 90% post-IPO.
- HUDCO would not benefit as it is a complete OFS and hence the proceeds will go the promoter.
- HUDCOis a PSU engaged in providing loans for housing and urban infrastructure projects in India. HUDCO has been conferred the status of Miniratna (Category-I PSE) by the GoI.
- Revenues for FY16 were Rs. 3,350 cr. and profit Rs. 810 cr. It has 874 full time employees (Mar ‘17.).
- The total sanctioned loans since inception areRs. 1,63,137 cr., of which 37%, were Housing Finance loans and Rs. 63%, were Urban Infrastructure Finance loans. ByDec 2016, the outstanding Loan Portfolio was Rs. 36,385.8 cr., now divided at 31% and69%, latter being Urban Infrastructure Finance loans and project-linked bonds.
- HUDCO classifies housing finance loans into social housing, residential real estate and retail finance, which is branded as HUDCO Niwas (collectively, “Housing Finance”).Under social housing, the beneficiaries of the loans are 1) families with household income of Rs. 300,000 p.a. or less and 2) those with household income from Rs. 3,00,001 p.a. to Rs. 6,00,000 p.a.
- Under residential real estate, the loans are given to public and private sector borrowers for housing and commercial real estate projects, including land acquisition. Such projects cater to the middle-income group and high-income group of society.HUDCO finances social housing and residential real estate through lending to State Governments and their agencies, which, in turn, extend the finance to the ultimate individual beneficiaries. HUDCO ceased sanctioning social housing and residential real estate loans to the private sector in March 2013.
- With respect to urban infrastructure finance, HUDCO gives loans for projects relating to:
- water supply; roads and transport; power; emerging sectors, which includes SEZs, industrial infra, gas pipelines, oil terminals and telecom sector projects; commercial infra and others, which includes shopping centres, market complexes, malls-cum-multiplexes, hotels and office buildings;
- social infra and area development; and sewerage, drainage and solid waste management (collectively, “Urban Infrastructure Finance”).
Exhibit 1 – Loan Portfolio Segments
- HUDCO has a pan-India presence with a corporate HQ, 21 regional and 11 development offices.
- HUDCO’s borrowers under Urban Infrastructure Finance are State Governments and their agencies. They ceased sanctioning new Urban Infra loans to entities in the private sector in March 2013.
- HUDCO also provides consultancy services in housing and urban development. The services encompass govt.housing and urban infra. programs. They play a key role in Govt. schemes to develop the Indian housing and urban infrastructure sectors, such as DAY-NULM, JNNURM and PMAY-HFA (Urban), through the appraisal and monitoring of projects. They also advise on urban and regional planning, design and development and environmental engineering.
- HUDCO’s business is supported by capacity building activities through research and training in the field of human settlement development, through the Human Settlement Management Institute and the promotion of alternative building materials and cost-effective technology for house building. Through these activities, they try and develop greater demand for social housing and urban infrastructure development and thereby increase demand for the financing of the same. They also earn revenue from their training services.
- 69% of HUDCO’s loan portfolio is in the urban infrastructure segment and the remaining 31% is in the housing finance loan segment. See Fig 2.
- HUDCO primarily lends to state governments and their agencies (89.9%). See Fig 4
- Leadership is Ravi Medithi (CMD), Rakesh Kumar Arora (CFO), Nand Lal Manjoka (director) and Harish Sharma (Compliance Officer).
Fig 2 –HUDCOLoan Portfolio
Fig 3 – HUDCO Geographic concentration of loan portfolio/ Fig 4 – HUDCO Borrower Category Profile
- As at Dec 31, 2016, HUDCO’s GNPAs were Rs. 2,474.5 cr., or 6.8% of their outstanding loans, advances and investments in project-linked bonds (collectively, the “Loan Portfolio”), compared to Rs. 2,382.4cr., or 6.68% of their Loan Portfolio as at FY16. Further, as at December 31, 2016, their net NPAs constituted 1.51% of their Loan Portfolio, compared to 2.06% as at FY16.
News, Updates and Strategies of HUDCO
- HUDCO sanctioned Rs. 1,275 cr. towards the first installment of its committed loan of Rs.7,500 cr. in Dec 2016 to Govt. of Andhra Pradesh for the development of the proposed capital Amaravati.
- The AP Finance department, HUDCO and the Special Purpose Vehicle Bhogapuram International Airport Company Ltd., entered into a formal agreement in June 2016 that the government would stand guarantor to the Rs.650-cr. loan to be extended by HUDCO. The amount was to be utilised by the government to acquire 2,400 acres for the Airport in the first phase.
- HUDCO approved a loan facility of Rs. 1768 cr. for Maharashtra’s showpiece highway project — the Nagpur-Mumbai super communication express way in April 2017. The loan had been approved for Maharashtra State Road Development Corporation (MSRDC), the nodal agency for executing the project, which is meant for land acquisition purposes.
- The Comptroller and Auditor General of India rapped HUDCO in August 2016 for "excess" mobilisation of over Rs 3,200 cr. leading to additional interest burden of about Rs. 30 cr. on the state-run firm. HUDCO was accused of "non-judicious" mobilisation of funds with higher proportion of bank loans whose interest rates were higher than the other sources.Also in April 2017, the CAG indicated that HUDCO faces a potential loss of Rs 628.4 cr. and a wasteful expenditure of Rs 134.7 cr. which was caused by a subsidiary of ONGCVidesh Ltd. To improve its operations, CAG recommended HUDCO to strengthen procedure for assessment of requirement of funds, ensuring mobilisation of funds in "economical, efficient and effective manner" and strengthening monitoring system for proper funds' utilisation, among others.
- Minister of Housing & Urban Poverty Alleviation,Venkaiah Naidu inaugurated the 47th Foundation Day of HUDCO in April 2017. As per the minister, in the last 47 years, HUDCO had constructed 16 mn. residential units across the country and over 92% of these dwelling units had benefited the economically weaker sections and low income groups.
- Ravi KanthMedithi, CMD of HUDCO expects the cost of funding to go down. Currently the cost of funding is 7.5%.
- HUDCO raisedRs 1,789 cr. from tax-free bonds in Feb 2016. Under the offer, a retail investor could earn up to 7.69% by subscribing to 15-year bonds. The paper with 10-year maturity offered 7.29%.
- The unofficial grey market premium is in the range of Rs. 28-29/share. This is a positive.
- The issue has been subscribed 1.41 times on the 2nd day as on 12.45 PM.
Financials of HUDCO
Fig 5 – HUDCO Financials *FY17P projection is a simple annualisation of 9M FY17 data
- HUDCO’s revenues, EBITDA and PAT have grown at 4.8%, 4.2% and 6.8% CAGR from FY12-16, Fig 5.
- FY17 data is a projection of 9M FY17 financials. The revenue and PAT growth have been steady. However based on 9M FY17 data, the financials for FY17 could fall.
- The EPS has risen steadily in the last 5 years. However for FY17, again, the EPS could fall YoY at the current rate of growth.
- In accordance with CPSE Capital Restructuring Guidelines, with effect from FY16, HUDCO is required to pay a minimal annual dividend of 30% of its PAT or 5% of its net worth, whichever is higher, unless an exemption is provided. Dividend from HUDCO has fallen over the years. This is a negative.
- HUDCO has a low ROE of 9.2% and ROCE of 9.8% for FY16.
Fig 6 – HUDCO Cash Flow Position *FY17P projection is a simple annualisation of 9M FY17 data
Fig 7 – Financial Metrics
- HUDCO has an unstable cash flow pattern. It has generated FCF for equity shareholders in only 2 out of the last 5 financial years (from FY12 to FY16). This is a negative.
- From Fig 7 we can see that the RoA has fallen over the years. The cost to income ratio has spiked by a few bps. Also the spread and NIM’s have fallen in the same time period. This is a negative.
- The GNPA’s for HUDCO are high at almost 7% over the last few years. The NNPA has marginally fallen, however still high at 1.51%. This is a negative.
We benchmark HUDCO against other housing finance (HF) companies, government focussed lenders and other comparable banks. See Fig 8.
Exhibit 8 – Financial Benchmarking
- Both PE and P/B (at 1.3 times) for HUDCOappears attractive compared to its peers.
- HUDCO has witnessed weak PAT growth compared to peers with the 3 year PAT growth at 5.0% and sales at 4.7%. The growth is lowest in the industry. This is a negative.
- The D/E ratio at 2.80 is best amongst peers. This indicates room for growth and a conservative lending approach. Also PAT margin for FY16 was24.17%, amongst the highest in the industry.
- The return ratios are poor and low in the industry.
- Positives for HUDCOand the IPO
- HUDCO’s IPO pricing is attractive. This is a good value offering.
- The company has good capital adequacy, providing enough room to grow.
- HUDCO has high margins. This is a positive and all sales growth provides significant PAT growth.
Risks and Negatives for HUDCO and the IPO
- The Gross and Net NPAs are high with further upside risk depending upon litigation results.
- HUDCO is an agency of the GoI, State Govts., the RBI and the NHB in their policy initiatives and any policy or strategy change or any change in the tax incentives that the GoI currently provides to HFCs may have an adverse effect on their business.
- HUDCO has concentrations of loans in certain States (24.7% in Telangana and 13.9% in Rajasthan) and any economic downturn or natural disasters affecting those States could lead to defaults.
- Some of the reforms under the scheme of Ujwal DISCOM Assurance Yojana have had and will continue to have an adverse impact on their results of operations and financial condition.
- HUDCO’s investment in Indbank Housing Limited is not in compliance with HFC Directions. These say that HFCs like HUDCO may not own more than 15% of the shares in another HFC. But it owns 2,500,000 equity shares in Indbank Housing, a HFC, which is 25% of the shares in that company.
- With a control over 90% of HUDCO (post IPO), the promoters will need to reduce to 75% within 3 years of listing. This means a further dilution or a M&A at a later date.
Overall Opinion and Recommendation
- India has the 2nd largest urban population in the world and by 2050, around 50% of India’s population i.e., 814 mn. is expected to live in urban areas. The need for up-gradation and development of urban infra and urban services cannot be overstated. The present levels of urban infra are grossly inadequate to meet the demand of the existing urban population.
- HUDCO is primarily a lender to the state govt./govt. bodies and hence the lending has to be in sync with the government policies which can have social objectives as well which might not make lending attractive for HUDCO.
- The firm has high gross and net NPAs. It has struggled to grow and lend in the last few years, in an environment where there is a massive shortage of infra.
- PSUs in this sector face difficulties such as management independence, incentives, skill improvement, risk taking ability, etc.
- Delayed implementation in loan disbursements due to regulatory clearance and pending litigations for recovery of non-payment by state borrowers negatively impact the financial growth of the firm.
- “It is far better to own a wonderful business at a fair price than a fair business at a wonderful price”. We feel that HUDCO is an average business available at a wonderful price.
- This IPO offering is rated AVOID, and investors are advised to look elsewhere for long term gains.
This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same.JM has no known financial interests in HUDCO or any group company. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at email@example.com.
About Punit Jain
The author is a SEBI-registed Research Analyst (SEBI Registration No. INH200002747), and has a firm called JainMatrix Investments (www.jainmatrix.com) which offers an Investment Advisory Service. He can be contacted at firstname.lastname@example.org
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