IPO

Thursday, May 04, 2017 Click here for Rating Reckoner
Housing and Urban Development Corporation
Focused on loans to state governments and their agencies
CM RATING42/100
Housing and Urban Development Corporation (HUDCO) is a wholly owned public sector undertaking (PSU) Company, providing loans for housing and urban infrastructure projects in India. The company is conferred with the status of Miniratna (Category-I Public Sector Enterprise) having more than 46 years of experience. The company has a pan-India presence with 21 regional offices and 11 development offices.

The total outstanding loan portfolio of the company stood at Rs 36385.82 crore end December 2016 (9% CAGR over FY 2014-16), comprising 30.86% of housing finance loans (22% CAGR over FY 2014-16) and 69.14% of urban infrastructure finance loans and project-linked bonds (4% CAGR over FY 2014-16). As at end December 2016, the total sanctioned loans since inception stood at Rs 163137.24 crore, of which 36.92% were housing finance loans and 63.08% were urban infrastructure finance.

The company provides housing loans across three categories - social housing, residential real estate and retail finance (branded as Hudco Niwas). On the urban infra side, Hudoc lends for projects relating to water supply, roads and transport (including railways and ports), power, emerging sectors (including special economic zones, industrial infrastructure, gas pipelines, oil terminals and telecom sector projects), commercial infrastructure and others (which includes shopping centers, market complexes, malls-cum-multiplexes, hotels and office buildings) etc.

The company also provides consultancy services in the area of housing and urban development for government housing and urban infrastructure programs. It plays a key role in various government schemes to develop the Indian housing and urban infrastructure sectors through the appraisal and monitoring of projects. The company also advises on urban and regional planning, design and development and environmental engineering.

The borrowers under the Urban Infrastructure Finance are primarily state governments and their agencies. The company has ceased sanctioning new Urban Infrastructure Finance loans to entities in the private sector in March 2013. As at end December 2016, about 89.93% of total loan portfolio was to state governments and their agencies.

The company has been profitable since inception over 46 years ago, including a profit after tax of Rs 496.26 crore in the nine months ended December 2016 (9M FY2017). The company enjoys highest credit ratings, access to diversified and lower-cost funding and ability to significantly increase borrowings in compliance with the housing finance companies (HFC) directions. The HFC directions currently permit HFCs to borrow up to 16 times their net worth, while the borrowing of the company stands at only 2.81 times of the net worth. The Capital to Risk (Weighted) Assets Ratio (CRAR) stands at robust level of 63.70% compared with the regulatory requirement of 12.00%.

The gross non-performing asset (NPA) ratio of the company was higher at 6.80%, mainly on account of private sector loans gross NPA of 5.8%, while the company has maintained the net NPA ratio at substantially lower level of 1.51% at end December 2016. The provision coverage ratio was strong at 78.98%.

The net interest margins (NIM) has been hovering in a range of 4-5%. The NIMs stood at 4.11% in FY2017. The RoE (return on equity) of the company has been 9.98% in FY2016, while the RoA (return on assets) was healthy at 2.35% due to lower leverage ratio.

Ravi Kanth Medithi, IAS, is the Chairman and Managing Director. He has been associated with the company since 11 April 2014. Nand Lal Manjoka, IRTS, 58, is the Director (Corporate Planning) of the company. He has been associated with the company since 11 April 2013. Rakesh Kumar Arora, 57, is the Director (Finance) and CFO. He has been associated with the company since 1 October 2015.

Key strategy of the company

  • Grow total Loan portfolio and increase housing finance and social housing as a percentage of total loan portfolio
  • Continue to focus on sanctioning loans to state governments and their agencies
  • Increase financing of housing and urban infrastructure projects with increasing geographical reach to smaller cities
  • Continue to participate in the implementation of government housing and urban infrastructure programs.
  • Incentivize borrowers to avail fixed interest rate loans so as to better match assets and liabilities and thereby decrease interest rate and liquidity risks
  • Continue to raise funds from diverse sources

The Offer and the Objects

The offer for sale (OFS) is of up to 204,058,747 equity shares by the promoters, the government of India (GoI). The entire proceeds from the OFS will be paid to the government. The OFS will mop up proceeds of Rs 1127.94 crore at the lower price band of Rs 56 per share (face value Rs 10 per share) and Rs 1209.56 crore at the upper band of Rs 60 per share. Post-IPO, the promoter's stake will reduce to 89.8% from existing 100%.

The minimum bid lot is 200 equity shares and in multiples of 200 equity shares thereafter. The issue is to be made through a book building process and will open on 08 May 2017 and will close on 11 May 2017.

The issue includes a reservation of 3,868,747 equity shares for subscription by eligible employees. A discount of Rs 2 on the offer price will be offered to retail individual bidders bidding in the retail portion and to eligible employees bidding in the employee reservation portion.

Strengths

The company plays a key role in various government schemes to develop the Indian housing and urban infrastructure sectors and a very high proportion of loan portfolio is to state governments and their agencies. Gross NPAs for loans to state governments and their agencies was negligible at 0.75% against total gross NPAs of 6.80% of loan portfolio. Advantage of lending to state governments and their agencies is that for the purposes of calculating CRAR, the HFC directions on capital adequacy accord a zero risk-weight to such loans if they are guaranteed by a state government. CRAR as at December 31, 2016 was 63.70% compared with the regulatory requirement of 12.00%.

Highest credit ratings, access to diversified and lower-cost funding and ability to significantly increase borrowings in compliance with the HFC directions

There is pan-India presence and strong relationships with state governments and their agencies. The company has network of 21 regional offices and 11 development offices. The pan-India presence has enabled to develop strong relationships with state governments and their agencies.

Weaknesses and concerns

The gross NPA do not take into account excluded loans totaling Rs 832.45 crore to R.K.M. Powergen and Nagarjuna Oil Corporation, as per court order. If the excluded loans had been considered to be NPAs, gross NPAs rises to 9.09% and net NPAs to 3.59% as at December 31, 2016. If in the future, the company is required to recognize the excluded loans as NPAs, it would have an adverse effect on results of operations and financial condition.

The company aims to increase lending for housing finance and the social housing segment both in absolute terms and as a percentage of loan portfolio, which may result in a decrease in NIM if the government does not allocate enough amounts for issuing tax-free bonds or capital gains bonds or if the NHB does not enter into refinancing transactions.

The concentrations of loans in certain states and any economic downturn in those states or natural disasters affecting those states could lead to increases in defaults by borrowers in those states.

The Fiscal Responsibility and Budget Management Act limits the amounts states can borrow and as current strategy is to focus on lending to states and their agencies, this may have an adverse effect on business, financial conditions and results of operations.

The company's financial track record is sluggish. Between FY 2012-FY 2016, total income has grown at a CAGR of only 4.8% and net profit has grown at a CAGR of only 6.9%.

Valuation

HUDCO's EPS for FY2016 is Rs 4.05. At the lower price band of Rs 56 per equity share of Rs 10 face value P/E works out to 13.8 times of FY2016 EPS. At the upper band of Rs 60 per equity share, P/E works out to 14.8 times of FY2016 EPS. P/E on annualized 9MFY2017 EPS of Rs 3.31 per share works out to 16.9 at lower price band and 18.2 times at higher price band.

The book value of Hudco is Rs 44.8 as of December 2016. The adjusted book value, net of net non-performing assets, is Rs 42.05 per share.

P/BV for Hudco works out to 1.34 times and P/Adj BV at 1.43 times at the upper price band

There are no comparable listed companies in India engaged in the same line of business as the company. However, among the comparable PSU lenders in the infrastructure space, Rural Electrification Corporation (REC) is trading at P/BV of 1.3 times and Power Finance Corporation is trading at P/BV of 1 times. All BVs are as of December 2016.

At the price band of Rs 60 per share, Hudco is offered at a P/E of 18.2 times (annualized 9M FY2017 EPS). Among the comparable PSU lenders, REC trades at P/E of 6.1 times and PFC at 5.7 times (annualized 9M FY2017 EPS).

Housing and Urban Development Corporation: Issue highlights
For Offer for Sale Offer size (in Rs crore)
- On lower price band1127.94
- On upper price band1209.56
Offer size (in no. of shares )20.41 crore
Price band (Rs)56-60
Post issue capital (Rs crore)
- On upper price band2001.90
- On lower price band2001.90
Post-issue Promoter shareholding (%)89.8
Issue open date08/05/2017
Issue closed date11/05/2017
ListingBSE,NSE
Rating 42/100

 

Housing and Urban Development Corporation: Financials
1203 (12)1303 (12)1403 (12)1503 (12)1603 (12)1612 (09)
Income from operations2736.772862.642950.673346.553252.642613.02
Other Income41.8758.7052.2181.3097.4464.97
Total Income2778.642921.343002.883427.853350.082677.99
Interest Expenses1629.081567.031701.651775.381907.311508.58
Other expenses161.37173.31162.73203.40188.53144.89
Gross Profit988.191181.001138.501449.071254.241024.52
Depreciation4.574.924.225.384.513.23
Profit before Tax, Provisions and Exceptional Item983.621176.081134.281443.691249.731021.29
Provisions and Write Off 43.89135.399.18273.80129.20280.55
Exceptional Item0.0019.87-20.290.005.160.26
Profit Before Tax 939.731060.561104.811169.891125.69741.00
Provision for tax 318.16360.87370.84401.57315.08244.71
PAT621.57699.69733.97768.32810.61496.29
EPS*(Rs)3.103.503.673.844.053.31
* Annualized on current equity of Rs 2001.9 crore. Face Value: Rs 10
Source: Capitaline Corporate Database

 

Housing and Urban Development Corporation: Operational and financial parameters
1403 (12)1503 (12)1603 (12)1612 (09)
Revenue from operations2950.673346.553252.642613.02
Profit after tax733.97768.32810.61496.29
Net interest income1252.441570.601361.681105.03
Net worth7073.137720.518411.978908.26
NoF6987.007653.888343.328835.86
Total borrowings21304.7523467.6525608.9624842.76
Profitability ratios:
NIM4.59%5.18%4.11%4.26%
Long-term debt to equity ratio 2.92.73.02.8
Average yield on Loans10.81%11.01%9.81%10.07%
Average cost of funds8.43%7.91%7.70%7.97%
Spread2.37%3.10%2.11%2.10%
Cost to income ratio12.11%12.88%13.72%13.08%
RoA2.57%2.43%2.35%1.84%
RoE10.76%10.30%9.98%7.59%
Key Ratios
CRAR 27.85%50.46%63.85%63.70%
Provision coverage ratio64.41%75.75%70.56%78.98%
Gross NPAs Ratio6.76%6.25%6.68%6.80%
Net NPAs Ratio2.52%1.59%2.06%1.51%

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 Rating Reckoner
Rating range Risk-return profile Recommendation
51 or above Low risk, moderate to High return Must subscribe
45-50 Low risk low return or Moderate risk, moderate/high return May subscribe
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