IPO Note | NBFC
May 04, 2017
HUDCO Limited
SUBSCRIBE
Issue Open: May 08, 2017
Issue Close: May 11, 2017
HUDCO is a wholly owned Government company with focus on Housing and
Urban Infrastructure Finance in India. The Government is divesting its 10% stake
Issue Details
in the company as part of its disinvestment programs.
Face Value: `10
Unique portfolio focusing on urban infrastructure and housing: HUDCO primarily
lends to urban infrastructure projects relating to water supply, roads & transport,
Present Eq. Paid up Capital: `2002cr
and power accounting for 69% of the loan book. It also lends towards Housing
Offer for Sale: **20.4cr Shares
Finance, which forms the balance 31% of the loan book. Both the segments have
vast untapped opportunity in India, which would provide potential growth
Fresh issue: Nil
opportunity for HUDCO to scale up its operations.
Unleveraged balance sheet to boost growth without raising capital, making it ROE
Post Eq. Paid up Capital: `2001 cr
accretive: On a net worth of `8,968cr, HUDCO has a loan book of `34,288cr,
implying a leverage of 3.8x. Further, the CAR of 68% at the end of 9MFY2017
Issue size (amount): *`1,128cr -**1,210cr
leaves enough scope for leveraging balance sheet without having to raise capital
for next 4-5 years. HUDCO reported ROE of 9.5% for FY2016, which is lower
Price Band: `56-60
than the large NBFCs in India. However, ability to grow its balance sheet without
Lot Size: 200 shares and in multiple
dilution in the medium term would prove to be ROE accretive for HUDCO, and it
thereafter
can reach mid teens over the next few years.
Post-issue implied mkt. cap: *`11,211cr -
Higher reported GNPAs is due to past NPAs from Private Sector: The reported
**`12,011cr
GNPAs & NNPAs of HUDCO were 6.80% and 1.51% respectively at the end of
Promoters holding Pre-Issue: 100%
9MFY2017. HUDCO’s high NPA was due to large defaults from some of the
Private Sector Corporates in which it had exposure to earlier. However, it’s NPA
Promoters holding Post-Issue: 89.81%
from Government sector is only 0.75%. It has already done substantial provisions
on the Private sector NPAs and stopped lending to them from FY2013 onwards,
*Calculated on lower price band
and hence, we don’t expect material change in NPAs in the near term. Further, a
** Calculated on upper price band
provisioning coverage ratio of 72% lends enough comfort on the loan book.
Book Building
Ability to raise funds at competitive rates has enabled in high NIM: HUDCO has
AAA rating on its long term borrowings from ICRA & CARE, which has helped it in
QIBs
50% of issue
borrowing at very competitive rates from the market. Despite funding to large and
Non-Institutional
15% of issue
long gestation projects HUDCO has been able to maintain NIM in the range of
4.6-4.3% over the last three years.
Retail
35% of issue
Outlook Valuation: HUDCO has a unique blend of business with focus on
financing both housing and urban infrastructure, which has vast untapped
Post Issue Shareholding Pattern
opportunity in India. Focus on Govt. sponsored projects and ability to raise funds
at a competitive price provides earnings visibility for many years. At the issue price
Promoters
90%
band of `56-60, the stock is offered at 1.25x-1.35x its 9MFY2017 BV, which we
believe is reasonably priced, and hence, recommend SUBSCRIBE to the issue.
Others
10%
Key Financials
Y/E March (` cr)
FY2013
FY2014
FY2015
FY2016
9mFY2017
NII
1,296
1,249
1,571
1,345
1,104
% chg
17.0
(3.6)
25.8
(14.4)
Net profit
700
734
768
811
496
% chg
12.6
4.9
4.7
5.5
EPS
3.5
3.7
3.8
4.0
3.3
Book Value (`)
32.5
35.6
38.9
42.3
44.8
P/E
17.2
16.4
15.6
14.8
18.2
P/BV (x)
1.8
1.7
1.5
1.4
1.3
Siddhart Purohit
RoE (%)
10.7
10.3
9.9
9.6
7.4
+022 39357600, Extn: 6872
Source: RHP, Angel Research; Note: Valuation ratios based on pre-issue outstanding shares and at
[email protected]
upper end of the price band
Please refer to important disclosures at the end of this report
1
HUDCO | IPO Note
Company background
HUDCO is a wholly-owned Government company with more than 46 years
experience in providing loans for housing and urban infrastructure projects in
India. The corporation has been playing a key role in various Govt. schemes to
develop the Indian housing and urban infrastructure sector. At the end of
9MFY2017, HUDCO had total outstanding loan portfolio of `36,385cr, of which
31% was towards Housing Finance and balance 69% was towards the Urban
Infrastructure Finance segment. Of the total portfolio ~90% of the loans were
given to various State Governments and their agencies.
The two segments which are served by HUDCO are Urban Infrastructure and
Housing Finance. In the Urban infrastructure finance segment, HUDCO gives
loans for projects relating to water supply, roads & transport and power. While the
Housing Finance Loans are classified into Social Housing, Residential real estate,
and Retail Finance, which is branded as HUDCO Niwas.
Key Management Personnel
Ravi Kanth Medithi - Chairman & MD- He is an IAS officer with 29+ years of
experience in public administration. Prior to this he has held various positions with
Government of India, Government of Kerala and Joint Secretary, Ministry of
Power, Government of India.
Issue details
Issuance of 20.4cr Equity shares of face value via IPO at an offer price band of
`56-60. The issue size is `1,128cr - `1210cr at the price band and there is a
discount of `2/ share for retail category and for employees.
Objects of the offer
To achieve the benefit of listing the stock on the exchanges.
May 04, 2017
2
HUDCO | IPO Note
Investment rationale
Unique portfolio focusing on urban infrastructure and housing - which has huge
potential in India: HUDCO primarily lends to Urban infrastructure projects relating
to water supply, roads & transport and power, which accounts for 69% of the loan
book. It also lends towards Housing Finance, which forms the balance 31% of the
loan book. Both the segments have vast untapped opportunity in India, which
would provide potential growth opportunity for HUDCO to scale up its operations.
The Government’s ambitious projects of upgrading urban infrastructure like
transport is a positive trigger for HUDCO, as opportunities to finance large scale
projects could be expected.
Exhibit 1: Loan bifurcation
( ` Cr )
FY14
FY15
FY16
9mFY17
Segmental Loan Portfolio
Housing Finance Loan Portfolio
7,875
9,661
11,696
11,228
Urban Infrastructure Finance Loan Portfolio
22,137
23,473
23,969
25,158
Total Loans
30,012
33,135
35,665
36,386
Segmental Loan Portfolio %
Housing Finance Loan Portfolio
26.2%
29.2%
32.8%
30.9%
Urban Infrastructure Finance Loan Portfolio
73.8%
70.8%
67.2%
69.1%
Source: RHP, Angel Research
Exhibit 2: Break up of Urban Infrastructure
Loan Portfolio ( ` Cr )
FY14
FY15
FY16
9mFY17
Water Supply
3,752
5,638
7,284
8,485
Roads & Transport
6,074
6,041
6,041
6,142
Power
7,626
7,138
5,380
5,226
Emerging Sector
1,636
1,932
1,814
2,127
Commercial Infrastructure
1,224
1,135
1,662
1,411
Social Infrastructure
1,233
943
1,033
1,045
Sewerage and Drainage
591
647
755
722
Total
22,137
23,473
23,969
25,158
% of Portfolio
Water Supply
17%
24%
30%
34%
Roads & Transport
27%
26%
25%
24%
Power
34%
30%
22%
21%
Emerging Sector
7%
8%
8%
8%
Commercial Infrastructure
6%
5%
7%
6%
Social Infrastructure
6%
4%
4%
4%
Sewerage and Drainage
3%
3%
3%
3%
Total
100%
100%
100%
100%
Source: RHP, Angel Research
May 04, 2017
3
HUDCO | IPO Note
Unleveraged balance sheet to boost growth without raising capital, making it ROE
accretive: On a net worth of `8,968cr, HUDCO has a loan book of `34,288cr,
implying a leverage of 3.8x. Further, the CAR of 68% at the end of 9MFY2017
leaves enough scope for leveraging balance sheet without having to raise capital
for next 4-5 years. HUDCO reported ROE of 9.5% for FY2016, which is lower than
the large NBFCs in India. However, ability to grow its balance sheet without
dilution in the medium term would prove to be ROE accretive for HUDCO, and it
can reach mid teens over the next few years.
Exhibit 3: ROE (%) has been moderate
Exhibit 4: ROA (%) trend
12.0
3.0
10.3
9.9
9.6
2.4
10.0
2.5
2.3
2.3
7.4
1.8
8.0
2.0
6.0
1.5
4.0
1.0
2.0
0.5
0.0
0.0
FY14
FY15
FY16
9mFY17
FY14
FY15
FY16
9mFY17
Source: Company, Angel Research
Source: Company, Angel Research
Exhibit 5: CAR %- Well capitalised to grow
Exhibit 6: Leverage (X)- Scope for further leveraging
70
63.85
63.7
4.1
4.1
4.1
60
4.1
50.46
50
4.0
4.0
40
4.0
27.85
4.0
30
4.0
20
4.0
10
0
4.0
FY14
FY15
FY16
9mFY17
FY14
FY15
FY16
9mFY17
Source: Company, Angel Research
Source: Company, Angel Research
May 04, 2017
4
HUDCO | IPO Note
Higher reported is GNPAs due to past NPAs from Private Sector, where it has
ceased to lend: The reported GNPAs and NNPAs of HUDCO were 6.80% and
1.51% at the end of 9MFY2017. HUDCO’s high NPA was due to large defaults
from some of the Private Sector Corporates in which it had exposure to earlier.
However, it’s NPAs from Government sector is only 0.75%. It has already done
substantial provisions on the Private sector NPAs and stopped lending to them
since FY2013, and hence, we don’t expect material change in NPAs in the near
term. Further, a PCR of 72% provides enough comfort on the loan book.
Moreover, HUDCO normally finances large projects by State Govt. entities. The
chances of defaults in these projects are negligible since they are Government
projects and carry Govt. guarantees. However, as a policy, even if the loans are
given to Govt. entities, if an interest payment is due above 90 days it is classified
as NPA. However, it has been noted by the management that subsequently it is
recovered.
Exhibit 7: Asset Quality (%)
8
6.76
6.68
6.8
7
6.25
6
5
4
3
2.52
2.06
1.59
1.51
2
1
0
FY14
FY15
FY16
9mFY17
GNPAs % NNPAs %
Source: RHP, Angel Research
Exhibit 8: Provisioning Coverage Ratio (%)
90
79
76
80
71
70
64
60
50
40
30
20
10
0
FY14
FY15
FY16
9mFY17
Source: RHP, Angel Research
May 04, 2017
5
HUDCO | IPO Note
Ability to raise funds at competitive rates has enabled in high NIM: HUDCO has
AAA rating on its long term borrowings from ICRA & CARE, which has helped it in
borrowing at very competitive rates from the market. Despite funding to large and
long gestation projects HUDCO has been able to maintain NIM in the range of
4.6-4.3% over the last three years. In funding large scale and long gestation
projects, the sources of funds also has to be long term in nature and to meet this
HUDCO partly depends on tax free bonds, which in addition to carry lower
coupon rates are also of long tenure in nature.
Exhibit 9: Wide source of Funding (%)
1.6
3.1
0.2
5.1
10.1
15.4
59.0
Tax Free Bonds NCDs NHB CP Public Deposits Foreign Currency Loans Others
Source: RHP, Angel Research
Exhibit 10: Cost of Funds has been trending down
Exhibit 11: NIM (%) has been largely stable
12
10.81
11.01
6
9.81
10.07
5.18
10
5
4.59
8.43
7.97
7.91
7.7
4.26
4.11
8
4
6
3
4
2
2
0
1
FY14
FY15
FY16
9mFY17
0
Avg Yield on Advances
Avg Cost Of Funds
FY14
FY15
FY16
9mFY17
Source: Company, Angel Research
Source: Company, Angel Research
May 04, 2017
6
HUDCO | IPO Note
Outlook & Valuation
HUDCO has a unique blend of business with focus on financing both housing and
urban infrastructure, which has vast untapped opportunity in India. Focus on Govt.
sponsored projects and ability to raise funds at a competitive price provides
earnings visibility for many years. At the issue price band of `56-60, the stock is
offered at 1.25x-1.35x its 9MFY2017 BV, which we believe is reasonably priced,
and hence, recommend SUBSCRIBE to the issue.
May 04, 2017
7
HUDCO | IPO Note
Exhibit 12: Income Statement
Y/E March (` Cr)
FY14
FY15
FY16
9mFY17
NII
1,249
1,571
1,345
1,104
- YoY Growth (%)
-3.6
25.8
-14.4
Other Income
52
81
97
65
- YoY Growth (%)
-11.1
55.7
19.9
Operating Income
1,301
1,652
1,443
1,169
- YoY Growth (%)
-3.9
27.0
-12.7
Operating Expenses
167
209
193
148
- YoY Growth (%)
-6.3
25.1
-7.5
Pre - Provision Profit
1,134
1,444
1,250
1,021
- YoY Growth (%)
-3.6
27.3
-13.4
Prov. & Cont.
9
274
129
281
- YoY Growth (%)
-93.2
2882.6
-52.8
Profit Before Tax
1,125
1,170
1,121
741
- YoY Growth (%)
8.1
4.0
-4.2
Exceptional Item
-20.3
0.0
5.2
0.3
PBT After Exceptional Item
1,105
1,170
1,126
741
Prov. for Taxation
371
402
315
245
- as a % of PBT
34
34
28
33
PAT
734
768
811
496
- YoY Growth (%)
4.9
4.7
5.5
Source: RHP, Angel Research
May 04, 2017
8
HUDCO | IPO Note
Exhibit 13: Balance Sheet
Y/E March (` cr)
FY14
FY15
FY16
9mFY17
Share Capital
2,002
2,002
2,002
2,002
Reserve & Surplus
5,130
5,779
6,470
6,966
Net Worth
7,132
7,780
8,472
8,968
Borrowings
18,888
18,315
22,732
23,470
- Growth (%)
39.4
-3.0
24.1
Other Liab. & Prov.
3,289
6,051
3,707
2,788
Total Provisions
406
451
467
408
Others
14
9
18
7
Deferred Tax
495
507
486
456
Total Liabilities
30,224
33,114
35,882
36,098
Cash and Cash equivalents
272
285
590
387
Investments
754
356
369
369
Total Loans & Advances
28,214
31,043
33,805
34,288
- Growth (%)
13.9
10.0
8.9
Fixed Assets
95
100
101
104
Current Investments
0
400
0
0
Others
10
10
2
2
Other Assets
879
920
1015
949
Total Assets
30,224
33,114
35,882
36,098
Source: RHP, Angel Research
May 04, 2017
9
HUDCO | IPO Note
Exhibit 14: Key Ratios
Y/E March
FY14
FY15
FY16
9mFY17
Profitability ratios (%)
NIMs
4.6
5.2
4.1
4.3
RoA
2.6
2.4
2.3
1.8
RoE
10.6
9.9
9.5
7.4
Asset Quality (%)
Gross NPAs %
6.8
6.3
6.7
6.8
Net NPAs %
2.5
1.6
2.1
1.5
Credit Cost
0.1
0.9
0.4
0.8
PCR %
64.4
75.8
70.6
79.0
Per Share Data (`)
EPS
3.7
3.8
4.0
3.3
BVPS
35.6
38.9
42.3
44.8
Adj BV
32.1
36.4
38.8
42.2
DPS
0.5
0.5
0.5
-
Valuation Ratios
PER (x)
16.4
15.6
14.8
18.2
P/BVPS (x)
1.7
1.5
1.4
1.3
P/ABVPS (x)
1.9
1.6
1.5
1.4
Dividend Yield (%)
0.8
0.8
0.8
0.0
DuPont Analysis
Interest Income
10.3
10.6
9.4
9.7
Interest Expenses
6.0
5.6
5.5
5.6
NII
4.4
5.0
3.9
4.1
Other Inc.
0.2
0.3
0.3
0.2
Total Income
4.6
5.2
4.2
4.3
Opex
0.6
0.7
0.6
0.5
PPP
4.0
4.6
3.6
3.8
Provision
0.0
0.9
0.4
1.0
PBT
3.9
3.7
3.2
2.7
Taxes
1.3
1.3
0.9
0.9
RoA
2.6
2.4
2.3
1.8
Leverage
4.0
4.1
4.1
4.0
RoE
10.6
9.9
9.5
7.4
Source: RHP, Angel Research
May 04, 2017
10
HUDCO | IPO Note
Research Team Tel: 022 - 39357800
E-mail: [email protected]
Website: www.angelbroking.com
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May 04, 2017
11