HUDCO IPO Review: Unique Position/Prospects Overshadow Lacklustre Performance

Hudco IPO will comprise sale of 20,01,90,000 equity shares translating to a 10% stake by the central government through an offer for sale (OFS) route. HUDCO stands a unique company in Housing finance space with focus is on lending to State Governments and their agencies rather than to individuals. A discount of up to 5% on the issue price would be given to retail investors and HUDCO employees iin the HUDCO IPO .  A quick review of HUDCO IPO has been attempted.

About HUDCO:

The Company was incorporated at New Delhi as “The Housing and Urban Development Finance Corporation Private Limited” in, 1970. The name was subsequently changed to “Housing and Urban Development Corporation Limited” in 1974. HUDCO  was  notified as a public financial institution  in  1996, and subsequentlyt National Housing Bank issued a certificate of registration to the Company on in 2001, permitting HUDCO to carry on the business of a housing finance institution.

Hudco is a unique institution with its motto of “Profitability with Social Justice”. A Public Sector Company, under the Ministry of Housing and Urban Poverty Alleviation(MoHUPA), HUDCO has been a key partner with the Government in building assets for the Nation. In its operations, Hudco lays a considerable emphasis on the housing need of the “deprived” that is Economically Weaker Sections (EWS) and Low-Income Groups(LIG).

HUDCO offers loans for housing projects, such as urban and rural housing, co-operative housing, community toilets, slum upgradation, staff housing, repairs and renewals, private sector projects, land acquisition, and housing programs. They also offers take out finance for housing and infrastructure projects to state government, public agencies, and private corporate sector agencies.

The Company provides loans for implementing agencies comprising state government bodies, co-operative societies, corporate employers, and community sectors; and building technology and rent to own schemes. It also provides finance for infrastructure projects in the sectors of water supply, sewerage, drainage, solid waste management, roads and transport, and electricity in the urban areas; and social infrastructure component, such as play/primary schools, working women hostels, health centers, play grounds, police stations, courts, jails, crematorium, etc. In addition, the company offers consultancy services, including URP services, environmental engineering, and government programs consultancy services; and disaster mitigation services.

HUDCO has access to a diverse range of funding which allows it to raise funds at competitive rates and maintain a reasonable spread even as its areas of operation include financing social housing. However from last financial year, the non availability of Tax free bonds from the side of govt. may have lead to a slightly lower spread. 

HUDCO funds its business with borrowings of various maturities in the domestic and international markets from a variety of sources.

Backed by a AA+ rating which was later upgraded to AAA rating HUDCO has been able to rate funds from a variety of sources. 

Objective of the HUDCO IPO:

1. 1. Carry out the disinvestment of 200,190,000 Equity Shares by the Selling Shareholder constituting 10% of the Company’s pre-Offer paid up Equity Share capital Company; and
   2. The HUDCO IPO seeks to achieve the benefits of listing the Equity Shares on the Stock Exchanges.

Financials:   

( in Rs. Crore)

Non Performing Assets (NPAs):

The NPAs of HUDCO increased from 5.46 per cent in 2010-11 to 6.3 per cent in 2014-15. At the end of  2014-15  this amounted to  Rs 4,795 crore and constituted 6.3 % of gross outstanding loans. As onSeptember 30, 2016, HUDCO gross NPAs were Rs. 2,479 crore which amounted to 6.87% of its Loan Portfolio (outstanding loans, advances and investments in project linked bonds) compared to Rs. 2,382 crore  or 6.68% of its Loan Portfolio as on March 31, 2016. Further, as on September 30, 2016, its net NPAs constituted 2.04% of its  Loan Portfolio, compared to 2.06% as on March 31, 2016. The above amounts and percentages do not take into account loans totaling Rs. 8,32 crore made to two companies (“Excluded Loans”), which loans would have been considered NPAs but for the interim order of the Madras High Court dated August 26, 2015, passed in the matter of R.K.M. Powergen Private Limited, and the relaxation of the applicable HFC Directions granted by the NHB for a loan to Nagarjuna Oil Corporation Limited pursuant to its letter dated September 30, 2015, respectively. If the Excluded Loans had been considered to be NPAs, as at September 30, 2016, HUDCO gross NPAs would  have constituted  9.17% of its Loan Portfolio and  the net NPAs  would have constituted 4.46% of its Loan Portfolio.

These NPA figures point to some mis-management at HUDCO on the NPA front and these NPA figures  are considered high as  HUDCO loans to State Governments and their agencies represented 89.83% of its Loan Portfolio in which its gross NPAs  was 0.85%. Thus on a very small loan portfolio to other than state govt. sector, HUDCO has build up substantial NPAs. In fact the over dominance of state government loans has been a saving grace for HUDCO else, its NPA may have spiraled much more. 

CAG report had indicted HUDCO of relaxing pre-disbursement condition of signing of fuel supply agreement, coal linkage and power purchase agreement while disbursed loan of Rs 493. 34 crore to M/s RKM Powergen Private Limited in March 2008 and May 2010. The loan with an outstanding of Rs. 482.57 crore became NPA in July 2014.  Similarly, HUDCO sanctioned a loan of Rs 360 crore in July 2007 to M/s KVK Nilachal Power Private Limited after relaxing pre disbursement condition of signing of fuel supply agreement and power purchase agreement and condition on promoter providing equity contribution of Rs 354.56 crore and this loan with an outstanding of Rs 348.71 crore became non-performing assets in October 2014. Further  HUDCO in contravention of directions of National Housing Bank adjusted Rs 134 crore towards interest during 2014-15 from accounts of M/s RKM Powergen Private Limited and M/s KVK Nilachal Power Private Limited after their loans became non-performing assets. 

Assessment of HUDCO IPO:

• HUDCO enjoys a unique status in Housing Finance Market and plays a Key Role in various Government’s Schemes.
• Steady increase is expected  in mortgage penetration levels in the country as a % of GDP. Growth in the housing finance industry is also supported by favorable demographics, with a large proportion of Indian population being below the age of 30 years. Housing credit as % of GDP has grown from 7% in 2007 to 9% in 2016 and seems poised for further uptick. 
• Participants in India’s housing finance market  comprise Banks, HFCs and NBFCs. The share of HFCs and NBFCs in the overall mortgage finance market remained steady at 36% as at June 30, 2016, with commercial banks accounting for the remaining 64%.
• As at September 30, 2016, total sanctioned loans by HUDCO since its inception were Rs1,571 bn of which Rs612 bn or 38.96%, were Housing Finance loans and Rs959 bn or 61.04%, were Urban Infrastructure Finance loans. HUDCO claims to have indirectly financed 1 out of 16 houses in the country.
• HUDCO’s focus is on lending to State Governments and their agencies rather than individuals. At the end of HY2017, 97% of its Housing Finance Loan Portfolio were to State Governments and their agencies. Thus HUDCOs primary competitors in Housing Finance are companies that lend to State Governments and their agencies, which are primarily commercial banks and the National Housing Bank i.e. NHB (which, in addition to being a regulator, also provides bulk housing loans). Hence HUDCO does not compete in a meaningful way with other HFCs or with NBFCs, whose main focus is on individual borrowers.
• HUDCO has access to various diverse means of raising funds. This helps it to fund its business with borrowings of various maturities in the domestic and international markets. HUDCOs market borrowings include, among others, NCDs ( secured, redeemable, non-convertible, non-cumulative tax-free bonds), term loans, Fixed deposit from public, commercial paper, and external commercial borrowings. As on November 30, 2016, HUDCO  had total outstanding borrowings of Rs. 257,44 crore of which 76.18%, was secured and  23.82%, was unsecured.
• As on September 30, 2016 HUDCOs Loan Portfolio to State Governments and their agencies constituted 89.83% of its total Loan Portfolio. Out of this, 66.71%, was subject to guarantees by various State Governments and the remainder was subject to some other form of security, such as a mortgage or negative lien. Its Loan Portfolio to the private sector constituted 10.17% of its Loan Portfolio was secured to extent of 99.71%,  by mortgages of the respective project properties, providing the company with a minimum initial security cover of at least 150% of the total loan amount, as well as personal guarantees and contributions by promoters. As at September 30, 2016, its total Loan Portfolio to individuals constituted  0.40% of its Loan Portfolio
• India Ratings (Fitch Group), ICRA and CARE have assigned a rating of ‘AAA’ to HUDCO’s long-term bonds, long-term bank facilities and fixed deposit program which has a major bearing on the interest rates on its  borrowings. This high rating is likely to be maintained since significant portion of its Loan portfolio is accounted by State Governments and their agencies. As on September 30, 2016, HUDCO loans to State Governments and their agencies represented 89.83% of its Loan Portfolio. Further its gross NPAs for loans to State Governments and their agencies was 0.85%.HUDCO record on the NPA front leaves lot to be desired. ( See section on NPA’s above). CAG observations on its overlooking some pre conditionals while advancing loans to RKM Powergen reflects poorly on the company’s affairs.
• HUDCO has in the past raised money through Taxfree Bonds & Capital Gains Tax Exemption Bonds at a concessional rate. In this financial year there seems to be no provision by Govt for Taxfree Bonds. However HUDCO may be beneficiary for getting finance at low rates for Govt affordable and social Housing schemes.
• To reduce housing  shortage & make it more affordable, the government has launched various schemes. Under the “Housing for All” scheme, the government plans to build around 20 million urban homes and 30 million rural homes by the year 2022. The credit linked scheme under the urban program, which offers 6.5% interest rate subsidy, has already started gaining traction and HUDCO has a key role as a central nodal agency.
• As at September 30, 2016, 97.94% of HUDCOs borrowings had a fixed rate of interest and 18.68% of its Loan Portfolio had a fixed rate of interest. As at September 30, 2016, 2.06% of our borrowings had a floating rate of interest (of which 60.56% was hedged) and 81.32% of its Loan Portfolio had a floating rate of interest.  Thus there is a challenge before the company to match the fixed/floating interest rate mix of our Loan Portfolio with the fixed/floating interest rate mix of its borrowings.
• HUDCO had in the past frequently  resorted to issue of tax-free and capital gains bonds, which are a relatively cheaper source of funding, . Howver GoI has not allocated amount for issuance of tax-free bonds in Fiscal 2017.
• Indian tax laws currently allow HFCs to claim a tax deduction up to 20% of profits from the provision of long-term finance for the construction or purchase of houses in India. Pursuant to Section 36(1)(viii) of the Income Tax Act, up to 20% of profits from housing finance activities may be carried to a special reserve and will not be subject to income tax. This is plus for HUDCO.
• HUDCO’s sustained performance and profitability earned it the Mini Ratna status in fiscal 2005. While its earnings have stagnated,, net profit margin at 19.9% is still quite strong for a company of this size & activities which include a social angle too.
• HUDCO cannot be compared with any of the existing housing finance companies as it is into refinancing, unlike giving home loans to end consumers directly.
• Housing sector is still under-penetrated and holds huge potential particularly with special focus of Government on the same. HUDCO IPO can be considered as a conduit to play in the domestic real estate market.
• HUDCO IPO is coming at a PE of approx 15 and considering its unique position in Housing finance market, special privileges granted to its by the government and considerable thrust of government on housing sector HUDCO IPO valuations can be considered reasonable.
• HUDCOs lacklustre performance in terms of meager growth in profits not withstanding, the sector in which it operates and Government backing and unrealized potential for the company  in this space makes HUDCO IPO worth a look.
• A discount of Rs. 2/- on the issue price of HUDCO IPO  to retail investors is an added attraction.
• Keeping all above factors in mind, I am likely to subscribe to HUDCO IPO 

Standard disclaimer:  I am not a SEBI registered analyst. I may have vested interest in every stock I discuss. Please do your own due diligence as stock market investments have high degree of inherent risk.