HUDCO IPO - SUBSCRIBE FOR LISTING GAINS - BY STALLION ASSET

Nidhi Hingorani · May 8, 2017

Hudco’s Grey Market Premium is 28-29 Per shares, Thats a Whopping 50% listing gain and is getting a lot of market participants Interested. Lets Understand 8 Factors that make Hudco so Interesting in the next 3 mins.

Factor 1 – About the IPO- The government of India is divesting 10% Stake for 1224 crores valuing the company at Approximately 12,000 Crores. The offering has come at a price of 56-60 with a 2/Share discount for retail shareholders.

Factor 2 – About the Business- The company is engaged in a very easy business of borrowing at 8%, and lending it at 10%. The Interest rate difference is the gross profit of the Company. The Company has 2 main cost 1) Operating Cost and 2) Credit Cost (NPA). The Company’s business is lending to Infrastructure and Housing projects undertaken by the Government or PSU Companies. The company used to lend to Private players as well but stopped that in 2013 as the NPA’s were very high there, as on 9month 2017, 100% of disbursement has happened to government Players only.

Factor 3 – Loan Book – As on December 2016, Hudco had a outstanding Loan of 36,400 crores, out of which 31% was given to housing project and 69% of book was given to Infrastructure projects like Water supply, Road and Transport, Power etc. Out of the Total loan book 10% was loans to private players, whereas 90% were to Government Companies. The Average duration of these loans are 8 years. All government loans are backed up by bank guarantees of atleast 125% of the loan book i.e. they are broadly risk free.

Factor 4 – NPA – Hudco has Gross NPAs of around 6.8% and Net NPAs were around 1.51% i.e. HUDCO has already done provision of 78.98 per cent of its NPA’s. The spike in NPA mainly due to loans which were towards private sector projects, private sector portfolio which currently bears a gross NPA ratio of 5.98% as against 0.75% for loans made to state governments. Since Going forward the Company isn’t going to be lending to Private Sector Entities, we expect NPA’s to be less than 1.5% going forward. When we compare HUDCO’s NNPA of 1.51% to its Peers REC(1.68%), PFC(2.28) (Face the same problem of private sector NPA’s) and SREI (2.10%) its inline with the Sector.

Factor 5 -Leverage – Most Retail Housing Finance Companies are leveraged between 10-13 times, whereas most Infrastructure players are leveraged 5 times. Surprisingly Hudco is leverage only 2.8x, probably because there weren’t many projects coming on the Smart City Side. With Government’s focus on Smart City we expect the company to increase its leverage to 5x in the next 3 years and won’t need any equity dilution for it.

Factor 6 – Return on Equity – We Expect Leverage will Increase going forward from 2.8x to 5x in next 3 years which will directly have an impact positively on the ROE of Hudco. Currently HUDCO has a ROE of 10%, which is lower compared to its peers REC and PFC. (Both over 20%).

Factor 7- Price/Book – Hudco at IPO Offer Price trades at a P/B of 1.35 inline with other players like REC and PFC who have P/B of 1.15 and 1.16 respectively. Since Hudco isn’t leveraged much (Debt/Equity of only 2.8 v/s 5 for Industry) it can trade at much higher 1.35 P/B. The Growth of its book of more than 20% is absolutely important for it to sustain more than 2x P/B, it does have the ability to grow but execution is important.

Factor 8- Price/Earning – Hudco Trades at a PE Ratio of 17.14, whereas its peers REC and PFC trade at between 6-7 times. There have been a lot of provisions in Hudco which have depressed current earnings, but we believe the provisions will reduce materially going forward.

Conclusion – It is absolutely necessary for Hudco to grow its loan book at more than 20% to increase its valuations, it hasn’t been able to do it in the past with last 5 year loan book growth at 5.3%CAGR. With A lot of Smart City Projects, Government Owned housing project we believe HUDCO has the capability to grow 20% plus for next 5-10 years if they can execute their loan book growth Right. At 60 (Minus 2 Discount for Retail), we are Strong buyers with limited downside risk but if the growth pick up we have a great investment with longevity of business model.

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