Any company in India with ROE of 30%. Can grow at 25% CAGR and has cash flows that can allow company to pay 40% dividend payout and is available at 10xFY26 earnings?
Let’s see:
HUDCO’s unique company profile allows it to function majorly differently than a conventional NBFC. HUDCO majorly lends to state governments which has a very low risk weight by RBI.
This will allow HUDCO to grow its loan book to ~3 times of current loan book without any need for any equity capital infusion this will push the ROE’s to 30% in 2 years. This is a very unique characteristic in any Indian NBFC and makes it necessary for investors to think beyond the standard norm of looking at HUDCO on price to book multiple.
As the equity capital is not required by HUDCO to grow, HUDCO can payout huge dividends around 40% of annual profits (unlikely case in any NBFC). Also this high dividend payout keeps the book value of the company lower and valuing it on price to book is not appropriate. Even the borrowers are mostly state governments and loans are asset backed causing NPA’s to be ~0.36% (lowest in industry)
Management has given strong guidance of almost doubling the loan book in 2 years with NIM expansion potential and beyond that also they for see ~ 22% CAGR. This means in 2 years HUDCO can report ~5000cr profits. (Currently ~2000 crs)
Now if we put all above facts and figures in a summary. HUDCO is a company where their loan book growth is not dependent on equity capital (book value) and the chances of NPA are almost absent (due to lending to government). Valuing it on price to book value is not logical. And must be valued like a manufacturing company with strong cash flows, ROE’s and Growth.
HUDCO with an equity capital of 14k crs can report Profits of 5000 crs. (30% ROE) by fy26. NPA’s are virtually absent so no negative surprises. Can payout 40-50% of thier earnings as dividend.
HUDCO is that rare company that is still valued at 10xFy26 despite these strong growth, ROEs and Cashflows.
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