Published on 5/05/2017 3:35:43 PM | Source: Reliance Securities Ltd

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Long-term Bet on Better Growth Prospects

Housing and Urban Development Corporation (HUDCO) – a “Miniratna “Category-I company – is a wholly-owned subsidiary of Government of India with more than four decades of experience in providing loans for housing and urban infrastructure projects. Although the Company caters to private players and individuals, a major chunk of loans is offered to state governments and their agencies. This business to business model of the company – which is mostly skewed towards lending to the state governments with consistent efforts to reduce bad loans – makes HUDCO a long-term safe bet for the investors. As on Dec 31, 2016, the state governments and their agencies accounted for 99.9% towards the total loan sanctions.

Further, the renewed thrust of the Government of India’s (GoI) to affordable housing and development of infrastructure sectors is expected to benefit HUDCO the most. Some of the GoI’s schemes include: Deendayal Antyodaya Yojana-National Urban Livelihoods Mission (DAYNULM), Jawaharlal Nehru National Urban Renewal Mission (JNNURM) and Pradhan Mantri Awas Yojana – Housing for All (PMAY-HFA).


Key Positives

* Expected to be the prime beneficiary of several initiatives of the government towards affordable housing and infrastructure development

* State governments and their agencies account for major chunk of its loan portfolio, which is considered as a safe avenue

* Enjoys highest rating and access to a diversified and low-cost funding

* Sustainable business model with healthy asset quality and comfortable NIM


Key Risks

* Default risks

* Any significant deterioration in portfolio value

* Unpredictable recoveries by liquidating guarantees in case of default


Outlook & Valuation

At the upper price band of Rs60, HUDCO’s market capitalization would stand at Rs120bn, which gives it price-to-book multiple of 1.3x on Dec’16 book value and P/E of 18.2x on annualized 9MFY17 profit. HUDCO is not directly comparable to any listed NBFCs, as it is primarily engaged in wholesale funding compared to retail lending by the latter. However, we can take valuation reference from the listed HFCs, which trades in range of 2.2x-12x on FY17 P/BV and 15x-45x on FY17 P/E. Further, discount of Rs2/share to the retail investors acts as an additional sweetener. Expecting HUDCO to deliver healthy performance owing to huge growth opportunity in housing and urban infrastructure segments, we recommend SUBSCRIBE to the Issue, as it provides favourable investment opportunity for the long-term investors with attractive valuations.


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