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Play on infrastructure growth available at lower valuation …

About the stock: HUDCO, a Miniratna company, plays a key role in various government’s schemes to develop Indian housing & urban infrastructure sector. HUDCO is one of the nominated nodal agency for subsidy to beneficiaries under credit-linked subsidy scheme.

• As of June 2023, AUM stands at ?79875 crore with 96.88% of loan book to government agencies

• Operations spread across India with 21 regional and 11 development offices

Investment Rationale:

• Key role in infrastructure development in India: HUDCO has been a key partner engaged in financing of infrastructure development undertaken by government with considerable emphasize on housing for ‘Economically Weaker Sections (EWS) & LowIncome Groups (LIG). With government’s focus on implementation of Sustainable Development Goals & Urbanization, there exists huge growth potential in housing and infrastructure sector. Capital expenditure in infrastructure sector is expected at ~?111 lakh crore in FY2-25E, of which urban infrastructure is projected at ~?19 lakh crore.

• Continued revival in growth expected in FY24-25E: Post stalling in Covid, state government capex for housing & urban infrastructure witnessed gradual recovery in FY22-FY23; which is expected to gather pace in FY24-25E. Strong budgetary allocation of ~?10 lakh crore for capex in FY24 with focus on PMAY (housing), Jal Jeevan Mission (water) and other projects to enable healthy growth at ~10% CAGR in FY24-25E.

• Steady operational performance with stable margins & asset quality: HUDCO holds credit rating of “AAA” for long-term borrowings from each of CARE, ICRA and IRRPL. Highest credit rating and issuance of tax-free bonds enables lower cost of funds. Substantial proportion of exposure to state government enables asset quality to remain steady with GNPA ratio at ~3.3-3.5% and NNPA ratio at ~0.5%; which is expected to remain in similar range ahead.

• Strong capital adequacy, growth to remain RoE accretive: HUDCO has been engaged in providing loans for housing & urban infrastructure to state government and their agencies which attracts relatively lower risk weights. Thus, HUDCO’s capital adequacy has remained strong (Tier I at 64.65% as of March 2022) without any need for capital infusion. With continued exposure to state entities, capital consumption is expected to remain lower and thus advances growth will be RoE accretive.

Rating and Target Price

• As a play on India’s infrastructure story, HUDCO offers steady business growth with steady operational performance and asset quality. Low capital consumption to ensure no equity dilution with healthy dividend payout

• At CMP, the stock is trading 0.75x FY25E BV which seems relatively lower. Assigning BUY rating to the stock, we value HUDCO at | 85 i.e. ~0.95x FY25E BV factoring ~10% CAGR growth in business and steady RoE

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