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Performance outlier

Firing on all cylinders, HUDCO (HUDCO IN), the numero uno firm, which finances urban infra and government’s PMAY affordable projects to State agencies, recorded a robust earnings quarter underpinned by high order loans and asset resolution. HUDCO has ushered in 15% ROE ahead of expectations promising 25% loan growth and 15-16% ROE during FY26-27E. After witnessing a confluence of fundamental & cyclical tailwinds and with froth in valuation standing behind us, we reiterate our Conviction Buy call.

Exceeding business benchmarks; ROE gets closer to the 15% mark: Q3 was a good quarter, with PAT soaring to INR 7.4bn, up 6.7% QoQ and 42% YoY, powered by robust NII at INR 9.8bn, up 23.3% QoQ and 47.3% YoY, a provision write-back of INR 168mn, and AUM growth of 7.1% QoQ and 40.9% YoY. Asset quality strengthened further, with GNPA dipping 16bp to ~1.9%. The strategic pivot toward high-yield infrastructure projects paid off, with yield rising to ~9.4% in 9MFY25 vs ~9.4% in 9MFY24 while COF improved, easing from ~7.7% to ~7.5%, due to low-cost ECB borrowings. NIM held steady at ~3.2%, with good sanctions pipeline targeting urban infra assets offering upside potential.

Healthy sanctions pipeline to fuel growth; PMAY 2.0 to aid in momentum: With a loanbook of INR 1,189.3bn, up 7.1% QoQ and 40.9% YoY, HUDCO is well-positioned to exceed FY26 target of INR 1,500bn poised to clock in a 27.9% loan CAGR and a 50% disbursement CAGR during FY24-27E, led by: 1) robust sanctions pipeline, up 53% YoY, to INR 156.8bn backed by hydro & pump projects, mobility and energy projects, including PPA, land acquisition projects (Pune & Bengaluru Ring Road) under the PPP models, 2) counterpart funding to States for PMAY 2 beginning in FY26, and 3) higher sanctions-to-disbursals at an 80% conversion rate. Moreover, with robust disbursements pipeline underscored by 35% mobility and road projects, 15-20% power sector and 40% housing and the Meerut-Kumbh Mela and more such projects, HUDCO’s growth visibility is robust.

Improved asset quality; more NPA resolution in the pipeline: Asset quality saw a marked improvement, with GNPA down 16bp QoQ and 126bp YoY to ~1.9%. The absolute GNPA stock declined by 2% QoQ and 16% YoY to INR 22.3bn, aided by the resolution of four long-standing NPA accounts of INR 2.6bn in FY25. As on Q3FY25, out of INR 22.3bn in NPA, INR 12.2bn (six accounts) are in the NCLT with 100% provisioning while INR 0.4bn (three accounts) outside NCLT are also fully provisioned. HUDCO aims to resolve its entire NPA portfolio by FY26, with key projects under resolution, including KSK Mahanadi, Nagarjun Oil, Naya Raipur Development Authority, and AP Housing. With an expected 80% recovery from NPA pool, we expect GNPA to decline to 1.5% by FY27E.

Reiterate Conviction Buy with TP of INR 361: We raise our EPS by 4% in FY25E, 6% in FY26E and 8% in FY27E after factoring in improving growth trajectory and write-backs led by accelerated bad asset resolution. Q3 was characterized by 40% YoY loan growth, upbeat guidance, steady margin and an NPA downcycle driving an earnings potential. Moreover, HUDCO ushering into 15% ROE corridor and GoI spend uptick, which supports robust growth visibility, make the bull case more compelling. We retain our TP at INR 361 on 2.7x FY27E P/B and reiterate our Conviction Buy call

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