ET INTELLIGENCE GROUP: Investors hoping to benefit from the government's push towards affordable housing and infrastructure sectors can look to subscribe to the initial public offering of Housing and Urban Development Corporation (Hudco), a wholly-owned subsidiary of the Government of India.
The issue priced at an attractive 1.3 times the company's book value at the upper price range may bring long-term gains for investors, given the business model that is skewed towards state government spending and likely tapering of bad assets in the loan portfolio of Hudco.
Through the issue, which is in the form of offer for sale (OFS), the Government of India is set to reduce its stake in the company to 89.8%. Of the total issue size (20.4 crore shares), 36.2% is reserved for retail investors, including employees of the company , and the issue will be availed at a discount of Rs 2 per share on the offer price for these investors.
BUSINESS
Hudco, a miniratna, is in the business of financing housing and urban infrastructure projects. As of December last year, its outstanding loan book stood at Rs 36,386 crore with housing and infra segments accounting for 37% and 63% of advances, respectively. Since FY14, the proportion of housing portfolio has increased from 26% and it hopes to raise it further as it looks to partici pate in government schemes such as Pradhan Mantri Awas Yojana (PMAY) and National Urban Livelihoods Mission (NULM).
Although Hudco caters to private sector players and individuals (through Hudco Niwas), state governments and agencies account for the majority of loan sanctions (99.9% for 9MFY17). The board and management have since March 2013 decided to stop sanctioning of new housing and urban finance loans to private sector entities till an improvement in the credit risk of private players.
FINANCIALS
Hudco's loan book has grown at a compounded rate of 17% since FY14 based on annualised FY17 numbers. While net earnings grew at 7% CAGR between FY12 and FY16, for the first nine months of FY17, the profitability has moderated due to a jump in total loan provisions from Rs 129 crore in FY16 to Rs 280.5 crore.
The provisions were because ageing of non-performing assets, especially from the private sector portfolio which currently bears a gross NPA ratio of 5.98% as against 0.75% for loans made to state governments. With incremental sanctions to private sector having stopped since the past four years, the bad asset ratio and provisions could peak in the next one year.
RISKS
Slower than expected tapering of bad assets and related provisions is a risk that could dent the profitability going ahead.The traction in net interest income (NII) will depend on how efficiently the portfolio balance is shifted towards housing finance segment which typically has lower average yield compared to urban infrastructure loans. The resolution of loans to state electricity boards under the Uday scheme could continue to adversely impact the recognition of interest income from the exposure that accounts for 5.4% of the loan portfolio.
Source : ET Realty
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