So should you subscribe to the offer? Here's a quick compilation of what leading brokerages across the country suggest.
Government has been emphasising on both housing and infrastructure development. In such scenario, HUDCO is well placed to cater the upcoming opportunities. Over FY14-FY16 its assets under management (AUM) have grown at a CAGR of 9.4%. Going forward, we believe that it can grow in double digit given the strong momentum in the sector.
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Currently, HUDCO has leverage of 2.7x, as the growth kicks in, it will leverage the book leading to improvement in return on equity. On the valuation front, at the given upper band price of issue of Rs. 60, the stock is offered at P/E of 18.14x of its 9MFY17 annualised EPS and 1.34x 9MFY17 P/BV which we believe is reasonably priced as compared to its peers. We recommend subscribing to the issue.
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Owing to its AAA credit rating, HUDCO is able to garner low cost liabilities and lend at a competitive rates. At the same time, its strong relationships with various state governments enable it to grow at a healthy rate. Recent initiatives by the central government in affordable housing space and smart cities could ensure that HUDCO can grow at 15% CAGR over FY17-19e and deliver return on equity (RoE) of 12%.
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Given the limited appraisal skills, HUDCO witnessed huge NPAs in its private sector portfolio. While it has stopped lending to this segment since 2013, re-starting it could be a risk. ALM (asset liability management) mismatch and governmental disposition on allowing HUDCO to raise tax free bonds could result in margin volatility in the future.
At the upper price band of Rs60 per share, the stock trades at 1.0x FY19e book. While comparison with housing finance companies (HFCs) is absolutely unwarranted due to the fact that HUDCO doesn't lend directly to the home buyer, IPO valuations leave some upside for investors.
With the likelihood of accelerated spending on housing and urban infra projects by state governments and implementation of targeted schemes by the central government, the growth opportunity for HUDCO is set to enhance significantly, thereby enabling the company to swell its loan assets faster than its historical pace. The loan spread is expected to remain steady at 2-2.2% over the longer term, although there could be intermittent volatility due to higher share of floating rate assets.
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Being substantially capitalised and commanding the highest credit rating, HUDCO can raise long-term money at the best possible rates from the bond market. Asset quality issues are confined to the private sector exposure, but thankfully they are largely addressed in terms of provisioning. Consequently, credit cost may come-off in the coming years augmenting the franchise profitability. Given the reasonable visibility for steady asset growth and better return ratios, the IPO valuation at 1.4-1.5x 9M FY17 P/ABV seems attractive. We recommend Subscribe.
In ICRA’s opinion, the housing finance sector will register a growth of around 18% to 20% in Fiscal 2017, compared with the 5-year CAGR of 18% in Fiscal 2011 to Fiscal 2016. The growth is likely to be supported by some pick-up in primary sales, new launches and a healthy growth in the Affordable Housing segment. ICRA expects banks to grow their home loan books at around 16% to 19% and HFCs at a slightly higher pace of around 17% to 21% leading to an overall growth of 18% to 20% in Fiscal 2017. The long-term growth outlook for the sector remains positive given the Government’s focus on “Housing for All” by 2022, and the favourable regulatory environment.
The reported GNPAs & NNPAs of HUDCO were 6.80% and 1.51% respectively at the end of 9MFY2017. HUDCO’s high NPA was due to large defaults from some of the private sector corporates in which it had exposure to earlier.
However, it’s NPA from government sector is only 0.75%. It has already done substantial provisions on the private sector NPAs and stopped lending to them from FY2013 onwards, and hence, we don’t expect material change in NPAs in the near term. Further, a provisioning coverage ratio of 72% lends enough comfort on the loan book.
At the issue price band of Rs 56-60, the stock is offered at 1.25x-1.35x its 9MFY2017 BV, which we believe is reasonably priced, and hence, recommend SUBSCRIBE to the issue.