may 5, 2017 housing and urban development corporation...

May 5, 2017

IPO Review

ICICI Securities Ltd | Retail Equity Research

Housing and Urban Development Corporation Ltd (HUDCO) is a wholly-

owned government company with more than 46 years of experience in

providing loans for housing and urban infrastructure projects in India. It

has been conferred the status of Miniratna (Category-I PSE) by GoI. As of

31 December 2016, total outstanding loan was |36385.8 crore; of which

|11228 crore and |25157 crore were housing finance loans (30.86%) and

urban infrastructure finance loans (69.14%) respectively.

HUDCO has its registered and corporate office in New Delhi. In addition,

they have 21 regional offices and 11 development offices, giving presence

in capital city of nearly every state. For 9MFY17, NII and PAT stood at

|1091 crore and |496 crore respectively. As of 31 December 2016, GNPA

stood at 6.8%; majority of being from urban infra finance at 5.85% while

housing finance GNPA is 0.95%.

Key business aspects

Key role in government’s schemes to develop Indian housing and urban

infrastructure sectors; high proportion of loan portfolio to state government

HUDCO plays a key role in various government’s schemes to develop

Indian housing and urban infrastructure sector. As of 31 December 2016,

~| 32721.9 crore of loan (89.9%) is to state governments and their

agencies; of which ~|24073.6 crore (73.6%) were backed by state

government guarantees. GNPA stood at 6.8% (December 2016) with

GNPA on loans to state governments at 0.75%. The other advantage of

lending to state government backed agencies is “zero” risk-weight

considered for CRAR calculation which is currently at 63.7%.

Increase housing finance and social housing as % of total loan portfolio

In addition to growing advances, two of HUDCO’s goals are to increase

proportion of housing and social housing loans. With shortage in urban

and rural housing, the company believes that state governments and their

agencies will continue to play a key role in helping to finance building of

new dwellings which provides an opportunity to grow their loan portfolio

and increase proportion of housing and social housing loans.

Highest credit ratings, access to diversified and lower-cost funding & ability

to significantly increase borrowings in compliance with HFC directions

HUDCO holds credit rating of “AAA” for long-term borrowings from each

of CARE, ICRA and IRRPL which lowers their cost of borrowing. As of 31

December 2016, HUDCO met funding requirement through equity shares

and debt instruments including tax free bonds (permitted by GoI). As of

31 December 2016, total borrowing is at 2.81x of NoF. With HFC

directions permitting HFCs to borrow up to 16x of their NoF, HUDCO have

ability to significantly increase borrowing and thereby increase advances.

Concerns

Fixed rate borrowing & floating rate loans expose to interest rate risk

Asset quality could worsen if two un-recognised assets taken to NPA

High capital adequacy of 63% dependant on zero risk weights

Concentrations of loans in certain states can have geographical risk

Exposure to discoms to pose pressure

Priced at 1.4x P/ABV (post issue 9MFY17 ABV) on higher band

At the IPO price band of | 56-60, the stock is available at a multiple of 1.4x

9MFY17 ABV (post issue) at the upper end of the price band. Post issue

market capitalisation is at ~| 12011 crore.

Housing and Urban Development Corporation Ltd

Price band | 56-60

Rating matrix

Rating : Unrated

Issue Details

Issue Opens 8-May-17

Issue Closes 11-May-17

Issue Size (| Crore) 1128-1210

Price Band (|)* 56-60

No of Shares on Offer (crore) 20.4

QIB (%) 50

Non-Institutional (%) 15

Retail (%) 35

Minimum lot size (No. of shares) 200

*Retail and employee discount of | 2 per share

Objects of the Issue

The objects of the Offer are: (i) to carry out the disinvestment of 20.4

crore equity shares by the selling shareholder constituting 10.19% of

company’s pre-offer paid up equity share capital and (ii) to achieve

the benefits of listing the equity shares on the stock exchanges

1997-98 2001-04 2006

HUL acquires 23% stake.

Shareholding Pattern Pre-Issue Post-Issue

Promoter & promoter group 100.0% 89.8%

Public 0.0% 10.2%

Financial Summary

| Crore FY13 FY14 FY15 FY16 9MFY17

Net Interest Inc. 1260.0 1222.0 1537.0 1328.0 1090.7

Non Interest Inc. 84.7 72.8 108.2 110.7 77.3

Operating profit 1176.6 1138.7 1439.2 1250.0 1022.8

Net Profit 690.7 728.0 760.8 806.4 495.6

Valuation Summary (at | 60; upper price band)

(x) FY14 FY15 Pre Post

P/E 16.2 15.8 15.0 15.0

P/BV 1.7 1.5 1.4 1.4

P/ABV 1.9 1.7 1.5 1.5

FY16

Research Analyst

Kajal Gandhi

[email protected]

Vishal Narnolia

[email protected]

Vasant Lohiya

[email protected]


Company Background

HUDCO is a wholly-owned government company with more than 46 years

of experience in providing loans for housing and urban infrastructure

projects in India. It has been conferred the status of Miniratna (Category-I

Public Sector Enterprise) by the GoI. As of 31 December 2016, their total

outstanding loan portfolio was at |36385.8 crore; o which |11228 crore

and |25157 crore were housing finance loans (30.86%) and urban

infrastructure finance loans and project-linked bonds (69.14%)

respectively.

Housing finance loans are classified into social housing, residential real

estate and retail finance, which is branded as HUDCO Niwas (collectively,

“Housing Finance”). Under HUDCO Niwas, it provides financing to

individuals directly and bulk loans to state governments, their agencies

and public sector undertakings (“PSUs”) for on-lending to their employees

and to other HFCs for on-lending to the general public.

Exhibit 1: Break-up of loan book

Sector Loans % Loans % Loans % Loans %

Housing Finance 7,875 26.2 9,661 29.2 11,696 32.8 11,228 30.9

State Housing 4,721 60.0 6,722 69.6 8,201 70.1 7,755 69.1

Private Sector entities 2,445 31.1 2,561 26.5 2,876 24.6 2,898 25.8

HUDCO Niwas 709 9.0 379 3.9 620 5.3 575 5.1

Individual Retail Loans 190 - 166 - 141 - 132 -

Bulk Retail Loans 520 - 212 - 479 - 444 -

Urban Infrastructure Finance 22,137 73.8 23,473 70.8 23,969 67.2 25,158 69.1

Water Supply 3,752 17.0 5,638 24.0 7,284 30.4 8,485 33.7

Roads and Transport 6,074 27.4 6,041 25.7 6,041 25.2 6,142 24.4

Power 7,626 34.5 7,138 30.4 5,380 22.4 5,226 20.8

Emerging Sectors 1,636 7.4 1,932 8.2 1,814 7.6 2,127 8.5

Commercial Infrastructure & others1,224 5.5 1,135 4.8 1,662 6.9 1,411 5.6

Social Infrastructure & Area Development1,233 5.6 943 4.0 1,033 4.3 1,045 4.2

Sewerage and Drainage 591 2.7 647 2.8 755 3.2 722 2.9

Total Loan Portfolio 30,012 100.0 33,135 100 35,665 100.0 36,386 100.0

FY15 FY16 9MFY16 FY14

Source: RHP, ICICIdirect.com Research

In social housing loan beneficiaries are given to borrowers belonging to

the economically weaker sections (“EWS”) of the society, which is defined

as families with household income of |300000 per annum or less, and

borrowers belonging to the lower income group (“LIG”), which is defined

as families with household income from |300001 per annum to |600000

per annum. These residential loans are financed through primarily lending

to state governments and their agencies, which, in turn, extend the

finance to or utilise the finance for the ultimate beneficiaries.

Under urban infrastructure finance, borrowers are primarily state

governments and their agencies. HUDCO has ceased sanctioning new

urban infrastructure finance loans to entities in the private sector in March

2013.

Exhibit 2: Borrower wise loan book break-up

Borrower Category (% of loans) FY14 FY15 FY16 9MFY17

State Governments & their agencies 85.7 87.5 89.6 89.9

Private sector entities 13.6 12.0 10.0 9.7

Individuals 0.6 0.5 0.4 0.4

Total 100 100 100 100



In terms of asset quality, GNPA stood at 6.8% as of 31 December 2016.

Majority of GNPA is from urban infra finance at 5.85%, while housing

finance GNPA is 0.95%. Borrower-wise, as of 31 December 2016, GNPAs

for loans made to private sector (excluding loans given to individuals)

were 5.98% compared to 0.75% for loans made to state governments and

their agencies.

Exhibit 3: Borrower wise NPA

Borrowers Amount % Amount % Amount % Amount %

State Governments and their agencies 349.8 1.2 296.1 0.9 253.1 0.7 274.1 0.8

Private sector entities 1,649.2 5.5 1,741.5 5.3 2,103.5 5.9 2,176.5 6.0

Individuals 31.1 0.1 31.9 0.1 25.9 0.1 24.0 0.1

Total 2,030 6.8 2,070 6.3 2,382 6.7 2,475 6.8

FY16 9MFY16 FY14 FY15


Company has its registered and corporate office in New Delhi. In addition,

they have 21 regional offices and 11 development offices, giving presence

in the capital city of nearly every state.

Exhibit 4: Geographical loan book share

Loan portfolio % share

North 7,924.6 0.2

South 19,709.9 0.5

East 2,779 0.1

West 5,972.8 0.2

Total 36,386 1.0


HUDCO is not into direct lending and is engaged primarily in institutional

lending business. Therefore, there is no directly comparable peer in India.

For nine months ended Dec 2016, NII and PAT stood at | 1091crore & |

496 crore respectively, while FY16 NII and PAT were at | 1328 crore & |

806 crore respectively.


Financial Performance

HUDCO’s total outstanding loan as of 31 December 2016, stood at |

36385.8 crore; of which | 11228.14 crore, or 30.86%, were housing

finance loans and | 25157.68 crore (69.14%) were urban infrastructure

finance loans and project-linked bonds. Margins remained above 4% in

previous 3 fiscals with NIMs at 4.26% as on 9MFY17. HUDCO earned

profit of | 806 crore as on FY16; representing CAGR of 5.3% over FY13-

16. Asset quality has been prudent with NNPA at 1.51% as on December

2016. RoA remained above 2% in FY14-16.

Exhibit 5: Advances stood at | 36386 crore as of December 2016

30012

33135

35665 36386

10.4

7.6

0

2

4

6

8

10

12

0

5000

10000

15000

20000

25000

30000

35000

40000

FY14 FY15 FY16 9MFY17

(%

)

| c

rore

Advances Advances growth (%)


Exhibit 6: Trends in net interest income

1260 1222

1537

1328

1091

-40

-20

0

20

40

0

200

400

600

800

1000

1200

1400

1600

1800

FY13 FY14 FY15 FY16 9MFY17

(%

)

| c

rore

Net Interest Income NII growth (%)

Source: RHP, ICICIdirect.com, Research

Exhibit 7: Margin trends

4.59

5.18

4.11 4.26

0.00

1.00

2.00

3.00

4.00

5.00

6.00


(%

)

Net Interest Margins


Exhibit 8: Asset quality trend

2030.2 2069.6

2382.4 2474.5

6.76

6.25

6.686.80

5.9

6.0

6.1

6.2

6.3

6.4

6.5

6.6

6.7

6.8

6.9

0

500

1000

1500

2000

2500

3000


(%)

| c

rore

GNPA GNPA ratio (%)


Exhibit 9: Return ratios

10.810.3

10.0

7.6

2.6 2.4 2.41.8

0.0

4.0

8.0

12.0


(%

)

ROE (%) ROA (%)



Housing Finance sector in India

India had an estimated population of 1.3 billion and a GDP (at current

prices) of ~ $2.1 trillion in FY15. India will soon have the largest and

youngest workforce the world has ever seen. At the same time, the

country is undergoing a massive wave of urbanization as ~ 10 million

people move to towns and cities each year in search of jobs and

opportunities.

Traditionally, Indian housing finance market has been largely catered to

by banks and HFCs. As per ICRA, total housing credit outstanding in India

grew 19% YoY and stood at ~| 12.8 trillion as of 30 June 30 2016.

Among the participants, share of HFCs remained steady at ~36%, while

banks accounted for remaining 64%.

Outlook on Housing market in India

India’s housing market is well placed with factors including under-

penetration of mortgage market, large gap between housing demand and

supply, improved affordability as a result of tax incentives, encouraging

regulatory environment and positive demographic trends which are

together expected to fuel growth in the housing finance market. As per

ICRA, 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. Key factors to aid housing finance growth ahead

can be termed as;

Steady increase in mortgage penetration levels

In India, mortgage penetration (housing credit as a percentage of GDP)

has increased steadily from ~7% in March 2007 to ~9.2% in June 2016,

led by favourable demographics, increasing urbanisation, focus on

affordable housing along with tax incentive on home loans. Over the

medium term, ICRA expects mortgage penetration to continue to increase

supported by government initiatives like ‘Housing for All’ and prevailing

tax incentives and also the expected increase in supply of affordable

homes.

Exhibit 10: Mortgage penetration in India



Increasing urbanization and population growth

India’s urban population increased from 222 million (26% of population)

in 1990 to 410 million (32%) in 2014 and is expected to reach 814 million

(50%) by 2050. Three of India’s cities are among the most populous in the

world: Delhi (25 million), Mumbai (21 million) and Kolkata (15 million).

Despite India being ranked second in the world in terms of urban

population size, its current urbanization ratio is low compared to China

(54%), Indonesia (53%), Mexico (79%), Brazil (85%) and Russia (74%).

Therefore, urbanisation is expected to continue at healthy pace, thereby

creating strong demand for housing and housing related finance.

Shortage of Housing

For FY12-FY17, shortage in urban housing has been estimated at ~19

million dwellings, which can increase significantly if the rate of

urbanization increases. This shortage becomes particularly important to

address as ~96% of this shortfall is among the population classified as

part of the Lower Income Group (“LIG”) or Economically Weak Sections

(“EWS”). As per a study by India’s Ministry of Rural Development

(“MoRD”), total rural housing shortage for the 12th Five Year Plan (2012-

17) is 44 million dwelling units.

Favourable regulatory environment & affordable housing finance segment

With the aim of reinforcing primacy of housing sector and provide

housing to all, government has introduced various national policies

including Housing for all Mission 2022; Rajiv Awas Yojana; National

Urban Livelihoods Mission; Credit Risk Guarantee Fund Scheme for Low

Income Housing; Smart Cities Mission and Indira Awas Yojana. Further,

various states are initiating their own affordable housing projects. While

the numbers are still small in comparison with the government targets,

ICRA notes that supply creation has started picking up in the segment.

Affordable housing is emerging as a key growth segment. As per ICRA’s

estimates, total loan book of the players in the affordable housing

segment grew at 28% YoY at ~|960 billion as of March 2016. In terms of

market dynamics, given lack of formal income proofs, banks have limited

presence in this segment which is largely catered to by HFCs. However,

given the market potential, there could be increased competition in the

segment with new HFCs, microfinance institutions (MFIs), and small

finance banks with experience in lending to similar borrower segments,

entering the space. Opportunities for growth are high given the current

low penetration levels and the government thrust on the segment. In

ICRA’s opinion, over the medium to long term, affordable housing credit

growth is likely to be higher 30%, which could push the mortgage

penetration levels to over 15% by March 2022, around 5% higher than

likely otherwise.

Urban infrastructure finance market in India

The infrastructure sector plays a crucial role as a vehicle of growth in

economies, and even more so in emerging economies, which usually face

infrastructure deficits with respect to their growing populations.

Urbanisation needs to be guided towards inclusive, equitable and

sustainable growth of towns and cities with proper civic amenities. All

citizens should have access to basic services of clean water, sanitation,

sewage, solid waste management, urban roads, safe and affordable

public transport systems, affordable housing, and a clean and healthy

environment.

To augment infrastructure spending (not just urban infrastructure), in the

Union budget for FY17, the government has approved raising of up to |


313 billion through bonds in FY17 by National Highway Authority of India,

Power Finance Corporation, Rural Electrification Corporation, Indian

Renewable Energy Development Agency Limited, National Bank for

Agriculture and Rural Development and Inland Water Authority. The total

allocation for infrastructure development in Union budget for FY18 stands

at ~ | 4.0 trillion.

According to the Government’s High Powered Expert Committee

(“HPEC”), ~$640.2 billion is needed until 2031 for investment in urban

infrastructure and services if India is to maintain and accelerate economic

growth. The investment required for the eight major sectors of urban

infrastructure (roads, transport, traffic support, street lighting, water

supply, sewerage, storm water drains and solid waste management) is

estimated at $506.3 billion. An additional $67 billion will be needed for

renewal and redevelopment of certain urban areas, particularly slums,

and ~$16.3 billion will be required for capacity building of urban local

bodies to ensure availability of sufficient skills to plan, develop and

manage the required infrastructure projects. Given inability of public

sector to bankroll investments of this magnitude, a significant funding gap

exists estimated at $80-110 billion for the period 2012–2031. As per

Planning Commission’s (now known as the NITI Aayog) Working Sub-

Group on infrastructure, funding gap in infrastructure is estimated at

$238.4 billion for 2012–2017. Therefore, both estimates reveal that

significant private investment is required to satisfy India’s infrastructure

needs.

Exhibit 11: Urban infrastructure investment requirements for 2012 – 2031


Key strengths and strategies:

Key role in government’s schemes to develop Indian housing and urban

infrastructure sectors; high proportion of loan portfolio is to state

government

HUDCO plays a key role in various government’s schemes to develop the

Indian housing and urban infrastructure sectors, such as DAY-NULM and

PMAY-HFA (Urban), through the appraisal and monitoring of projects.

Through their role of appraising projects under various government

schemes, they have built a strong relationship with state governments

and their agencies. As of 31 December 2016, ~| 32721.98 crore, or

89.93% of total loan portfolio is to state governments and their agencies.

As of 31 December 2016, ~|24073.63 crore of loans to state governments

and their agencies, or 73.57%, were subject to various state government

guarantees while remainder was subject to some other form of security,


such as a mortgage or negative lien. In many cases, loans to state

governments and their agencies are subject to repayment through

allocations in state government budgets or recourse to alternate sources

of revenue, which reduces the recovery risk of loans. As of 31 December

2016, the company’s gross NPAs for loans to state governments and their

agencies stood at 0.75% of loan portfolio compared with total gross NPAs

of 6.80% of total loan portfolio.

The other advantage of lending to state governments and their agencies

is that for the purposes of calculating CRAR, the HFC directions on capital

adequacy accord a “zero” risk-weight to such loans if they are guaranteed

by a State government. As of 31 December 2016, HUDCO’s CRAR stood

at 63.7% compared with the regulatory requirement of 12.00%.

Continue to focus on sanctioning loans to state governments and their

agencies

Due to increasing NPAs in loans made to the private sector, in March

2013, HUDCO’s board decided to stop sanctioning new housing finance

loans to private sector and to focus on sanctioning loans to state

governments and their agencies, where the risk of NPAs is lesser. As of

31 December 2016, HUDCO’s gross NPAs for loans made to the private

sector (excluding loans given to individuals) were 5.98% compared to

0.75% for loans made to state governments and their agencies. Although

the Board only prohibited the sanctioning of new housing finance loans to

private sector, company’s management decided to not sanction new

urban infrastructure finance loans to private sector. Consequently, for

nine months ended 31 December 2016 and FY16, FY15 and FY14, total

sanctions to state governments and their agencies accounted 99.93%,

99.97%, 99.93% and 99.92% of total sanctions for those periods,

respectively. As a result of this strategy, HUDCO have managed to

decrease net NPAs from 2.52% as of 31 March 2014 to 1.51% as of 31

December 2016.

Exhibit 12: Sanctions to state government and their agencies

99.92 99.93 99.97 99.93

10

20

30

40

50

60

70

80

90

100

FY14 FY15 FY16 Q3FY17

(%

)


Exhibit 13: Net NPA trend

2.52

1.59

2.06

1.51

0.00

0.50

1.00

1.50

2.00

2.50

3.00


(%

)


Increase housing finance and social housing as percentage of total loan

portfolio

In addition to growing their loan portfolio, two of their goals are to

increase housing finance loans (which include social housing) and social

housing loans as a percentage of loan portfolio.

The shortage in urban housing for the period from FY12 to FY17 has been

estimated at ~19 million dwellings, which can increase significantly if the

rate of urbanization increases. This shortage becomes particularly

important to address as ~96% of this shortfall is among the population

classified as part of the LIG or EWS. As per a study by the MoRD, total


rural housing shortage for the 12th Five Year Plan (2012-17) is 44 million

dwelling units. The same study identified access to finance as a critical

and fundamental pre-requisite for habitat development.

The company believes that state governments and their agencies will

continue to play a key role in helping to finance the building of new

dwellings for the LIG, EWS and persons in rural areas which provides an

opportunity to grow their loan portfolio and increase housing finance

loans and social housing loans as a percentage of our loan portfolio.

Exhibit 14: Current states of housing finance loan and social housing loan

26.2%

29.2%

32.8%

30.9%

15.7%

20.3%

23.0%

21.3%

0%

5%

10%

15%

20%

25%

30%

35%


Source: RHP, Company, ICICIdirect.com Research

The interest rates HUDCO charge on social housing loans are generally

less than the interest rates charged for other housing loans (residential

real estate and HUDCO Niwas), which are generally less than the interest

rates charged for urban infrastructure finance loans.

For nine months ended 31 December 2016, average yield on housing

finance loans (which includes social housing loans) and urban

infrastructure loans was 9.60% and 10.39%, respectively. HUDCO is able

to borrow funds for on-lending for social housing at lower interest rates

than otherwise would be able to if the government allocates them

amounts for issuing tax-free bonds or capital gains bonds or HUDCO

enter into refinancing transactions with NHB.

The foregoing borrowings have more than offset the lower interest rates

on social housing loans and for 9MFY17 HUDCO’s NIM on housing

finance loans was 4.26%, which was more than NIM on urban

infrastructure finance loans of 4.25%.

Highest credit ratings, access to diversified and lower-cost funding and

ability to significantly increase borrowings in compliance with HFC

directions

HUDCO holds a credit rating of “AAA” for long-term borrowings from

each of CARE, ICRA and IRRPL, which lowers their cost of borrowing. As

of 31 March 2017, HUDCO met funding requirements through equity

shares issued to promoter and from market borrowings, including tax-

free bonds, taxable bonds, deposits, commercial paper, re-financing

assistance from NHB and term loans. Company’s relationship with

government provides them with access to funds for long-term duration

and at lower cost of borrowing. It has also enabled the company to

source foreign currency loans from bi-lateral and multi-lateral agencies,

which diversifies their lenders. In addition, the government has permitted


them to issue tax-free bonds from time to time, which are at a lower cost

of interest.

As of 31 December 2016, total borrowings stood at ~| 24842.76 crore

(standalone), representing 2.81 times of NoF of ~|8835.86 crore

(standalone). The HFC directions currently permit HFCs to borrow up to

16 times their NoF. HUDCO’s overall borrowing limit approved by

shareholder is ~|40000 crore. This borrowing limit may be increased if it

is approved by shareholders. Therefore, the company have the ability to

significantly increase the amount of borrowings and thereby increase the

amount of funds they have to lend for housing finance loans and urban

infrastructure finance loans.

Exhibit 15: Cost of interest bearing liabilities

8.43

7.91

7.7

7.97

7.2

7.4

7.6

7.8

8

8.2

8.4

8.6


(%

)


Incentivise borrowers to avail fixed interest rate loan to reduce interest rate

and liquidity risks

If HUDCO is unable to match lending portfolio with its borrowings, they

would be exposed to interest rate and liquidity risks as a result of lending

to customers at interest rates and in amounts and for periods that may

differ from their funding sources. As at 31 December 2016, 98.27% of

borrowings had a fixed rate of interest, while 20.25% of loan portfolio had

a fixed rate of interest. As at 31 December 2016, ~1.73% of borrowings

had a floating rate of interest (of which 68.49% was hedged) and 79.75%

of loan portfolio had a floating rate of interest. In order to reduce interest

rate and liquidity risks, HUDCO have been incentivising state

governments and their agencies to avail fixed interest rate loans for all

loans (except HUDCO Niwas) by keeping fixed interest rates lower than

floating interest rates. Effective from 14 October 2016, their fixed interest

rates for new loans were lower by 0.10%-0.50% for all loans to state

governments and their agencies (except HUDCO Niwas).


Exhibit 16: Financial Summary

| Crore FY13 FY14 FY15 FY16 9MFY17

Net Interest Income 1260.0 1222.0 1537.0 1328.0 1090.7

Pre Provisioning Profit 1176.6 1138.7 1439.2 1250.0 1022.8

Net Profit 690.7 728.0 760.8 806.4 495.6

EPS (|) 3.5 3.7 3.8 4.0 2.5

Book value per share (|) 35.6 38.9 42.3 44.8

GNPA (%) 6.8 6.3 6.7 6.8

RoE (%) 10.8 10.3 10.0 7.6

RoA (%) 2.6 2.4 2.4 1.8



Key risks and concerns

Fixed rate borrowing & floating rate loans expose to interest rate risk

98.27% of Hudco’s borrowings had a fixed rate of interest and 20.25% of

its loan portfolio had a fixed rate of interest as at 31 December 2016.

Hence, 1.73% of borrowings had a floating rate of interest (of which

68.49% was hedged) and 79.75% of loan portfolio had a floating rate of

interest. If they are unable to match the fixed/floating interest rate mix of

loan portfolio with the fixed/floating interest rate mix of borrowings,

company would be exposed to interest rate risk as a result of lending to

customers at interest rates that may differ from the funding sources.

Asset quality could worsen if two un-recognised assets taken to NPA

Reported GNPA ratio of 6.8% does not take into account loans totalling |

832.5 crore made to two companies namely R.K.M. Powergen Private

Limited and Nagarjuna Oil Corporation Limited (“Excluded Loans”). The

former due to the interim order of the Madras High Court and latter due to

the relaxation of the applicable HFC directions granted by the NHB, are

not getting classified as NPA.

If included, the GNPA ratio would have been 9.09% of loan portfolio and

net NPAs would have been 3.59% of loan portfolio.

High capital adequacy of 63% dependant on zero risk weights Currently CRAR is 63% as the risk weight assigned to loans guaranteed

by state governments is zero. Increase in risk weights of state

government guaranteed loans can impact capital adequacy in future and

lead to need for fresh capital raising.

Concentrations of loans in certain states can have geographical risk

Hudco has provided loans in 31 States and Union Territories with largest

share of loans to Telangana at 25.6%. Rajasthan and Karnataka have

13.5% and 10.5% share respectively. Any economic downturn or any

other adverse developments in these states may adversely impact the

ability of those states to honour their guarantees raising the

delinquencies.

Exposure to discoms to pose pressure

Hudco has exposure under the UDAY Scheme to DISCOMs (including

combined generation, transmission and distribution undertakings) at |

1950.3 crore, which represented 5.36% of its loan portfolio as on Dec’16.

The UDAY Scheme resulted in them recognising | 27.2 crore and | 33

lakh less in interest income for FY16 and 9MFY17, respectively, than they

would have, had the UDAY scheme not been in place.

Any change in tax incentives to HFCs may impact business, financials

The NHB provides refinance for certain qualifying loans at reduced rates

to qualifying HFCs through its schemes. In addition, the RBI has provided

certain incentives to the housing finance industry by extending priority

sector status to housing loans, lower risk weights for affordable housing,

allowing HFCs, including Hudco, to raise long-term ECBs etc.

Indian tax laws currently allow HFCs to claim a tax deduction up to 20%

of profits from the provision of long-term finance for the construction or

purchase of houses in India. Pursuant to Section 36(1)(viii) of the Income

Tax Act, up to 20% of profits from housing finance activities may be

carried to a special reserve and will not be subject to income tax. As at 31

December 2016, the balance in their special reserve was |3808 crore.

Accordingly, any decrease in Hudco’s involvement in government

schemes or any change in the tax incentives that the GoI currently

provides to HFCs may have an adverse effect on our business, financial

condition and results of operations.


Financial Summary

Exhibit 17: Profit and Loss Statement

(| Crore) FY13 FY14 FY15 FY16 9MFY17

Interest Earned 2827.0 2924.0 3312.0 3235.0 2599.7

Interest Expended 1567.0 1702.0 1775.0 1907.0 1509.0

Net Interest Income 1,260.0 1,222.0 1,537.0 1,328.0 1,090.7

growth (%) -3.0 25.8 -13.6 -17.9

Non Interest Income 84.7 72.8 108.2 110.7 77.3

Operating Income 1344.7 1294.8 1645.2 1438.7 1168.0

Staff cost 122.3 104.8 161.3 140.3 115.2

Other Operating expense 45.8 51.3 44.7 48.4 30.0

Operating profit 1176.6 1138.7 1439.2 1250.0 1022.8

Provisions 145.0 19.6 276.9 133.8 282.8

Exceptional items 19.9 -20.3 0.0 5.2 0.3

PBT 1051.5 1098.8 1162.3 1121.4 740.3

Taxes 360.8 370.8 401.5 315.0 244.7

Net Profit 690.7 728.0 760.8 806.4 495.6

EPS (|) 3.5 3.7 3.8 4.0 2.5


Exhibit 18: Balance Sheet

(| Crore) FY13 FY14 FY15 FY16 9MFY17

Sources of Funds

Capital 2001.9 2001.9 2001.9 2001.9 2001.9

Reserves and Surplus 4513.0 5130.0 5778.5 6470.0 6966.3

Networth 6514.9 7131.9 7780.4 8471.9 8968.2

Borrowings 13504.0 18868.2 18315.0 21342.0 23070.0

Other Liabilities & Provisions 6930.1 4223.9 7018.6 6068.1 4059.8

Total 26949.0 30224.0 33114.0 35882.0 36098.0

Applications of Funds

Fixed Assets 88.7 94.9 99.5 100.9 103.6

Investments 683.9 753.8 355.6 368.5 368.5

Advances 24762.0 28214.0 31043.0 33805.0 34288.0

Other Assets 1414.4 1161.3 1615.9 1607.6 1337.9

Total 26,949.0 30,224.0 33,114.0 35,882.0 36,098.0



Exhibit 19: Key Ratios

(Year-end March) FY14 FY15 FY16 9MFY17

Valuation

No. of Equity Shares (Crore) 200.2 200.2 200.2 200.2

EPS (Rs.) 3.7 3.8 4.0 2.5

BV (Rs.) 35.6 38.9 42.3 44.8

ABV (Rs.) 32.0 36.4 38.8 42.2

P/E 16.2 15.8 15.0 24.0

P/BV 1.7 1.5 1.4 1.3

P/ABV 1.9 1.7 1.5 1.4

Yields & Margins (%)

Net Interest Margins 4.59 5.18 4.11 4.26

Yield on Average interest-earning assets 10.81 11.01 9.81 10.07

Cost of interest bearing liabilities 8.43 7.91 7.70 7.97

Quality and Efficiency (%)

GNPA 6.76 6.25 6.68 6.80

NNPA 2.52 1.59 2.06 1.51

ROE 10.8 10.3 10.0 7.6

ROA 2.6 2.43 2.35 1.84



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may 5, 2017 housing and urban development corporation...

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