Hudco aims to transform into an infrastructure finance company (IFC) to access cheaper funds and reduce borrowing costs. (RBI) approval decision expected within a month or two.This will allow Hudco an access to a larger investor base, enabling diversification of resource base and optimization of borrowing.
To qualify as an IFC, at least 75% of assets must be dedicated to infrastructure lending, with additional criteria including a net worth of ₹300 crore, a minimum ‘A’ credit rating, and a CRAR of 15%.
Hudco is interested in financing projects related to energy transition as part of its IFC transformation.
The company has been pursuing IFC status for nearly two years and submitted its application to the RBI on March 29, 2022.
The government plans to launch a housing scheme in the interim Union Budget for 2024-25, for people in rented homes, slums, or unauthorized colonies, allowing them to buy or build their own houses.
Aligning with the ‘Housing for All’ mission, encompassing PMAY-Urban and PMAY-Rural schemes.Fin. minister highlighted the construction of 3 crore houses under PMAY-Rural and proposed an additional 2 crore houses over the next 5 Yrs to meet growing demand.
The Union Budget estimates for FY25 for PMAY stand at Rs 80,671 crore, as compared with FY24 budget estimates of Rs 79,590 crore for the “housing for all”
₹25,103 crore is designated for PMAY-Urban to accelerate the ‘Housing for All’ mission, while the remaining funds support the PMAY-Rural scheme.
Query
What could be the chances that HUDCO gets an IFC status ?
If it gets IFC can it be considered in the league of IREDA,REC,PFC ?
What changes for HUDCO future earning with additional allocation in the budget and if it gets IFC status ?
Can hudco be more than just a PSU rally and be a long term bet ?
The future for Hudco appears to be bright if it is getting an IFC status from its good old HFC Image. In anticipation , the stock price has already run up a bit.
However, already there are other PSU’s like PFC , REC, IRFC, IREDA with proven capability, So how much they can effectively lend for infra project and minimise NPA is to be seen.
As far as Stand alone HFC in PSU finance space the valuation of LIC housing finance looks much better as it is yet to catch up with investor fancy.
Discl: Not invested in Both the stocks discussed above. Not a buy sell recommendation
pl do your own assessment before investment
Any company in India with ROE of 30%. Can grow at 25% CAGR and has cash flows that can allow company to pay 40% dividend payout and is available at 10xFY26 earnings?
Let’s see:
HUDCO’s unique company profile allows it to function majorly differently than a conventional NBFC. HUDCO majorly lends to state governments which has a very low risk weight by RBI.
This will allow HUDCO to grow its loan book to ~3 times of current loan book without any need for any equity capital infusion this will push the ROE’s to 30% in 2 years. This is a very unique characteristic in any Indian NBFC and makes it necessary for investors to think beyond the standard norm of looking at HUDCO on price to book multiple.
As the equity capital is not required by HUDCO to grow, HUDCO can payout huge dividends around 40% of annual profits (unlikely case in any NBFC). Also this high dividend payout keeps the book value of the company lower and valuing it on price to book is not appropriate. Even the borrowers are mostly state governments and loans are asset backed causing NPA’s to be ~0.36% (lowest in industry)
Management has given strong guidance of almost doubling the loan book in 2 years with NIM expansion potential and beyond that also they for see ~ 22% CAGR. This means in 2 years HUDCO can report ~5000cr profits. (Currently ~2000 crs)
Now if we put all above facts and figures in a summary. HUDCO is a company where their loan book growth is not dependent on equity capital (book value) and the chances of NPA are almost absent (due to lending to government). Valuing it on price to book value is not logical. And must be valued like a manufacturing company with strong cash flows, ROE’s and Growth.
HUDCO with an equity capital of 14k crs can report Profits of 5000 crs. (30% ROE) by fy26. NPA’s are virtually absent so no negative surprises. Can payout 40-50% of thier earnings as dividend.
HUDCO is that rare company that is still valued at 10xFy26 despite these strong growth, ROEs and Cashflows.
Govt spend on Housing for poor could have a cascading effect on economy and many sectors could benefit…
for example , apart from financing the housing projects , for construction of houses you would need cement and steel, pipes , plumbing , sanitary items etc and day labourers to build that who need to be paid. and these labourers with money in hand would buy FMCG, consumer durables.
Then follows electricity connection …then the house owners would tend to buy TV, refrigerator , air cooler , 2 wheeler …etc etc.
So indirectly , any kind of Public spend would finally result in pushing up the economy further.
Discl : Invested from lower level in hudco and other related companies and hence may be biased. not a buy sell recommendation. PSU companies are subject to change in govt policy and volatility in stock price. Qoq sequential growth may be lumpy at times
Please do your own assessment before investing
