HUDCO Urban Development - Will it develop the investor too?

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I am refferring to following news,
News 1 >Status Change: Hudco may soon become infrastructure finance company - The Economic Times

  • 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.

News 2>Budget 2024: Aim For 2 Crore More Houses In Next Five Years Under PM Awas Yojana, Says Nirmala Sitharaman

  • 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 ?

D-Invested~70s on PSU momentum…added at 200

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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

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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.

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Pradhan Mantri Awas Yojana

Pretty interesting read

This time the government may focus more on poor who are desperately in need of housing and may be the way forward…

My conviction is that the spending will increase…I may be wrong…

Disclaimer -Biased and invested

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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

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Block Deals in HUDCO & IREDA

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report HUDCO enclosed
Nirmal_Bang_HUDCO_Q1_FY25_Result_Update.pdf (726.6 KB)

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HUDCO signs MoU to fund Rs.25000 Crore for VPPL

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HUDCO | Management Interview

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  • Loan book will cross INR 1.25 lakh crore in FY25 as we transition from being a housing finance company to an infrastructure financing institution
  • INR Rs 25,000 crore MoU with Vadhavan Port Project (VPPL)
  • Yields are likely to be steady with NIM sustaining at 3-3.2%.
  • 2-3 years visibility as per management as they have long gestation period

Watch the management interview here - https://youtu.be/ealIGPRXyec

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HUDCO’s Q3 FY25 Earnings Call Takeaways

1. What is HUDCO’s current business focus and strategy?

HUDCO has transitioned from a primarily housing finance company to an NBFC-IFC focused on infrastructure financing. It provides holistic support for infrastructure creation aligned with the Indian government’s Viksit Bharat initiative. This includes multi-sector financing (housing, urban development - metro, mobility, roads, transports, water, sewage), rural infrastructure, and consultancy services.

2. How has HUDCO performed in Q3 FY25, and what are the key financial highlights?

HUDCO has demonstrated strong financial performance, with sanctions increasing fivefold year-on-year from INR 18,000 crores to INR 92,000 crores. Disbursements have also grown significantly to INR 31,760 Crores in the past 9 months, compared to INR 17,000 Crores the previous year. The loan book has increased by 41% year-on-year, reaching INR 118,000 Crores. The company boasts a strong debt-equity ratio (less than 6%) and a CRAR of around 47-48%. Net NPA is at 0.18%, and gross NPA is also reducing.

3. What is HUDCO’s loan growth guidance for the next few years?

While near-term growth may be high (30-40%), HUDCO anticipates settling into a CAGR of 15-16% in the long term. The company projects a loan book of INR 1.5 lakh Crores for the next fiscal year and INR 300,000 crores by 2030.

4. What is the composition of HUDCO’s sanction book, and what is the typical conversion rate from sanction to disbursement?

HUDCO’s loan book spans across nearly all Indian states and various sectors. Currently, the housing portfolio represents about 40%. The conversion ratio from sanction to disbursement is generally more than 80%, with the pipeline converting in 3-4 years due to the capital-intensive nature of the projects. The first-year disbursement is usually around 30-35%.

5. How is HUDCO managing its cost-to-income ratio, and what are its profitability metrics?

HUDCO is focused on sustaining and improving its cost-to-income ratio by continuously reducing the cost of funds and improving income. NIMs are around 3.2% (3.85% excluding the EBR portion of INR 20,000 crores), and spreads are around 2.41%. Return on assets has improved to 2.45%, and return on equity has increased from approximately 11% to over 14%.

6. What is HUDCO’s strategy for managing and resolving NPAs?

HUDCO is actively resolving its assets, with a target of resolving approximately INR 150 crores in principal and INR 50 crores in interest for the next quarter. Of the total INR 2,200 crores in NPAs, around INR 1,200 crores is under NCLT, and INR 429 crores is under DRT. The company also employs OTS policies. The PSU NPA will come to 0 by Q4, that is what we are expecting.

7. What is HUDCO’s role in the Pradhan Mantri Awas Yojana (PMAY), and what are the expectations for future disbursements under this scheme?

HUDCO expects to disburse around INR 100,000 crores in the next 4-5 years under PMAY 2.0, focusing on state sector entities and potentially PPP housing projects. It contributed a loan of around INR 42,000 crores, INR43,000 crores for PMAY 1.0.

8. How does HUDCO determine its lending yields, and what factors influence its borrowing costs?

HUDCO’s yields are based on internal benchmarks, using its own internal MCLR and rate card. The company is diversifying its borrowing mix, aiming to increase the proportion of external commercial borrowings and FCNRs to around 20% to further reduce borrowing costs. 17% of total borrowing is now from external commercial borrowings and FCNR (B). The weighted average cost of borrowing is 6.8%.

Discl: AI Summary. Remain Invested in Hudco at higher levels. Planning to SIP in the bottom.

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HUDCO | MoU Signed

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a. HUDCO signs MoU with IHS, Erasmus University, Rotterdam
b. Focus on housing & urban development collaboration

Any benefit for the company ?

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Absolutely! Few of the executives along with their most preferred buddies will get an all paid trip to Rotterdam and back annually - what better way to keep up the morale of senior management and executives… lol!

Disclosure: Sold out nearly one year back.

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HUDCO | Management Interview

  • Focus On Infra | ‘Hopeful of big bang close to Q4FY25’
  • HUDCO is now an infrastructure financing company but has been careful in financing infrastructure projects.
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