7 things to know before you invest in HUDCO IPO

Housing and Urban Development Corporation (Hudco), a wholly-owned Government Miniratna company has come out with a public issue to divest 10% government stake. The company is also giving out a discount of up to 5% on the issue price to Hudco employees and retail investors.

The company has granted various loans to state governments for development of housing sector and infrastructure purposes. Hudco enjoys privileges of being an entity of the government. Other than that, it also offers various invest opportunities to investors.

Following are the reasons why one should invest in HUDCO IPO: -

Housing for All: The government has reportedly planned to construct 20 million urban homes and 30 million rural homes by 2022, under the ‘Housing for All’ scheme. Therefore, this could be a great opportunity for the company to make a mark as it participates actively in housing projects in areas of social housing and residential real estate.

Growing urbanisation: Migration of young people to urban areas has led to inflow of working population. Therefore, the requirement and investment in urban infrastructure has grown to a great extent. Here the company is well positioned to capitalise on the growth in the segments like water supply, drainage, sewerage, road etc.

Valuation of the company: An investor would tend to avoid investing in the company if he or she looks at the company’s asset quality situation. However, the valuation of the issue at 1.3X FY17 book dispels most of the concerns and encourages investors to invest in the company.

Provision Coverage Ratio: The company always maintained healthy provisions due to slippages in the private sector portfolio. Provision coverage ratio stands at a staggering 79%. The Board has decided to restrict its lending only to state government and their agencies from April 2013 and analysts expect it to decline from FY19 onwards. Such a situation will be a big driver of earnings for the company.

Sources of funds & low borrowing cost: The company has various sources of funds. The government has given green signal to the company to issue tax-free bonds when required and it also has access to foreign currency loans from bi-lateral and multi-lateral agencies. The company also has a highest credit rating of AAA for long-term borrowings, which reflects its low cost of borrowing.

Increasing returns with improved leverage: The excessive capital and low leverage of the company could not generate expected returns for the company. Therefore, the company reportedly decided to go with the divestment plan in this public offer. So once the company improves its leverage with the growing loan book, the return ratios should improve in the days to come.

Interest Margin: The company has been providing incentives to state governments and their agencies to opt for fixed interest rate loans for all loans except Hudco Niwas by maintaining the fixed interest rates lower than floating interest rates with an objective to reduce interest rate and liquidity risks. Such a decision has enabled it to keep an interest margin more than 4%.