HUDCO IPO is AVOID as sector uncertainties loom – JainMatrix

HUDCO IPO is AVOID as sector uncertainties loom – JainMatrix

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Bangalore-based JainMatrix Investments has come up with its research report on HUDCO IPO which opened for subscription yesterday. The PSU IPO has already received full subscription, thanks to massive interest from retail category. Nevertheless, HUDCO IPO rating by JainMatrix Investments is AVOID, and the research firm has outlined its reasons as follows:

  • HUDCO’s revenues, EBITDA and PAT have grown at 4.8%, 4.2% and 6.8% CAGR from FY12-16, Fig 5.
  • FY17 data is a projection of 9M FY17 financials. The revenue and PAT growth have been steady. However based on 9M FY17 data, the financials for FY17 could fall.
  • The EPS has risen steadily in the last 5 years. However for FY17, again, the EPS could fall YoY at the current rate of growth.
  • In accordance with CPSE Capital Restructuring Guidelines, with effect from FY16, HUDCO is required to pay a minimal annual dividend of 30% of its PAT or 5% of its net worth, whichever is higher, unless an exemption is provided. Dividend from HUDCO has fallen over the years. This is a negative.
  • HUDCO has a low ROE of 9.2% and ROCE of 9.8% for FY16.
  • HUDCO has an unstable cash flow pattern. It has generated FCF for equity shareholders in only 2 out of the last 5 financial years (from FY12 to FY16). This is a negative.
  • From Fig 7 we can see that the RoA has fallen over the years. The cost to income ratio has spiked by a few bps. Also the spread and NIM’s have fallen in the same time period. This is a negative.
  • The GNPA’s for HUDCO are high at almost 7% over the last few years. The NNPA has marginally fallen, however still high at 1.51%. This is a negative.

HUDCO IPO rating

  • India has the 2nd largest urban population in the world and by 2050, around 50% of India’s population i.e., 814 mn. is expected to live in urban areas. The need for up-gradation and development of urban infra and urban services cannot be overstated. The present levels of urban infra are grossly inadequate to meet the demand of the existing urban population.
  • HUDCO is primarily a lender to the state govt./govt. bodies and hence the lending has to be in sync with the government policies which can have social objectives as well which might not make lending attractive for HUDCO.
  • The firm has high gross and net NPAs. It has struggled to grow and lend in the last few years, in an environment where there is a massive shortage of infra.
  • PSUs in this sector face difficulties such as management independence, incentives, skill improvement, risk taking ability, etc.
  • Delayed implementation in loan disbursements due to regulatory clearance and pending litigations for recovery of non-payment by state borrowers negatively impact the financial growth of the firm.
  • “It is far better to own a wonderful business at a fair price than a fair business at a wonderful price”. We feel that HUDCO is an average business available at a wonderful price.
  • This IPO offering is rated AVOID, and investors are advised to look elsewhere for long term gains.

Read the full report on HUDCO IPO rating here

Download the PDF file .

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