The IPO of Housing and Urban Development Corporation Limited (HUDCO) is likely to be launched later this month following bumper listing of D-Mart. Although poor listing of CL Educate has disappointed investors, there is much to look forward to the IPO market this year (don’t forget to go through the list of most promising IPOs expected in 2017). Needless to say, HUDCO IPO features in the list.
Public sector undertakings (PSUs) have traditionally delivered good returns on listing as investment banks have a clear mandate to leave some money on the table. The deal for retail investors gets sweeter in PSU IPOs as they usually get a discount on IPO price as well. HUDCO is also likely to follow these guidelines. Cochin Shipyard is another PSU hopeful of floating an IPO and has filed prospectus for the same.
While more details regarding HUDCO IPO are not finalized yet, it is always a good practice to get a broad idea beforehand. Here are some important aspects of the company’s operations and the IPO.
The President of India as promoter
HUDCO is promoted by the President of India who also owns all shares in the company (2,001,899,300 directly and 700 through its nominees). The President acts through the Ministry of Housing and Urban Poverty Alleviation, Government of India, the Ministry of Rural Development, Government of India and the Ministry of Urban Development, Government of India.
In other words, the government of India has full control of the company. Since the company is totally owned by the President of India, there are no external investors. This is understandable as HUDCO is a PSU. Directly or indirectly through various ministries or departments, the government owns PSUs.
HUDCO IPO = Full OFS
HUDCO IPO will not involve issue of fresh shares and thus, the development institution will not get any money from the public offer. The government plans to divest 10% of the shares through the IPO and all the 200,190,000 shares will be sold through the Offer For Sale (OFS) route. We have maintained in the past that full OFS IPOs or offers with a big OFS component are not the best for retail investors. However, offers of profitable PSUs are exception as pricing is usually kept moderate.
Read Also: Upcoming IPOs in 2017 to keep an eye on
HUDCO as a market-maker
As India’s premier development institution in bankrolling housing finance companies and offering venture capital in housing and urban development sectors, HUDCO plays a much bigger role of a participant. It is not a regulator but somewhere between a regulator and a market player. HUDCO plays a crucial role in various government schemes such as DAY-NULM (Deendayal Antyodaya Yojana-National Urban Livelihoods Mission), JNNURM (Jawaharlal Nehru National Urban Renewal Mission) and PMAY-HFA (Pradhan Mantri Awas Yojana – Housing for All) through the appraisal and monitoring of projects.
Being a market maker of sorts, HUDCO has developed strong relationships with various state governments and their agencies. This helps as state governments and their agencies accounted for nearly 89.8% of HUDCO’s total loan portfolio as of 30 September 2016.
Solid financial performance
HUDCO boasts of strong financial performance including consistently increasing revenues and strong profitability. The company’s top-line has increased in each of the last four years and looks on track of doing an encore this year as well. Similarly, its proven business model means profits have remained strong and have followed a growth trajectory in the timeframe.
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HUDCO’s sustained performance and profitability earned it the Miniratna status in fiscal 2005. While its earnings have improved, profitability has slipped a bit in the latest six months. Nevertheless, net profit margin at 19.9% is still quite strong for a company of this size.
HUDCO’s consolidated financial performance (in INR crore)
|Profit after tax||621.6||699.7||734.0||768.3||774.3||348.2|
|Net margin (%)||22.4||24.0||24.4||22.4||23.4||19.9|
HUDCO IPO will be a darling of dividend investors
Being a profitable PSU, HUDCO pays regular dividend and this is something retail investors will find attractive. The company is required to pay a minimal annual dividend of 30% of its profit after tax (PAT) or 5% of its net worth, whichever is higher. Although this was not maintained in the latest financial year, the dividend rate of 5% was still quite attractive. Even after the IPO, the government will remain the biggest shareholder which means there is no reason to believe that this dividend policy will change.
Increasing urbanization means outlook bright for HUDCO
Everyone keeping eyes and ears open knows that urban India is witnessing a massive inflow of working population from rural parts of the country, but here are some statistics. India’s urban population increased from 222 million in 1990 to 410 million in 2014 and is expected to reach 814 million by 2050. More importantly, the figure in 1990 made 26% of India’s population but increased to 32% in 2014. Going by the forecasts, half of India is expected to live in cities by 2050. Coming from our low base, this may appear a drastic change but India ranks pretty low in urbanization. According to data from the government of India and World Economic Forum (WEF), China (54%), Indonesia (53%), Mexico (79%), Brazil (85%) and Russia (74%) are much ahead of India in terms of urbanization rates.
Shortage of housing
This migration to urban India is leading to a shortage of housing and according to government data, the shortage in urban housing between FY 2012 and FY 2017 was estimated at close to 19 million dwellings. As one can expect, this shortage can increase significantly if the rate of urbanization increases or if the housing creation takes a dip. The other aspect of this shortage is that close to 96% of it is among the population classified as part of the LIG (Lower Income Group) or EWS (Economically Weaker Section).
To reduce this shortage, the government has launched various schemes such as DAY-NULM, JNNURM, and PMAY-HFA. Under the ‘Housing for All’ scheme, the government plans to build 20 million urban homes and 30 million rural homes by 2022. The credit linked scheme under the urban program, which offers 6.5% interest rate subsidy, has already started gaining traction and HUDCO is playing the key role of central nodal agency.
As much will depend on how the offer is priced, we wouldn’t speculate on this aspect. In the meantime, feel free to head to the discussion page for HUDCO IPO to get a sense as to what other investors think about this upcoming IPO.