HUDCO Ltd. 1 P a g e. Recommendation Subscribe BACKGROUND

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1 Recommendation Subscribe BACKGROUND Price Band Rs. 56 Rs. 60 Housing and Urban Development Finance Corporation Ltd. (HUDCO) was Bidding Date 8 th May 11 th May 2017 Book Running Lead Manager Registrar Sector IDBI Capital, ICICI Securities, Nomura, SBI Capital Market Alankit Assignments Ltd. NBFC Infra Finance Minimum Retail Application- Detail At Cut off Price Number of Shares 200 Minimum Application Money Rs. 11,600 Discount to Retail & Employee Rs. 2 Consolidated Financials (Rs Cr) FY16 9MFY17 Net Interest Income Pre Provision Profit PAT Lower Upper Valuations Band Band Market Cap (Rs in cr) 11,211 12,011 EPS* P/E ratio* P/BV* RoE (%)* 9.6% 9.6% *calculated on FY16 numbers (post issue basis) Post Issue Shareholding Pattern Promoters 89.81% Institution 5.00% Bodies Corp & public 5.19% Offer structure for different categories QIB (Including Mutual Fund) 50% Non-Institutional 15% Retail 35% Post Issue Equity (Rs. in cr) Issue Size (Rs in cr) Face Value (Rs) 10 Anupam Bafna Research Analyst ( ) anupam.bafna@nirmalbang.com established in April, HUDCO has more than 46 years of experience in providing loans for housing and urban infrastructure projects in India. It has been conferred the status of Miniratna (Category-I Public Sector Enterprise) by the GoI. Under housing finance loans HUDCO provides project loan for social housing, residential real estate and even retail finance. With respect to urban infrastructure finance, HUDCO make loans for projects relating to water supply, roads and transport, which includes railways, ports, power and even emerging sectors. Loan book of HUDCO stood at Rs Cr as on December 2016 of which Housing finance constituted 26.2% of the total portfolio whereas urban infrastructure finance contributed 73.8%. Investment Rationale: a) Key player for Government s schemes for Indian housing and urban infrastructure sectors b) Pan-India presence and strong relationships with State Governments and their agencies c) Increasing Share of Housing Finance in the total Loan Portfolio d) Highest Credit Rating and Diversified Sources of Funding e) Highly secured Loan portfolio Details of the Issue: The public issue of HUDCO consists of an offer for sale of 20.4 Cr equity shares aggregating up to Rs. 1,210 crore (at upper price band). Objects of the Issue: The whole issue of Rs. 1,210 Cr (on upper band) is offer for sale by Ministry of Housing and Urban Poverty Alleviation representing 10.2% stake in the company. Valuation and Recommendation: Government has been emphasizing on both housing and infrastructure development. In such scenario, HUDCO is well placed to cater the upcoming opportunities. Over FY14-FY16 its AUM has grown at a CAGR of 9.4%, but going forward we believe that it can grow in double digit given the strong momentum in the sector. Currently, HUDCO has leverage of 2.7x, as the growth kicks in, it will leverage the book leading to improvement in return on equity. On the valuation front, at the given upper band price of issue of Rs. 60, the stock is offered at P/E of 18.14x of its 9MFY17 annualised EPS and 1.34x 9MFY17 P/BV which we believe is reasonably priced as compared to its peers. We recommend subscribing to the issue. Financial Snapshot FY14 FY15 FY16 9MFY17 Net Interest Income 1, , , ,104.3 YoY growth (%) -4% 26% -14% Pre Provision Profit 1, , , ,021.1 YoY growth (%) -4% 27% -13% PAT YoY growth (%) 11% 2% 5% P/E Rs. 60 * P/BV Rs. 60 * * annualised 1 P a g e

2 Business Housing and Urban Development Finance Corporation Ltd. was established in April, HUDCO has more than 46 years of experience in providing loans for housing and urban infrastructure projects in India. It has been conferred the status of Miniratna (Category-I Public Sector Enterprise) by the GoI. Under housing finance HUDCO provides project loans for social housing, residential real estate and even retail finance, which is branded as HUDCO Niwas. Under social housing, the ultimate beneficiaries of the loans are borrowers belonging to the economically weaker sections of the society, under residential real estate, the ultimate beneficiaries of the loans it makes are public and private sector borrowers for housing and commercial real estate projects. It finances social housing and residential real estate through primarily lending to State Governments and their agencies, which, in turn, extend the finance to or utilize the finance for the ultimate individual beneficiaries. Post March 2013, HUDCO ceased sanctioning new social housing and residential real estate loans to entities in the private sector. With respect to urban infrastructure finance, HUDCO make loans for projects relating to water supply, roads and transport, which includes railways ports, power and even emerging sectors, which includes SEZs, industrial infrastructure, gas pipelines, oil terminals and telecom sector projects; commercial infrastructure and others, which includes shopping centre, market complexes, mallscum-multiplexes, hotels and office buildings; social infrastructure and area development; and sewerage, drainage and solid waste management. Loan book of HUDCO stood at Rs Cr as on December 2016 of which Housing finance constituted 26.2% of the total portfolio whereas urban infrastructure finance contributed 73.8%. Sector wise loan book breakup: FY14 FY15 FY16 9MFY17 Particulars (in Rs. Cr) Amt % Amt % Amt % Amt % Housing Finance % % % % - State Housing % % % % - Private Sector entities % % % % - HUDCO % % % % Individual Retail Loans Bulk Retail Loans Urban Infra Finance % % % % - Water Supply % % % % - Roads and Transport % % % % - Power % % % % - Emerging Sectors % % % % - Commercial Infrastructure & Others % % % % - Social Infrastructure & Area Development % % % % - Sewerage and Drainage % % % % Total Loan Portfolio % % % % 2 P a g e

3 Details of the products in the portfolio Loan Type Avg Loan Size as at Dec 31, 2016 (in Cr) Avg Residual Tenure as at Dec 31, 2016 (in years) NIM for 9MFY17 Housing Finance Loan Portfolio % Urban Infrastructure Finance Loan Portfolio % Total Loan Portfolio % Investment Rationale Key player for Government s schemes in housing and urban infrastructure sectors HUDCO plays a key role in various Government s schemes to develop the housing and urban infrastructure sectors under the various Government schemes like Deendayal Antyodaya Yojana - National Urban Livelihoods Mission, JNNURM and PMAY-HFA (Pradhan Mantri Awas Yojana Housing for All). As on December 31, 2016, Rs Cr i.e % of its total Loan Portfolio, was to State Governments and their agencies. In many cases, these loans to State Governments and their agencies are subject to repayment through allocations in State government budgets or recourse to alternate sources of revenue, which reduces the recovery risk of loans to State Governments and their agencies. As at December 31, 2016, GNPAs for loans to State Governments and their agencies was 0.75% of the Loan Portfolio compared with total GNPAs of 6.80% (Net NPA 1.51%) of Loan Portfolio which demonstrate a healthy portfolio quality in the segment. We believe, with the government s increasing focus on both housing and infrastructure will benefit players like HUDCO. Pan-India presence with strong relationships with State Governments and their agencies HUDCO has 21 regional offices and 11 development offices, across India in all the states having corporate office in New Delhi. Its pan-india presence has enabled it to develop strong relationships with State Governments and their agencies. HUDCO s pan-india presence has also enabled the company to diversify the geographical risk of its Loan Portfolio. The geographical break up of Loan Portfolio as on December 2016 is as under: 3 P a g e

4 Increasing Share of Housing Finance in the total Loan Portfolio: HUDCO has been increasing the share of housing loans in the portfolio and within those social housing loans as a percentage of the Loan Portfolio. The shortage in urban housing for the period from FY12 to FY17 has been estimated at close to 19 mn dwellings, which can increase significantly if the rate of urbanization increases which is crucial to address. State Governments and their agencies will continue to play a key role in helping to finance the building of new dwellings for the Lower income group, economic weaker sections and persons in rural areas and we believe this provides HUDCO with the opportunity to grow Loan Portfolio and increase Housing Finance loans and social housing loans as a percentage of Loan Portfolio. Below table indicates % of Housing Finance and social housing loans as a percentage of total Loan Portfolio: Sector FY14 FY15 FY16 9MFY17 CAGR Housing Finance 7, % 9, % 11, % 11, % 21.9% -of which social housing 4, % 6, % 8, % 7, % 31.8% Urban Infrastructure Finance 22, % 23, % 23, % 25, % 4.1% Total Loan Portfolio 30, % 33, % 35, % 36, % 9.0% Highest Credit Rating and Diversified Sources of Funding HUDCO enjoys highest Credit Ratings from all the reputed rating agencies. HUDCO has credit rating of AAA for long-term borrowings from each of CARE, ICRA and IRRPL, which aids in keeping the cost of borrowing lower. HUDCO has funded its business requirements through equity from the Government of India and market borrowings like tax-free bonds, bonds, term loans and public deposits. HUDCO is approaching GoI for allocation of low-cost funding sources and also NHB for additional refinance assistance, which is also a low-cost funding source. HUDCO s relationship with the Government provides it with access to funds for long-term duration and at lower cost of borrowing. It has also enabled them to source foreign currency loans from bi-lateral and multi-lateral agencies, which diversifies their lenders. Highly secured Loan portfolio HUDCO has given loans which are backed by adequate collateral security. Also most of its exposure is now to State Governments which subject to various State government guarantees and the remainder was subject to some other form of security, such as a mortgage or negative lien. HUDCO has no restructured loan outstanding as on 31 st December In respect of loans to the private sector, the security options include mortgage of the project property, escrow of the receivables and hypothecation of the assets. The security coverage under the long-term loans are over 125%-150% of the loan outstanding. 4 P a g e

5 Recognized and provided for majority of stress assets In the past HUDCO has given loan to the private sector which caused majority of the NPAs in the portfolio. Post March 2013, it has stopped lending to private sector. Of the stressed loan, almost it has provided for majority existing NPAs. As a result its PCR stands at 79% as on December HUDCO has GNPA/ NNPA of 6.8% and 1.51% as on December respectively. From the ex-private book which is mainly lent to the state governments, there is minimal stress (0.75% of the book). Dent of the profitably was majorly by provisioning but this has been majorly tackled, going forward we believe this pain will be way behind and bottom line of the company will improve. Key Risk and Concerns HUDCO has registered muted loan of ~10% in the past several years. Increasing competition from Indian banks in the urban infrastructure finance sector Increase in non-performing assets in outstanding loans, advances, and investments would adversely affect the profitability Any change in schemes and policies if central and state government will adversely affect the company performance Valuation and Recommendation Government has been emphasizing on both housing and infrastructure development. In such scenario, HUDCO is well placed to cater the upcoming opportunities. Over FY14-FY16 its AUM has grown at a CAGR of 9.4%, but going forward we believe that it can grow in double digit given the strong momentum in the sector. Currently, HUDCO has leverage of 2.7x, as the growth kicks in, it will leverage the book leading to improvement in return on equity. HUDCO is substantially capitalized with CAR of 68.7% as its loans are guaranteed by state government and thus carry zero risk weight. HUDCO had minimal incremental NPAs after it stopped lending to private sector post in 2013 and it has no restructured loan assets. Also, it enjoys highest credit rating. Company has highly secured portfolio and has maintained NIMs of ~4.5% - 5% in the recent past. HUDCO has no direct comparable given the uniqueness of its business but we have compared it with PFC and REC as they are into infrastructure financing business. Peer Comparison Company Advances YoY Growth NIM CAR Leverage ROE ROA Rerturctured (Trailing) (FY16) book % (FY16) P/E P/BV PFC 235, % 4.54% 22.28% % 2.60% 5.94% REC 201, % 4.85% 21.30% % 2.92% 10.46% HUDCO 36,386 * 1.90% 4.26% 63.70% % 2.57% 0.00% , Company Data, NBRR * annualised On the valuation front, at the given upper band price of issue of Rs. 60, the stock is offered at P/E of 18.14x of its FY17 annualised EPS and 1.34x 9MFY17 P/BV which we believe is reasonably priced as compared to its peers. We recommend subscribing to the issue. 5 P a g e

6 Industry Prospects Economic activity in India picked up pace and the trajectory of growth was underpinned by macroeconomic stability embodied in narrowing fiscal and current account deficits and ebbing inflation. Domestic financial markets exhibited different responses to episodic shifts in risk sentiment on global spillovers, with money and bond markets remaining relatively sheltered. The Indian economy posted gains in Fiscal Underlying conditions have been firming up in India for scaling up the growth momentum. Housing finance: Traditionally, the Indian housing finance market has been largely catered to by Banks and HFCs. Together; they play a significant role in the housing finance system that promotes competition, market efficiency and consumer choice with improved terms and conditions in obtaining housing finance. The housing finance sector will register a growth of around 18% to 20% in FY17, compared with the 5-year CAGR of 18% in FY11 to FY16. The growth is likely to be supported by some pick-up in primary sales, new launches and a healthy growth in the Affordable Housing segment. Banks are expected to grow their home loan books at around 16% to 19% and HFCs at a slightly higher pace of around 17% to 21% leading to an overall growth of 18% to 20% in FY17. The long-term growth outlook for the sector remains positive given the Government s focus on Housing for All by 2022, and the favourable regulatory environment. Urban infrastructure: The infrastructure sector plays a crucial role as a vehicle of growth in economies, and even more so in emerging economies, which usually face infrastructure deficits with respect to their growing populations. The rising population has intensified focus towards development of urban infrastructure. The total allocation for infrastructure development in Union budget for Fiscal 2018 stands at approximately Rs.4.0 trillion. According to the Government s High Powered Expert Committee ( HPEC ), approximately US$640.2 billion is needed until 2031 for investment in urban infrastructure and services if India is to maintain and accelerate economic growth. The investment required for the eight major sectors of urban infrastructure (roads, transport, traffic support, street lighting, water supply, sewerage, storm water drains and solid waste management) is estimated at US$506.3 billion. An additional US$67.0 billion will be needed for renewal and redevelopment of certain urban areas, particularly slums, and US$16.3 billion will be required for capacity building of urban local bodies to ensure the availability of sufficient skills to plan, develop and manage the required infrastructure projects. g Sub-Group on Infrastructure estimates the funding gap in infrastructure in general to be US$ Thus, there exists a huge opportunity in the sector in coming years. 6 P a g e

7 Financials Particulars FY12 FY13 FY14 FY15 FY16 9MFY17 Interest Earned 2, , , , , ,613.0 Interest Expended 1, , , , , ,508.7 Net Interest Income 1, , , , , ,104.3 YoY Growth 17.0% -3.6% 25.8% -14.4% Other Income TOTAL INCOME 1, , , , , ,169.3 YoY Growth 17.8% -3.9% 27.0% -12.7% Total Operating Expenses YoY Growth 7.4% -6.3% 25.1% -7.5% Cost to income ratio 14.4% 13.2% 12.8% 12.6% 13.4% 12.7% Profit Before Provisioning , , , , ,021.1 YoY Growth 19.6% -3.6% 27.3% -13.5% Provisions & Contingencies YoY Growth 208.5% -93.2% % -52.5% Credit Cost 0.19% 0.55% 0.03% 0.88% 0.38% 0.82% Profit Before Tax , , , , Exceptional Items (20.3) Total Tax provision Tax Rate 33.9% 34.7% 33.0% 34.3% 28.1% 33.0% Net Profit after tax YoY Growth 9.4% 10.9% 1.9% 4.7% DPS Equity 2, , , , , ,001.9 Face value EPS * CMP PE * Reserve 3, , , , , ,966.8 Networth 5, , , , , ,968.7 Book Value P/BV CRAR 27.85% 50.46% 63.85% 63.70% Gross NPAs 6.76% 6.25% 6.68% 6.80% Net NPAs 2.52% 1.59% 2.06% 1.51% Provisioning coverage ratio 64.41% 75.75% 70.56% 78.98% ROA * 2.26% 2.50% 2.64% 2.43% 2.33% 1.84% RONW * 10.4% 10.9% 11.1% 10.3% 9.9% 7.6% * annualised 7 P a g e

8 Particulars FY12 FY13 FY14 FY15 FY16 9MFY17 EQUITY AND LIABILITIES Share Capital 2, , , , , ,001.9 Reserves & Surplus 3, , , , , ,966.8 Networth 5, , , , , ,968.7 Minority Interest Borrowings Long Term Borrowings 13, , , , , ,082.4 Short Term Borrowings , Current Maturities 5, , , , ,373.0 Total Borrowings 18, , , , , ,856.5 Growth - YoY -10.8% 15.2% 6.8% 23.2% -2.3% Deferred Tax Assets/Liabilities (Net) Other Long Term Liabilities Long Term Provisions Other Non Current Liabilities Short Term Provisions Trade Payables Other Current Liabilities 1, , , , ,383.3 Total Current Liabilites & Provisions 2, , , , , ,477.8 TOTAL LIABILITIES 27, , , , , , ASSETS Long term Loans and Advances 19, , , , , ,025.0 Short term Loans and Advances 3, , , , , ,267.8 Advances 22, , , , , ,292.8 Growth - YoY 9.2% 13.9% 10.0% 8.9% 1.4% Net fixed assets Non-Current Investments Current Investments Total Investments 1, Other Non Current Assets Cash and Bank Balances 2, Trade Receivables Other Current Assets , Total Other Assets 3, , , , , ,340.1 TOTAL ASSETS 27, , , , , , P a g e

9 Disclaimer: Nirmal Bang Securities Private Limited (hereinafter referred to as NBSPL )is a registered Member of National Stock Exchange of India Limited, Bombay Stock Exchange Limited and MCX stock Exchange Limited. We have been granted certificate of Registration as a Research Analyst with SEBI, Registration no. is INH for the period to NBSPL or its associates including its relatives/analyst do not hold any financial interest/beneficial ownership of more than 1% in the company covered by Analyst (in case any financial interest is held kindly disclose) NBSPL or its associates/analyst has not received any compensation from the company covered by Analyst during the past twelve months. NBSPL /analyst has not served as an officer, director or employee of company covered by Analyst and has not been engaged in market making activity of the company covered by Analyst. The views expressed are based solely on information available publicly and believed to be true. Investors are advised to independently evaluate the market conditions/risks involved before making any investment decision. Nirmal Bang Research (Division of Nirmal Bang Securities Pvt. Ltd.) B-2, 301/302, Marathon Innova, Opp. Peninsula Corporate Park Off. Ganpatrao Kadam Marg Lower Parel (W), Mumbai Board No. : /8001 Fax. : P a g e