Mumbai: Ahead of the opening of the initial public offering (IPO) of Housing and Urban Development Corp. Ltd (Hudco) on Monday, analysts were mostly upbeat about the company’s valuations, even as concerns on bad loans remain. The government aims to sell a 10.19% stake in Hudco to raise up to Rs1,200 crore, with a price band of Rs56-60 per equity share. The issue will open on 8 May and close on 11 May. Hudco is engaged in wholesale funding, providing loans for housing and urban infrastructure projects. A major chunk of loans is offered to states and their agencies.

In a 5 May note, Reliance Securities Ltd said at Rs60 a share, the upper end of the IPO price band, Hudco will have a price-to-book (PB) multiple of 1.3 times on December 2016 book value, and price to earnings (PE) multiple of 18.2 times on annualized nine-month FY17 profit. “We can take valuation reference from the listed housing finance companies (HFCs), which trades in range of 2.2-12 times on FY17 price to book value and 15-45 times on FY17 on PE," the brokerage firm said.

Out of the total loan portfolio of around Rs36,386 crore, around 89.93% was extended to state governments and their agencies 31 December 2016.

Urban infrastructure projects relating to water supply, roads, transport and power account for 69% of Hudco’s loan book. The balance 31% goes to housing finance.

“Both segments have vast untapped opportunity in India, which would provide potential growth opportunity for Hudco to scale up its operations," Angel Broking Pvt. Ltd said in note on 4 May. According to the brokerage, capital adequacy ratio of 68% at the end of nine months of FY2017 leaves enough scope for leveraging balance sheet without having to raise capital for next 4-5 years. It reported a return on equity (RoE) of 9.5% for FY2016, which is lower than the large non-banking financial companies in India. “Ability to grow its balance sheet without dilution in the medium term would prove to be RoE-accretive for Hudco, and it can reach mid-teens over the next few years," Angel Broking added.

According to IIFL Wealth and Asset Management Ltd, Hudco’s loan spread is expected to remain steady at 2-2.2% over the long term. “Being substantially capitalized and commanding highest credit rating, Hudco can raise long-term money at best possible rates from the bond market," it said. Given the reasonable visibility for steady asset growth and better return ratios, the IPO valuation at 1.4-1.5 times’ nine months FY17 PB seems attractive," said IIFL in a note on 3 May.

However, SBICAP Securities Ltd, in a note on 2 May, said interest rate volatility could affect net interest income and net interest margin, affecting operating efficiency and its business. It also added that quality of loan portfolio deteriorating may result in increasing non-performing assets (NPA) and hence provisions for such NPA would increase. Hudco reported gross NPAs and net NPAs of 6.80% and 1.51%, respectively in the first nine months of FY2017. The high NPA level was due to large defaults from some private companies to which it had previous exposure, while its NPAs from government sector is only 0.75%, said Angel Broking.

According to Angel Broking, Hudco has already made substantial provisions on the private sector NPAs and stopped lending to them from FY2013, and hence, material change is not expected in NPAs in the near term. “Further, a provisioning coverage ratio of 72% lends enough comfort on the loan book," it said. Motilal Oswal Securities Ltd also added that increase in non-performing assets in outstanding loans, advances and investments would adversely affect the profitability of the company. “Default on the obligations by borrowers may adversely affect the financial metrics of the company, while social housing segment exposes the company to high NPAs in the future," it said in a note on 3 May.

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