May 2017


Hudco’s Grey Market Premium is 28-29 Per shares, Thats a Whopping 50% listing gain and is getting a lot of market participants Interested. Lets Understand 8 Factors that make Hudco so Interesting in the next 3 mins.

Factor 1 – About the IPO- The government of India is divesting 10% Stake for 1224 crores valuing the company at Approximately 12,000 Crores. The offering has come at a price of 56-60 with a 2/Share discount for retail shareholders.

Factor 2 – About the Business- The company is engaged in a very easy business of borrowing at 8%, and lending it at 10%. The Interest rate difference is the gross profit of the Company. The Company has 2 main cost 1) Operating Cost and 2) Credit Cost (NPA). The Company’s business is lending to Infrastructure and Housing projects undertaken by the Government or PSU Companies. The company used to lend to Private players as well but stopped that in 2013 as the NPA’s were very high there, as on 9month 2017, 100% of disbursement has happened to government Players only.

Factor 3 – Loan Book – As on December 2016, Hudco had a outstanding Loan of 36,400 crores, out of which 31% was given to housing project and 69% of book was given to Infrastructure projects like Water supply, Road and Transport, Power etc. Out of the Total loan book 10% was loans to private players, whereas 90% were to Government Companies. The Average duration of these loans are 8 years. All government loans are backed up by bank guarantees of atleast 125% of the loan book i.e. they are broadly risk free.

Factor 4 – NPA – Hudco has Gross NPAs of around 6.8% and Net NPAs were around 1.51% i.e. HUDCO has already done provision of 78.98 per cent of its NPA’s. The spike in NPA mainly  due to loans which were towards private sector projects, private sector portfolio which currently bears a gross NPA ratio of 5.98% as against 0.75% for loans made to state governments. Since Going forward the Company isn’t going to be lending to Private Sector Entities, we expect NPA’s to be less than 1.5% going forward. When we compare HUDCO’s NNPA of 1.51% to its Peers REC(1.68%), PFC(2.28) (Face the same problem of private sector NPA’s) and SREI (2.10%) its inline with the Sector.

Factor 5 -Leverage – Most Retail Housing Finance Companies are leveraged between 10-13 times, whereas most Infrastructure players are leveraged 5 times. Surprisingly Hudco is leverage only 2.8x, probably because there weren’t many projects coming on the Smart City Side. With Government’s focus on Smart City we expect the company to increase its leverage to 5x in the next 3 years and won’t need any equity dilution for it.


Factor 6 – Return on Equity – We Expect Leverage will Increase going forward from 2.8x to 5x in next 3 years which will directly have an  impact positively on the ROE of Hudco. Currently HUDCO has a ROE of 10%, which is lower compared to its peers REC and PFC. (Both over 20%).

Factor 7- Price/Book – Hudco at IPO Offer Price trades at a P/B of 1.35 inline with other players like REC and PFC who have P/B of 1.15 and 1.16 respectively.  Since Hudco isn’t leveraged much (Debt/Equity of only 2.8 v/s 5 for Industry) it can trade at much higher 1.35 P/B. The Growth of its book of more than 20% is absolutely important for it to sustain more than 2x P/B, it does have the ability to grow but execution is important.


Factor 8- Price/Earning – Hudco Trades at a PE Ratio of 17.14, whereas its peers REC and PFC trade at between 6-7 times. There have been a lot of provisions in Hudco which have depressed current earnings, but we believe the provisions will reduce materially going forward.

Conclusion – It is absolutely necessary for Hudco to grow its loan book at more than 20% to increase its valuations, it hasn’t been able to do it in the past with last 5 year loan book growth at 5.3%CAGR. With A lot of Smart City Projects, Government Owned housing project we believe HUDCO has the capability to grow 20% plus for next 5-10 years if they can execute their loan book growth Right. At 60 (Minus 2 Discount for Retail), we are Strong buyers with limited downside risk but if the growth pick up we have a great investment with longevity of business model.

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We at Stallion Asset look at a lot of Data to understand the Emerging Trends in the Corporate India. One way of Data Analysis is looking at Private Equity Deals to get an Understanding to where Smart Money is getting Invested.

Lately there has been a Surge in Smart Private Equity money investing in the Commercial Real Estate Market.

DLF – GIC Deal – GIC, the Government of Singapore Investment Arm has bought 40% Stake in DLF’s Rental Arm by Investing an Estimated 13,000 Crores valuing the Rental Arm at 32,500 Crores.  DLF Rental Arm has annuity revenues of 2700 Crores and has 30 Million Square Feet. The Valuation of Rental Arm is 12x Rental Revenues or 1100 Crores/Million Sq. feet.

Phoenix – CPPIB Deal – Lately Canadian Pension Fund picked up 49% Stake in Phoenix Bangalore at pre money valuation of 2200 Crores. Bangalore Phoenix mall has done a Revenue of 107 crores and is  1 million Square feet big. The Deal Happened at 20.5x Rental Revenues or 2200 Crores/Million Sq. Feet.

K Raheja – Blackstone Deal – Blackstone Group’s invested 1600 Crores to buy 15% stake in the office holding company of K Raheja Corp  valuing the rental arm of K Raheja Corp at 11,000 Crores. They have 20-million sq ft income-producing office portfolio and is the 2nd largest commercial rental company after DLF.  The transaction happened at 550 Crores per million Square feet. We dont have the rental income for this deal but we believe it should be in the range of 10-13x Rental Income.

Indiabulls Real Estate Rallied  by 40% on a Single day last week as it announced demerger plan of its commercial assets. Indiabulls Real Estate owns 55% in commercial real estate arm and will have FY2018 Rentals of 692 Crores and growing it to 1,357 Crores by FY2021. We believe if Indiabulls Real Estate Arm would be sold today, it would get a valuation of about 10,000 Crores.


So why exactly is everyone suddenly so bullish on the Indian Commerical real Estate Story?

1) Global investors have preferred to participate in the commercial / leasing market with 76% of money invested going into commercial properties, even though Commercial Real Estate is only 20% of Total real estate basket. The Rest 80% of the Market is the Housing Market, which got only 24% of total Foreign Investments.

2) There has been a Sharp surge in Occupancy levels and reduction in vacancy level of commercial real estate as there is very low new supply in the market. It Normally takes 3-5 years for fresh supply to hit the Market.

3) REITS and RERA- With Real Estate Investment Trust expected to list in 2017-2018, it is expected that large PE Players are set to get a mindblowing exit. RERA, first regulator on Real Estate will get the much needed transparency in the Sector.

4) Housing Loans – Majority of Home Buyer buy their house on Loans,  which decreases the incentive of paying by black money as home buyers can get access to cheap capital and get tax deductions. This increases white money in the real estate system and improves corporate governance.

Conclusion – Real estate was considered to be an ugly sector where mostly black money dealings use to take place and was not organised earlier, but now with entrance of large PE funds, RERA act, these companies now can improve their stretched balance sheet by liquidating a small percentage of their valuable rental assets. We believe Commercial Real Estate can be the biggest trend for the next 3-4 years.

Disclosure – Amit Jeswani and Family have no positions in Stocks discussed. Use this for Educational Purpose Only.

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