Housing and Urban Development Corporation

Introduction

Housing and Urban Development Corporation (HUDCO) is a government-owned corporation in India, founded in 1970 with head quarters in New Delhi, is incoming to the debt capital market from 17 September’2013, through an issue of Tax Free Bonds of face value of Rs.1,000 each, in the temperament of Secured Redeemable Non Convertible Debentures.

Issue Details

Issue, closes on 14 October’2013, has a size of Rs.750 crore, with a choice in HUDCO’s hand to retain an oversubscription up to the projection limit of Rs. 4,809.20 crore. Minimum appliance is Rs. 5,000 and in multiples of Rs. 1,000 after that, at the same time allotment will be done on first come first dole out origin. Life form tax-free, the interest does not draw Tax Deduction at Source {TDS} nor do the bonds attract wealth tax. In addition, the bonds do not have any lock-in period.

Rating

Hudco Bonds were rated AA+ by CARE and India Ratings, signifying high degree of safety regarding timely servicing of financial obligations, are proposed to be listed on Bombay Stock Exchange.

Listing

Hudco Bonds were proposed to be listed on Bombay Stock Exchange, are to be subject both in physical and dematerialized form, therefore a demat account is not necessary to buy these bonds. Trading lot is one bond and must be essentially in done demat form only.

Proffer of the Issue

Bonds have3 different series under which they are being offered:

# Retail investors defined as application up to Rs. 10 lakh from resident individuals, Hindu Undivided Family, Non Resident Indians and Qualified Foreign Investors being individual. 40 percent of the issue is reserved for retail investors, 30% for High Net worth Individuals, 20% for corporate and balance 10% for QIB.

Company Background

A mini-ratna, HUDCO is lends to housing and urban infrastructure projects across the country. In FY13, it posted top line of Rs. 2,900 crore and PAT of Rs. 700 crore, on net-worth of Rs. 6,500 crore. With low net Non Performing Assets of 0.83% as of 31 March’2013, it has a contented capital adequacy ratio of 23.24 percent. Hudco had sanctioned project worth Rs. 23,000 crore and pay out Rs. 6,000 crore in FY13 and targets to pay out Rs. 7,000 crore for the duration of FY14. For Q1FY14, it reported revenue of Rs. 617 crore plus PAT of Rs. 102 crore.

Rate of Return

This is the second tax-free bond issue this fiscal after REC (which closes on 16 September’2013), HUDCO is offering slightly higher coupon vis-a-vis REC. However, its credit rating of AA+ is a nick lower than REC’s AAA. On the other hand, that should not be prevention, the issue being a public sector undertaking with a track record of victorious bond issues.

The Fifteen year (Series II) bonds, carrying the highest coupon rate, are comparable to a 12.68 percent pre-tax return earned on other fixed income instruments, presumptuous the highest tax bracket of 30.9 percent for retail individuals. This is awfully good-looking rate as currently no bank is offering double digit interest rates on long term deposits. In reality, the 20 year Series III issue also carries a very attractive coupon of 8.74 percent which render to12.65 percent tax effective yield.

Before issued (in early 2013) Fifteen year HUDCO bonds are trading on Bombay Stock Exchange with yields of 7.61%-8.05%. Consequently, current rates are significantly higher.

The present issue is likely to witness overpowering response, comparable to REC which closes early on 16 September’2013, a week prior to its scheduled closure of 23 September’2013.

Recommendation

Present HUDCO bonds are very attractive and warrant subscription for debt investors. Both Series II and Series III are suggested, with prejudice towards the latter owing to its longer tenure.

Because this is the first public issue of tax-free bonds by the company this fiscal (having hoist about Rs. 2,400 crore during FY13), it hopes to exercise the green-shoe option and exhaust the entire shelf limit, given the very good-looking ticket rates. Issue mortal on first-cum-first-serve origin, retail investors must grab that application form at the initial.