HUDCO - Tax Free Bonds

Introduction: Housing and Urban Development Corporation (HUDCO) is entering the debt capital market 17^th September 2013, with an issue of Tax Free Bonds of face value of Rs.1,000 each, in the nature of Secured Redeemable Non Convertible Debentures.  

Issue Details: Issue, closing on 14^th October, has a size of Rs.750 crore, with an option in company’s hand to retain an oversubscription upto the shelf limit of Rs.4,809.20 crore. Minimum application is Rs. 5,000 and in multiples of Rs. 1,000 thereafter, while allotment will be done on first come first serve basis. Being tax-free, the interest does not attract TDS nor do the bonds attract wealth tax. Also, the bonds do not have any lock-in period.

Rating: Bonds, rated AA+ by CARE and India Ratings, indicating high degree of safety regarding timely servicing of financial obligations, are proposed to be listed on BSE.

Listing: Bonds, proposed to be listed on BSE, are to be issued both in physical and dematerialized form, hence a demat account is not necessary to buy these bonds. Trading lot is one bond and must be necessarily in done demat form only.

What’s on offer: Bonds have three different series under which they are being offered:

*Retail investors defined as application upto Rs. 10 lakh from resident individuals, HUF, NRIs and QFIs being individual. 40% of the issue is reserved for retail investors, 30% for HNIs, 20% for corporates 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 topline of Rs. 2,900 crore and PAT of Rs. 700 crore, on networth of Rs. 6,500 crore. With low net NPAs of 0.83% as of 31^st March 2013, it has a comfortable capital adequacy ratio of 23.24%. The company had sanctioned projects worth Rs. 23,000 crore and disbursed Rs. 6,000 crore in FY13 and targets to disburse Rs. 7,000 crore during FY14. For Q1FY14, it reported revenue of Rs. 617 crore and PAT of Rs. 102 crore.

Rate of Return: This is the second tax-free bond issue this fiscal after REC (which closes on 16^th September), HUDCO is offering slightly higher coupon vis-a-vis REC. However, its credit rating of AA+ is a notch lower than REC's AAA. However, that should not be a deterrent, the issue being a public sector undertaking with a track record of successful bond issues.

The 15 year (Series 2) bonds, carrying the highest coupon rate, are comparable to a 12.68% pre-tax return earned on other fixed income instruments, assuming the highest tax bracket of 30.9% for retail individuals. This is very attractive rate as currently no bank is offering double digit interest rates on long term deposits. Infact, the 20 year Series 3 issue also carries a very attractive coupon of 8.74% which translates to12.65% tax effective yield.

Previously issued (in early 2013) 15 year HUDCO bonds are trading on BSE with yields of 7.61%-8.05%. Thus, current rates are significantly higher.

The current issue is likely to witness overwhelming response, similar to REC which closes early on 16^th September, a week prior to its scheduled closure of 23^rd September.

Recommendation: Current HUDCO bonds are very attractive and warrant subscription for debt investors. Both Series 2 and 3 are recommended, with bias towards the latter due to its longer tenure.  

Since this is the first public issue of tax-free bonds by the company this fiscal (having raised about Rs. 2,400 crore in FY13), it hopes to exercise the green-shoe option and exhaust the entire shelf limit, given the very attractive coupon rates. Issue being on first-cum-first-serve basis, retail investors must grab that application form at the earliest!