HUDCO - Tax Free Bonds

Introduction: Housing and Urban Development Corporation (HUDCO) has entered the debt capital market, for the second time this fiscal, on 2^nd December 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 10^th January 2014, has a size of Rs.500 crore, with an option in company’s hand to retain an oversubscription upto the shelf limit of Rs.2,439 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 H1FY14, it reported revenue of Rs. 1,365 crore and PAT of Rs. 302 crore.

Rate of Return: This is the second tax-free bond issue this fiscal from HUDCO, with the company offering higher coupon of nearly 27 basis points for 20 year bonds, vis-a-vis the offer 3 months back for similar bonds (8.74%).

The 20 year (Series 3) bonds, carrying the highest coupon rate, are comparable to a 13.04% 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.

Previously issued (in September 2013) 20 year HUDCO bonds are trading on BSE with yields of 8.79%. Thus, current rate is significantly higher.

Recommendation: Current HUDCO bonds are very attractive and warrant subscription for debt investors in the Series 3 (20 years). Issue being on first-cum-first-serve basis, retail investors must grab that application form at the earliest as the response is likely to be overwhelming!