HUDCO - Tax Free Bonds

By Geetanjali Kedia

Introduction: Housing and Urban Development Corporation (HUDCO) has entered the debt capital market, for the third time this fiscal (after September and 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 19^th March 2014, has a size of Rs.75 crore, with an option in company’s hand to retain an oversubscription upto the shelf limit of Rs.285.81 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. 60% of the issue is reserved for retail investors, 20% each for HNIs and 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 9MFY14, it reported revenue of Rs. 2,073 crore and PAT of Rs. 442 crore.

Rate of Return: This is the third tax-free bond issue this fiscal (tranche III) from HUDCO. Since the company has exhausted most its quota for FY14 tax free bonds during September and December issues, this issue size is very small (just Rs. 75 crore) and mainly aimed at retail investors (60% allocation for them) so as to quickly garner the left-over requirement.

The company is offering higher coupon of 15 basis points for 15 year bonds vis-a-vis the offer 3 months back for similar bonds (8.83%), as 15 year yields have hardened. The 20 year bonds however are offering 5 basis points lower yields – 8.96% now as against 9.01% in December 2013.

The 15 year (Series 2) bonds, carrying the highest coupon rate, are comparable to a 13.00% 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 December 2013) 20 year HUDCO bonds are trading on BSE with yields of 8.88% while the 15 year bond at 999, indicating yield of 8.84%. Thus, the current rates are marginally higher for 20 year bonds and significantly more for 15 year bonds.

Recommendation: Current HUDCO bonds are very attractive and warrant subscription for debt investors. Since both Series 2 (15 years) and Series 3 (20 years) are good, one can apply in either, with a trade-off between longer duration or higher yield.

Issue being on first-cum-first-serve basis, retail investors must apply at the earliest as the issue size is very small and response is likely to be overwhelming!