HUDCO Tax Free bonds- A Worthy Investment Opportunity
Feb 25, 2013

India is the second most populous country of the world and ranks only next to China. However, it has witnessed slow growth in urbanisation so far. However, as per the estimates of Planning Commission, India is now all set to witness an unprecedented growth in urbanisation. Thriving employment opportunities in urban areas would act as a catalyst to expansion of cities. India’s urban population may double over next 20-25 years. Rapidly growing population puts tremendous pressure on systems and urban infrastructure.

To promote urban development, Housing & Urban Development Corporation Ltd. (HUDCO) was incorporated on April 25, 1970 under the Companies Act 1956. It is a public sector company fully owned by Government of India which has been awarded the status of Mini Ratna in 2004-05. It provides long term finance for construction of residential houses, satellite town set-ups and industrial enterprises of building material. It also provides consultancy services to the projects of designing and planning of works relating to Housing and Urban Development programs in India and abroad.

HUDCO has planned to raise Rs 500 crore by issuing Tranche II tax free bonds. The company intends to utilise the money raised through the Issue of bonds for the purpose of lending to finance working capital requirements, augmenting the resource base of the company and other operational requirements.

Business Profile

HUDCO has a PAN India presence and provides financial assistance nearly in 33 states and 1835 cities. It works towards achieving an objective of housing for all. HUDCO provides financial assistance to individuals under its flagship housing loan schemes - HUDCO NIWAS. It plays a key role in implementing action plan schemes of Government of India such as shelter up-gradation, night shelter and integrated low cost sanitation etc. It also grants assistance to create model villages and slums in each state. Besides financial assistance HUDCO also provides integrated inputs of physical planning, architectural design, efficient utilization of land and appropriate technologies ensuring user participation, use of innovative /renewable sources of energy to name a few. It also promotes the use of alternative building materials and appropriate technology to ensure quality affordable housing. In FY 2011-12, the company provided financial assistance to around 130 projects. It sanctioned loans worth Rs 20, 511 crore. It has a balance sheet size in excess of Rs 25,000 crore.

Highlight of the Issue

Issuer	Housing and Urban Development Corporation Limited
Issue Size	Rs 500 Crore and has a right to retain oversubscription upto the residual shelf limit. However, the company has to ensure that Bonds issued through the public issue route and private placement route shall together not exceed Rs 5,000 crores. In case our Company raises funds through private placements during the process of the present Issue, the Residual Shelf Limit for the Issue shall get reduced by such amount raised.
Nature of the issue	Public issue of the tax free bonds in the nature of secured, redeemable and non-convertible debentures having benefits under section 10(15)(iv)(h) of the Income Tax Act.
Credit Rating	"CARE AA+" by CARE and "IND AA+" by IRRPL
Issue Opens	February 21, 2013
Issue Closes	March 15, 2013
Issue Price	Rs 1, 000 each bond
Tenure	Tranche II-Series 1- 10 Year, Series 2-15 years
Coupon rate	Tranche II-Series 1- 7.03% p.a.; Series 2- 7.19% p.a.
Additional Rate	0.50% shall be paid to original Allottees of category IV *
Interest Payment	Annual
Min. Application	5 Bonds (Rs 5,000) and in multiples of 1 bond thereafter
Mode of Holding	Physical and Dematerialised Both
Listing	NSE and BSE. The bonds would be listed within 12 working days from the date of closure
Depositories	NSDL and CDSL
Debenture Trustee	SBICAP Trustee Company Limited
Registrar	Karvy Computershare Private Limited
Quota	40% for category Iv investors and 30% for category Iv investors**
	* Resident Individual Investors, Eligible NRIs on a repatriation or non-repatriation basis and Hindu Undivided Families through the Karta applying for Bonds aggregating up to and including Rs. 10 lakhs across all Series of the bond issue. Eligible NRI is not (i) based in the United States of America ("USA"), and/or, (ii) domiciled in the USA, and/or, (iii) residents/citizens of the USA, and/or, (iv) subject to any taxation laws of the USA.
	* * Resident Individual Investors, Eligible NRIs on a repatriation or non-repatriation basis and Hindu Undivided families applying for Bonds aggregating for not more than Rs. 10 lakhs across all Series of the bond issue. Eligible NRI is not (i) based in the United States of America ("USA"), and/or, (ii) domiciled in the USA, and/or, (iii) esidents/citizens of the USA, and/or, (iv) subject to any taxation laws of the USA.

(Source: Issue Prospectus, PersonalFN Research)

OUR VIEW:

In our opinion HUDCO tax free bond provides an excellent investment opportunity as the rates offered are quite decent. Moreover, there’s no restriction on a bondholder to hold bonds mandatorily for a particular period of time. Investors may sell or buy these bonds anytime on the exchanges. Hence investors need not worry much about liquidity in case of immediate need for funds.

The ticket size has been purposefully kept lower for greater retail participation and thus it is well within the reach of retail investors. Further, the quota of 40% reserved for retail investors enhances the chances of getting allotment.

For category IV investors, i.e. those who invest less than or equal to Rs 10,00,000; incentive of 0.5% is being offered over and above the coupon rate. For a person who invests as a category Iv investor and falls in the maximum tax bracket, gross pre- tax yield comes in the range of 10.9%- 11.1% for bonds with maturity profile of 10 years and 15 respectively. Considering the risk one is exposed to, coupons offered by HUDCO (when clubbed with tax exemption benefit) are satisfactory. We believe that HUDCO tax free bond is an attractive offering considering the rating profile of the issue and competitive yield (compared to post tax yield on other fixed income instruments) for those in the maximum tax bracket.

In case you wish to invest in the above instrument, you can email us at info@personalfn.com or contact us on 022-6136 1200