Position strengthened among industry’s best
Despite minor discrepancies in Q4 PAT due to capacity addition and forex losses, HUDCO’S (HUDCO IN) FY25 earnings showcased robust business growth and superior asset quality. Sustained business growth, coupled with consistent asset resolution and NIM expansion, is anticipated to prop HUDCO’s RoE and RoA to 16% and 2.4%, respectively, in FY26E-FY27E, solidifying its position as a top-tier NBFC. Maintain BUY.
MTM/notional losses and high opex dent PAT: PAT was flat QoQ but rose 3.9% YoY to INR 7.3bn, surpassing estimates due to provision write-backs of INR 1.4bn. NII fell 2.2% QoQ but rose 26.3% YoY at INR 9.6bn, impacted by a high base, one-off Q3 income, notional losses and increased borrowing costs. Operating expenses surged 26.3% QoQ to INR 1.2bn due to the addition of 63 new employees, pushing cost/income to 11.8%. NIM for FY25 improved 4bps YoY to 3.22%, backed by yield expansion to 9.5% (9.04% in FY24), and is expected to improve further with a strong urban infra sanctions pipeline and lower incremental CoF at 6.75%.
Robust urban infra sanctions to drive business momentum: With a book of INR 1,248.3bn, up 5% QoQ/34.7% YoY, HUDCO is well-positioned to exceed FY26 target of INR 1,500bn, poised to clock in a 28.5% loan CAGR (25% CAGR in FY25-28E) and a 50% disbursement CAGR in FY24- 27E, led by: 1) a calibrated entry into PPP models (HAM, BOT & focus on A-rated projects), 2) robust sanctions pipeline, up 128% YoY, to INR 358bn backed by projects in Maharashtra, Uttar Pradesh and Andhra Pradesh across sectors such as roads and urban mobility, 3) higher sanctions-to-disbursals at an 80% conversion rate.
Resolutions drive GNPA improvement; asset quality best in the industry: Asset quality improved significantly, with GNPA down 21bps QoQ/104bps YoY to 1.7%. Absolute GNPA fell 6% QoQ/17% YoY to INR 20.9bn, supported by resolution from long-standing NPAs in FY25. Of INR 20.9bn in NPA, INR 11.2bn (five accounts) is in NCLT with full provisioning, while INR 0.3bn (three accounts) outside NCLT is also fully provided for. The entire NPA pool is targeted for resolution within 18 months, with key accounts such as Shri Maheshwar, Konaseema (INR 1.02bn), Nagarjun Oil (INR 3.5bn) under active resolution. Anticipated resolutions of J&K project (INR 280–290mn) and Ahmedabad State asset (INR 1.24bn), which is in advanced auction stages with receipts likely in Q3FY26, may drive INR 4bn recoveries in FY26. One major account has been resolved in Q1. GNPA is expected to improve further to 1.2% by FY27E.
Reiterate BUY: We have maintained our estimates for FY26E-27E while introducing FY28E. A promising 25% AUM CAGR, anticipated NPA downcycle (with lowest order NPA of 1.2-1% by FY28) and RoEs stacking up to healthy 16% by FY27E-28E solidify HUDCO’s position as a toptier NBFC. The stock has seen >11% rally in the past month but has lurched for a fairly long period, reflecting tepid capex led project financing momentum in FY25. Said that, GoI’s continued focus on infra segment (infusion of INR 10tn in the past three budgets), proactive participation by states, Co.’s planned forays into top notch PPP projects and PMAY-2 roll out may ensure sustained growth momentum. So, strong growth visibility underscored by efficient capital deployment (boosting RoEs) compel us to reiterate BUY. We retain our 2.7x FY27E P/ABV for a niche business model with TP at INR 361 (unchanged).