Retail Research - HDFC Securities

Housing and Urban Development Corporation Ltd 

Tax Free Bonds: Tranche - 2 February 21, 2013 

Summary: Housing and Urban Development Corporation (HUDCO) has come out with the Tranche – 2 public issue of tax free bonds to raise 

Rs 500 crore with an option to retain over-subscription up to the residual shelf limit of Rs 2,785.5 crore. The issue is open for subscription on 

February 21, 2013 and closes on March 15, 2013 (with an option for early closure or extension, as may be decided by the Board of 

HUDCO). The issue consists of two series of Bonds – 10 year and 15 year carrying interest @ 7.03% and 7.19% p.a. respectively. Retail 

Individuals and HUF (applying for upto Rs.10 lakhs) would get an additional 50 bps interest rate. 

The CBDT has authorised HUDCO to raise the Bonds aggregating to Rs. 5,000 crores in Fiscal 2013. It came out with the Tranche 1 Issue, 

which opened for subscription on January 9, 2013 and closed on February 7, 2013. The amount collected in terms of applications in the 

Tranche – I Issue was reported to be Rs. 2,214.484 crores. From this Tranche 2, the company proposes to raise Rs. 500 crore with an option 

to retain oversubscription upto the Residual Shelf Limit. 

Credit Rating agencies – CARE and IRRPL have assigned ratings of ‘CARE AA+’ and ‘IND AA+’ respectively to this issue. Instruments with 

this rating are considered to have high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low 

credit risk. 

Tax-free bonds differ from tax saving bonds. The interest income from the instrument is not taxed in tax-free bonds while investible amount 

does not form part of the total income in tax saving bonds. In tax-free bonds there is no upper limit. This financial year, infrastructure 

companies like NHAI, PFC, IRFC, IIFCL were given permission to raise Rs 60,000 crore via tax-free bonds. 

HUDCO has in FY12 issued Tax free Bonds of Rs.1,000 each with coupon rates of 8.10% and 8.20% for 10 & 15 years bonds respectively. 

These bonds are currently quoted at Rs. 1,055 and Rs.1,070 offering YTM of 7.20% and 7.34% respectively (trading data as of Feb 19, 2013). 

In FY13, in tranche I, the company offered coupon rate of 7.34% and 7.51% for 10 & 15 years bonds respectively. They are currently quoted 

at Rs. 955 and Rs.1,008 offering YTM of 8.02% and 7.45% respectively (trading data as of Feb 21, 2013). 

Investors may also consider the tax free bonds which are currently trading in the secondary markets. The following table lists out the tax free 

bonds which are available for trading in the secondary markets such as BSE and NSE. 

Comparison of tax free bonds which are available for trading in the secondary markets: 

Issuer 

Series 

Credit 

Rating 

Date of 

Allotment 

Coupo 

n Rate 

Residual 

Maturity 

(Year) 

Coupon 

payment 

frequency 

Interest paid on 

Latest 

Traded 

Price 

(Rs) 

YTM 

Daily 

Averag 

e 

Volume 

(Nos) 

NHAI 820NHAI22 AAA 25-Jan-12 8.20% 8.94 Annual 1st of October 1096 7.19% 4340 

NHAI 830NHAI27 AAA 25-Jan-12 8.30% 13.94 Annual 1st of October 1085 7.65% 5776 

PFC 820PFC2022 AAA 1-Feb-12 8.20% 8.96 Annual 15th of October 1084 7.32% 1739 

PFC 830PFC2027 AAA 1-Feb-12 8.30% 13.96 Annual 15th of October 1108 7.36% 1862 

PFC 719PFC2023 AAA 4-Jan-13 7.19% 9.88 Annual 4th of January 993 7.41% 12 

PFC 736PFC2028 AAA 4-Jan-13 7.36% 14.88 Annual 4th of January 1002 7.43% 458 

IRFC Series -80 AAA 23-Feb-12 8.00% 9.02 Annual 15th of October 1074 7.27% 818 

IRFC Series -80 A AAA 23-Feb-12 8.10% 14.02 Annual 15th of October 1094 7.32% 4001 

HUDCO Series – 1 AA+ 5-Mar-12 8.10% 9.05 Annual 5th of March 1055 7.20% 419 

HUDCO Series – 2 AA+ 5-Mar-12 8.20% 14.05 Annual 5th of March 1070 7.34% 5854 

HUDCO Series – 4 AA+ 16-Feb-13 7.34% 9.99 Annual 16th of February 955* 8.02% 50 

HUDCO Series – 5 AA+ 16-Feb-13 7.51% 14.99 Annual 16th of February 1006* 7.45% 2800 

REC 793REC22 AAA 27-Mar-12 7.93% 9.11 Annual 1st of July 1082 7.43% 342 

REC 812REC27 AAA 27-Mar-12 8.12% 14.11 Annual 1st of July 1115 7.37% 915 

REC 722REC22TF AAA 19-Dec-12 7.22% 9.84 Annual 1st of December 1009 7.26% 460 

REC 738REC27TF AAA 19-Dec-12 7.38% 14.84 Annual 1st of December 1007 7.43% 1276 

IIFCL 719IIFCL23 AAA 22-Jan-13 7.19% 9.93 Annual 22nd of January 993 7.36% 32 

IIFCL 736IIFCL28 AAA 22-Jan-13 7.36% 14.93 Annual 22nd of January 992.5 7.50% 416 

IIFCL 740IIFCL33 AAA 22-Jan-13 7.40% 19.94 Annual 22nd of January 1010 7.35% 2407 

* - Traded data as on Feb 21, 2013. For the rest, Feb 19, 2013. 

Objects of the Issue: HUDCO intends to deploy the Issue proceeds towards lending purposes, working capital requirements, augmenting the 

resource base of its and other operational requirements (including debt servicing, which includes servicing of both the principal amounts as 

well as interest payments of various debt facilities availed by the Company in the past and currently outstanding in its books of accounts, 

including loans and market borrowings). The Issue proceeds shall not be utilized for providing loan to or acquisition of shares of any person 

who is part of the same group or who is under the same management as that of HUDCO. 

Issue Terms: 

Issuer 

Issue 

Issue Price and minimum 

application 

Stock Exchanges proposed for 

listing 

Issuance 

Housing and Urban Development Corporation Limited 

Public Issue by Housing and Urban Development Corporation Limited of tax free bonds of face value 

of Rs 1,000 each, in the nature of secured, redeemable, non-convertible bonds aggregating Rs.500 

Crores with an option to retain an over subscription upto a total of the residual Shelf Limit. 

Rs.1,000 & Rs.5,000 respectively 

NSE & BSE 

Both physical and dematerialized form 

Retail Research 1

Trading 

Trading Lot 

Depositories 

Rating 

Security 

Security Cover 

Compulsorily in dematerialized form 

1 (one) Bond 

NSDL and CDSL 

‘CARE AA+’ from CARE and ‘IND AA+’ from IRRPL. 

The security for the Bonds, being a floating first pari-passu charge on present and future receivables 

of HUDCO to the extent of amount mobilized under the Issue. The company reserves the right to 

create first pari-passu charge on present and future receivables for its present and future financial 

requirements. 

At least 100% of the outstanding Bonds at any point of time. 

Issue Details: 

Options Tranche – 2 Series I Tranche – 2 Series II 

Frequency of Interest Payment Annual Annual 

Tenor 10 years 15 years 

Redemption amount (Rs / bond) 

Repayment of the Face Value + interest 

Minimum Application Size 

5 Bonds (Rs. 5,000) across all of the Series of Bonds 

Put/Call Option None None 

Coupon Rates for Category - I, II and III Applicants (% p.a.) 7.03% 7.19% 

Coupon Rates for Category - IV Applicants (% p.a.) 7.53% 7.69% 

Mode of payment 

Direct Credit, NECS, RTGS, NEFT and. Cheques or 

Demand drafts. 

Coupon Rate (%) p.a for Category I, II and III: 7.03% per annum 7.19% per annum 

Effective pre-tax yield (per annum) for tax payers in 10% income tax bracket * 7.81% 7.99% 



Coupon Rate (%) p.a for Category IV (Only in primary issue): 7.53% per annum 7.69% per annum 




* = without considering education cess & secondary and higher education cess 

Step-down clause: To promote the retail participation and prevent malpractices in the application process, the issue bestows higher coupon 

rate only for primary retail subscribers who apply upto Rs.10 lakhs (category IV only). Accordingly, the Series I and Series II will be allotted to 

Category IV investors with an aggregate coupon rate of 7.53% p.a. and 7.69% p.a., respectively. 

Additional coupon rate of 0.50% is to be paid to original allottees under Category IV Portion. In the event the Bonds held by the original 

Allottees under Category IV are sold/ transferred (except in case of transfer of Bonds to legal heir in the event of death of the original Allottee), 

the coupon rate shall stand revised to the coupon rate applicable for Allottees falling under Category I, Category II and Category III. 

This clause is beneficial for retail investors who want to hold the bonds till maturity or long term. However this also means that category IV 

investors will get to participate less in the price upside if the interest rate cycle turns down. 

Taxation: 

Tax Free: The Bonds are tax free in nature (exempt u/s 10(15)(iv)(h) of the Income Tax Act, 1961 and the interest on the Bonds will not form 

part of the total income. 

TDS: Since the interest Income on these bonds is exempt, no Tax Deduction at Source is required. 

Long Term Capital Gains: Under section 2 (29A) & 2 (42A) of the Income Tax Act, the Bonds are treated as a long term capital asset if the 

same is held for more than 12 Months where they are subject to the tax at the rate of 20% of capital gains with indexation or 10% of capital 

gains without indexation. 

Short Term Capital Gains: Short-term capital gains, where bonds are held for a period of not more than 12 months would be taxed at the 

normal tax rates. 

STT: Securities Transaction Tax (STT) is not applicable on transactions in the Bonds. 

Gift Tax: As per section 56(2)(vii) of the I.T. Act, the gift shall be taxable as the income of the recipient where the aggregate fair market value 

of which exceeds Rs. 50,000. 

Wealth Tax: No wealth tax is levied. 

Cess: A 2% education cess and 1% secondary and higher education cess on the total income tax (including surcharge for corporate only) is 

payable by all categories of tax payers. 

DTC: The Hon’ble Finance Minister has presented the Direct Tax Code Bill, 2010 (‘DTC Bill’) on August 30, 2010. On the finalization of the 

DTC Bill and on obtaining the approval of the Indian cabinet, the DTC Bill will be placed before the Indian Parliament for its approval and 

notification as an Act of Parliament. Accordingly, it is currently unclear what effect the Direct Tax Code would have on the investors. 


Who can apply? 

Category I: 

• Public Financial Institutions, scheduled commercial banks, multilateral and bilateral development financial institutions, state industrial 

development corporations, which are authorised to invest in the Bonds; 

• FIIs and their sub – accounts (other than a sub-account which is a foreign corporate or foreign individual), registered with SEBI 

• Provident funds and pension funds with minimum corpus of ` 25 crores, which are authorised to invest in the Bonds; 

• Insurance companies registered with the IRDA; 

• National Investment Fund; 

• Insurance funds set up and managed by the army, navy or air force of the Union of India or set up and managed by the Department of 

Posts, India; 

• Mutual funds; and 

• Alternative Investment Funds, subject to investment conditions applicable to them under the Securities and Exchange Board of India 

(Alternative Investment Funds) Regulations, 2012. 

Category II: 

• Companies within the meaning of section 3 of the Companies Act, Limited Liability Partnerships and other bodies corporate registered 

under the applicable laws in India and authorised to invest in the Bonds. 

Category III: 

The following Investors applying for an amount aggregating to above Rs. 10 lakhs across all Series of Bonds in the Issue. 

• Resident Indian individuals; 

• Eligible NRIs on a repatriation or non – repatriation basis; and 

• Hindu Undivided Families through the Karta. 

Category IV: 

The following Investors applying for an amount aggregating to up to and including Rs. 10 lakhs across all Series of Bonds in the Issue. 

• Resident Indian individuals; 

• Eligible NRIs on a repatriation or non – repatriation basis; and 

• Hindu Undivided Families through the Karta. 

Who can not apply? 

• Minors without a guardian name; 

• Foreign nationals; (i) based in the 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 

• Overseas Corporate Bodies; 

• Indian Venture Capital Funds; 

• Foreign Venture Capital Funds; 

• Qualified Foreign Investors 

• Regional rural banks; 

• Societies; 

• Co-operative societies 

• Public/ private charitable/ religious trusts; 

• Scientific and/or industrial research organisations; 

• Partnership firms; 

• Persons ineligible to contract under applicable statutory/ regulatory requirements; and 

• Any category of investor other than the Investors mentioned under Categories I, II, III and IV. 

Basis of Allotment: 

Applicants belonging to all three Categories will be allocated as given in the table below: 

Portion QIB Corporate HNI Retail Individual 

Reservation for each Portion 

25% of the Overall 

Issue Size 


Issue Size 


Issue Size 


Issue Size 

In case of an oversubscription, allotments to the maximum extent, as possible, will be made on a first-come first-serve basis and thereafter on 

proportionate basis, i.e. full allotment of Bonds to the applicants on a first come first basis up to the date falling 1 (one) day prior to the date of 

oversubscription and proportionate allotment of Bonds to the applicants on the date of oversubscription (based on the date of upload of each 

Application on the electronic Application platform of BSE, in each Portion).). Further, Allotment shall be on first come first serve basis, with 

HUDCO having the discretion to close the Issue early irrespective of whether any of the Portion(s) are fully subscribed. 

Credit Rating: 

CARE has assigned a rating of ‘CARE AA+’ to the Bonds vide letter dated January 29, 2013. India Ratings and Research Private Limited 

(formerly Fitch Ratings India Private. Limited) ("IRRPL") has assigned a rating of ‘IND AA+’ to the Bonds vide letter dated January 29, 2013. 

Instruments with this rating are considered to have high degree of safety regarding timely servicing of financial obligations. Such instruments 

carry very low credit risk. 

Interest on application money: Interest @ 7.03% / 7.19 % p.a (+ 50 bps if applicable) shall be paid on amounts allotted from the date of 

realization of the cheque(s)/demand draft(s) or 3 (three) days from the date of receipt of the application (being the date of submission of each 

application as duly acknowledged by the Bankers to the Issue) whichever is later upto one day prior to the Deemed Date of Allotment. 


Interest on Refund: 5% p.a for all categories. 

Liquidity and Exit Options: The Bonds will be listed on NSE and BSE. 

Company Background: HUDCO is a techno financial institution engaged in the financing and promotion of housing and urban infrastructure 

projects throughout India. It was established on April 25, 1970 as a wholly owned government company with the objective to provide long term 

finance and undertake housing and urban infrastructure development programmes. It is a public financial institution under section 4A of the 

Companies Act and has been conferred the status of Mini-ratna. Hudco has a pan-India presence through its wide network of zonal, regional 

and development offices and occupies a key position in the GoI’s growth plans and implementation of its policies for the housing and urban 

infrastructure sector. 

Business of HUDCO is broadly classified into two business platforms: Housing finance and Urban infrastructure finance. It also provides 

consultancy services in the field of urban and regional planning, design and development, environmental engineering, social development, 

government programmes and others. Its business is supported by capacity building activities through HSMI, and alternative building materials 

and cost-effective technology promotion. 

As on September 30, 2012, HUDCO has provided finance for over 15 million dwelling units and over 1,600 urban infrastructure projects in 

India. Further, up to September 30, 2012, it has sanctioned loans of Rs 41,274 crores for housing and Rs 90,874 crores for urban 

infrastructure on a cumulative basis, of which Rs 31,050 crores and Rs 50,599 crores has been disbursed respectively. As part of consultancy 

services, up to September 30, 2012, it had appraised 1,253 projects with a project cost of Rs 26,482.92 crores under JNNURM. 

Competitive Strengths: 

• Key strategic position in the GoI's plans for growth of the housing and urban infrastructure sector. 

• Strong financial position. 

• Pan-India presence. 

• Established track record. 

• Varied consultancy services in housing and urban infrastructure sector. 

• Wide pool of skilled and professional workforce. 

Strategy: 

• Enhance participation in implementation of government programmes on housing and urban infrastructure 

• Increase financing of the housing and urban infrastructure projects 

• Develop strategic alliances with various agencies. 

• Enhance income from fee-based activities. 

Risks & Concerns: 

• If the level of NPAs in Hudco’s loan portfolio were to increase, its financial condition would be adversely affected. 

• Hudco may not be able to foreclose on the value of its collateral on a timely basis, or at all, when borrowers default on their obligations to it 

and this may have a materially adverse effect on its business, results of operations and financial condition. 

• Business of Hudco is vulnerable to interest rate volatility and will be impacted by any volatility in such interest rates in its operations, which 

could cause its net interest margins to decline and adversely affect the profitability. 

• Any inability to meet debt finance obligations may have an adverse effect on Hudco’s business and results of operations. 

• Financing of Indian housing and urban infrastructure sector is very competitive and increasing competition may result in declining margins 

and market shares. 

• Hudco may be unable to secure funding at competitive rates, which could adversely affect its growth, expansion and results of operations. 

• Business of Hudco may be adversely affected by future regulatory changes. 

• Hudco has high loan concentrations with its top ten borrowers contributing to 29.78% of its total loans outstanding as on March 31, 2012 

and default by any one of them could significantly affect its business. 

• In the event of Hudco failing to meet the capital adequacy and statutory liquidity requirements on account of any changes in the existing 

regulatory policy, its results of operation and financial condition could be severely affected. 

• Hudco is subject to risks arising from exchange rate fluctuations and devaluation of the Indian rupee against any foreign currencies, which 

could increase its cost of finance, thereby adversely affecting its results of operation and financial condition. 

• Hudco benefit from certain tax benefits available to it as a public financial institution and if these benefits are no longer available to it, its 

business, and financial condition, results of operations may be adversely affected. 

• Any downgrading in credit rating of Hudco’s Bonds may affect the trading price of the Bonds. 

• Changes in interest rates may affect the prices of the Bonds 

• A debenture redemption reserve will be created, only up to an extent of 50% for the Bonds and in the event of default in excess of such 

reserve; Bondholders may find it difficult to enforce their interests. 

• The proposed new Indian taxation system could adversely affect Hudco’s business and the price of the Bonds. 

Financials - P&L Consolidated: 

(Rs In Crores) 

Particulars 

31-12-12 

(9 month FY12 FY11 FY10 

ended) 

Operating Income 1967.95 2738.36 2263.46 2421.80 

Other Income 65.08 40.27 15.13 106.55 

Total Income 2033.03 2778.63 2278.59 2528.35 

Expenditure 243.06 205.05 173.08 326.56 

Operating Profit 1789.97 2573.58 2105.51 2201.79 


OPM % 90.95 93.98 93.02 90.92 

Interest & Financial Charges 1167.32 1629.08 1273.27 1413.76 

Depreciation 3.60 4.60 11.42 4.52 

Prior Period Adjustment (Net Income) 0.16 0.07 0.29 0.87 

PBT 619.82 939.97 821.11 784.38 

PBTM % 31.49 34.33 36.28 32.39 

Tax (incl. FBT & DT) 192.46 309.64 271.08 289.07 

Effective Tax Rate % 31.05 32.94 33.01 36.85 

PAT 427.20 630.33 550.03 495.31 

PATM % 21.70 23.02 24.30 20.45 

Balance Sheet Consolidated: 

(Rs In Crores) 

FY12 FY11 FY10 

EQUITY AND LIABILITIES 

Share Holder's Funds 5988.89 5520.97 5097.09 

Non-current Liabilities 14336.93 10096.50 11765.21 

Current Liabilities 7167.66 7119.46 5121.12 

Total 27493.48 22736.93 21983.42 

ASSETS 

Non-current Assets 20010.87 17683.11 16183.16 

Current Assets 7482.61 5053.82 5800.26 

Total 27493.48 22736.93 21983.42 

RETAIL RESEARCH Fax: (022) 30753435 Corporate Office, 

HDFC securities Limited, I Think Techno Campus, Bulding –B, ”Alpha”, Office Floor 8, Near Kanjurmarg Station Opp. Crompton Greaves, 

Kanjurmarg (East), Mumbai 400 042 Fax: (022) 30753435 Website: www.hdfcsec.com 

Disclaimer: This document has been prepared by HDFC securities Limited and is meant for sole use by the recipient and not for circulation. 

This document is not to be reported or copied or made available to others. It should not be considered to be taken as an offer to sell or a 

solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or 

complete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell securities 

referred to herein. We may from time to time solicit from, or perform investment banking, or other services for, any company mentioned in this 

document. This report is intended for Non-institutional Clients only. 

Disclaimer: HDFC Bank (a shareholder in HDFC securities Ltd) is associated with this issue in the capacity of Bankers to the issue and will 

earn fees for its services. This report is prepared in the normal course, solely upon information generally available to the public. No 

representation is made that it is accurate or complete. Notwithstanding that HDFC Bank is acting for Housing and Urban Development 

Corporation Limited, this report is not issued with the authority of Housing and Urban Development Corporation Limited. Readers of this 

report are advised to take an informed decision on the issue after independent verification and analysis.

Retail Research - HDFC Securities

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