Hindustan Aeronautics

Given the government's emphasis on achieving self-reliance in the defence manufacturing space, Hindustan Aeronautics Limited is well-positioned to push upwards its already sound status as a government-owned company. Also, its order book is highly impressive, indicating stable growth over the coming years [EasyDNNnews:PaidContentStart]

Hindustan Aeronautics Limited (HAL) is a leading Indian aerospace and defence company involved in the design, development, manufacturing, repair, overhaul, and upgrade and servicing of aircrafts, helicopters, aero engines, avionics, accessories and aerospace structures. It is currently a government entity with the president of India, through the Ministry of Defence (MoD), holding 71.64 per cent equity shares in the company. The company’s product portfolio encompasses fixed-wing aircrafts, rotary-wing aircrafts, aero engines, line replaceable units (LRUs) and airborne systems.

Business Segments
HAL’s primary business segments include:
1. Manufacturing: Production of aircrafts, helicopters, engines and associated accessories.
2. Services: Repair, overhaul, maintenance and upgrade of aircrafts, helicopters and their components.
3. Research and Development: Continuous innovation and development of new aerospace technologies.

Client Base
The company caters to both domestic and international clients. However, the majority of HAL’s clients are domestic clients in the Indian defence services. Indian Air Force (IAF), Indian Navy (IN), Indian Army (IA) and Indian Coast Guard (ICG) accounted for 95 per cent of the total revenue for FY24.

FY24 Financial Performance
HAL reported remarkable financial growth for FY24. The company achieved the highest-ever revenue from operations, totalling ₹30,381.08 crore, representing an 11 per cent increase from ₹26,927.46 crore in FY23. Its profit after tax (PAT) surged by 31 per cent, reaching ₹7,620.95 crore compared to ₹5,827.73 crore in the previous year. The cash flow from operating activities increased to ₹9,168.76 crore, up from ₹7,083.99 crore in the prior year.

The earnings per share (EPS) also saw significant growth, rising to ₹113.95 from ₹87.14 in FY23. HAL maintains a debt-free status, highlighting its financial strength and stability. Notably, 98.6 per cent of HAL’s revenue was generated from domestic operations, with exports contributing approximately 1.4 per cent of the total turnover. As mentioned earlier, the domestic revenue comprises orders from the Indian defence units.

FY24 Segmental Revenue Breakdown
In FY24, the segmental revenue breakdown shows that manufacturing represents 38.10 per cent of the total sales. Within this segment, sales of finished goods, specifically aircrafts and helicopters, account for 18.70 per cent, while sales of spares contribute 19.40 per cent. Repair and overhaul services are the largest component, making up 46.90 per cent of the revenue. Additionally, development activities represent 5 per cent, and other revenues comprise 10 per cent, showcasing a diverse revenue stream.

Q1FY25 Quarterly Performance
HAL reported a total income of ₹5,083.85 crore in Q1FY25. This figure includes ₹4,347.5 crore from operations and ₹736.35 crore from other income. The total income marks a significant increase compared to the same quarter in the previous year (Q1FY24), where the total income stood at ₹4,325.29 crore. The PAT stood at ₹1,437.14 crore. This signifies an impressive growth compared to the PAT of ₹816.13 crore recorded in Q1FY24. HAL reported EPS of ₹21.49 for Q1FY25. This figure demonstrates a significant increase compared to the corresponding EPS figure of ₹12.17 in Q1FY24.

Order Book
HAL’s active order book, which excludes completed orders, is currently valued at ₹64,000 crore. This significant figure is expected to increase further with the anticipated addition of ₹47,000 crore in new orders within the next 6-12 months. The growth of HAL’s order book is supported by its strong position in the market and its alignment with the Indian government’s focus on self-reliance in defence manufacturing.

Capital Expenditure Plans
1. Five-Year Capex Outlook: HAL has outlined a robust capex plan spanning the next five years, with an estimated investment of ₹14,000 to ₹15,000 crore. This translates to an average annual capex of approximately ₹3,000 crore.

2. Capacity-Building: The capex plan prioritises capacitybuilding to support the production of indigenous platforms such as the light combat aircraft (LCA), HTT-40 trainer aircraft and various helicopter development programmes. This expansion aims to facilitate the timely execution of existing orders and create capacity for new orders and potential export opportunities

3. New Project Development: The capex allocation will also support the development of new projects, including LCA Mark 2 (light combat aircraft), transfer of technology (TOT) for GE F414 engine manufacturing, indigenous multi-role helicopter (IMRH) engine manufacturing and infrastructure development for the design and development of the IMRH and advanced medium combat aircraft (AMCA).

4. Potential Funding Source: While HAL currently enjoys low debt reliance, it could leverage its strong credit rating to raise debt financing for large-scale capex projects if needed.

Growth Triggers
1. Increasing Demand for Defence Products and Services: The global geopolitical situation is driving demand for defence products and services, creating growth opportunities for companies like HAL. In India, the government’s push toward domestic products for self-reliance in defence manufacturing is expected to bring HAL greater opportunities and new orders.

2. Civil Aviation Sector Growth: The civil aviation sector in India is expected to grow rapidly. This presents opportunities for HAL to diversify into the civil market for manufacturing and maintenance as well as repair, and overhaul (MRO) services.

3. Expansion into New Markets: HAL aims to increase its exports, which currently contribute a relatively small percentage of its total turnover. Successful expansion into international markets could significantly boost HAL’s growth.

4. Focus on Operational Efficiency: HAL is implementing initiatives to improve its operational efficiency, such as Industry 4.0 concepts, automation, additive manufacturing and outsourcing non-core activities. These measures may lead to cost optimisation, improved profitability and increased production capacity.

5. Strategic Partnerships: HAL is forming strategic partnerships with global original equipment manufacturers (OEMs) to acquire core technologies and expand its product portfolio. These partnerships may help HAL gain access to new markets and technologies, fostering growth.

6. Government Support: HAL benefits from being a government-owned entity. Government policies aimed at promoting domestic defence manufacturing, such as the self-reliance initiative, provide a favourable environment for HAL’s growth.

7. Strong Financial Position: HAL has a healthy financial profile characterised by robust cash reserves, low debt and consistent profitability. This financial strength allows the company to invest in growth initiatives, such as capacity expansion and new product development.

8. Technological Advancements: HAL is investing in research and development to develop new technologies and products, including the LCA Mark 2, IMRH and AMCA programmes. These technological advancements can enhance HAL’s competitive edge and drive future growth.

9. Increasing Private Sector Participation: The relaxation of foreign direct investment (FDI) guidelines has led to increased participation of private companies in India’s defence sector. While this presents competition for HAL, it also creates opportunities for collaboration and joint ventures, which can contribute to the overall industry growth.

Valuation
The company showcases a strong return on equity (ROE) of 28.9 per cent and an impressive return on capital employed (ROCE) of 38.9 per cent, indicating effective profit generation from investments. Currently, the stock is trading at a price to earnings (PE) ratio of 34l times, reflecting investor confidence in its growth potential. Compared to the industry average PE of 66.8, this valuation appears attractive. The PEG ratio of 1.28 also suggests that the stock is reasonably priced relative to its expected earnings growth.

The enterprise value to EBITDA (EV | EBITDA) ratio stands at 20.9, offering insights into overall valuation relative to its earnings. Additionally, with a dividend payout ratio of 30.8 per cent, the company demonstrates a commitment to returning value to shareholders while retaining enough earnings for reinvestment and future growth. Overall, these metrics highlight a financially sound and promising investment opportunity.

Conclusion
HAL presents a buying opportunity, supported by robust fundamentals and strong growth prospects. The company’s record-breaking FY24 performance, healthy order book of ₹64,000 crore and expected additional orders of ₹47,000 crore provide strong visibility. With attractive valuations, strong profitability metrics and significant growth triggers through its ₹14,000 - ₹15,000 crore capital expenditure plan, HAL is well-positioned to benefit from India’s defence self-reliance initiative. Hence, we recommend BUY.

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