HAL stock at new high on strong Q4, prospect of bagging defence orders

State-owned aeronautics firm appears to have countercyclical strength, as supply of spares and lack of diversification are potential downside risks.

Hindustan Aeronautics’ (HAL’s) share has gained on strong March quarter (Q4) results. The public sector undertaking (PSU) has also received certification for its light civil passenger transport aircraft the “Hindustan 228-201”, which may help it find new revenue streams.

Net revenue was Rs 11,561 crore in Q4, up 7.7 per cent year-on-year (YoY) and 96 per cent quarter-on-quarter (QoQ). Ebitda (earnings before interest, taxes, depreciation, and amortisation) was Rs 2,500 crore, a dip of 12.5 per cent YoY, but a rise of 75 per cent QoQ. The Ebitda margin was 21.6 per cent. Profit after tax (PAT) was Rs 3,104 crore, including a tax refund of Rs 528 crore. The profit before tax (PBT) refund was Rs 2,576 crore, which was 12.3 per cent more than Rs 2,293 crore last year and 106 per cent more than Rs 1,249 crore in Q3.

Revenue booking is lumpy for the defence supplier. It recorded revenue of Rs 26,181 crore in financial year 2021-22 (FY22), Ebitda of Rs 5,408 crore, and PBT of Rs 5,245 crore. Tax incidence declined to Rs 144.7 crore, versus Rs 1,038 crore last year. Costs of financing also dropped substantially.

The aeronautics major has an order book of around Rs 83,000 crore comprising the Tejas, trainer aircraft, engines for various platforms, and at least three lines of helicopters. It has a strong presence in repair, maintenance and overhaul. The order book could expand, with at least one analyst believing that it will cross the Rs 1-trillion-mark in the current fiscal. A large proportion of the order book will not be liquidated until FY25.

The PSU hopes to downsize its current workforce from around 26,000 to about 23,000 in the next two-three years. The management believes the current revenue growth rate of 6-7 per cent and an Ebitda margin of 25-26 per cent can be maintained. In FY23, HAL is looking at sales of six light combat aircraft (LCA), nine advanced light helicopters (ALH), and three light combat helicopters (LCH). In addition, it will upgrade nine Mirages, four Jaguars and three Dorniers. 

The Ukraine war has created risks regarding revenues from Russian platforms, and sourcing of spares. The management believes it will be able to source spares from Russia — it has assurances from the Russians and it has sufficient inventory to continue for a while. It is seeking alternative suppliers for Ukraine exposures (on the helicopter side). 

The lack of diversification could be another long-term risk since defence contracts can be subject to major delays. HAL is also looking at unmanned aerial vehicles (drones), where it has a joint venture with Israel Aerospace Industries (IAI) and Dynamatic Technologies (DTL). It could possibly offer the light utility helicopter for civilian users, and also offer its maintenance and repair services to civil aviation. It may also try to enter the missile space, since it has experience in propulsion systems. In addition, it is looking to export the Tejas to Malaysia, Philippines, and maybe Egypt.

The stock is trading around Rs 1,900, having gained from around Rs 1,500 in mid-May, after touching a 52-week high of Rs 1,928.20 on Wednesday. ICICI Securities has a target of Rs 2,618 based on the discounted cash flow (DCF) method. The stock appears to have countercyclical strength since it has risen 36 per cent in the last three months, while the overall market has been bearish.