Analysts see up to 96% upside in HAL stock despite Russia overhang

The dependence on Russian spares can potentially impact Rs 4,000-4,200 crore worth of RoH revenues for Hindustan Aeronautics (HAL)

Shares of Hindustan Aeronautics Limited (HAL) have held their ground on the bourses ever since the war broke out between Russia and Ukraine in eastern Europe. While the S&P BSE Sensex has dropped 4.5 per cent on the BSE since February 24, shares of the state-owned defence company have advanced about 2 per cent, data shows. On Thursday, the stock zoomed 4.2 per cent in intra-day trade on the BSE as against a 2 per cent gain in the Sensex. 

This is despite HAL having import dependence on Russia for various spare part supplies. According to the company, the dependence on Russian spares can potentially impact Rs 4,000-4,200 crore worth of repair and overhaul (RoH) revenues out of its total ROH revenue of Rs 12,500 crore in FY21.    

The Street, however, has been perturbed by this as the company has inventory of 8-9 months for ROH, giving it enough breathing space to tide over the current crisis. According to global brokerage CLSA, HAL has reduced the share of Russian-spares-driven business to seven per cent of its backlog and about 25 per cent of its revenue.

"This assures that the company is well-stocked with inventory of spare parts to protect it from sanctions imposed on Russia for the rest of 2022," it said in a recent report.

InCred Equities, meanwhile, believe the company would not be impacted with any immediate effect of the Russia-Ukraine conflict till the first half of fiscal 2022-23 (H1FY23). Su-30, Mig 29 and Mig 21 are the major platforms for which RoH is dependent on Russian spare imports; Mi17 and An32 also undergo RoH with Russian support. 

"The impact of sanctions, if any, on Russian defence supply will need to be seen on a case-to-case basis. The company is also focusing on indigenous production of Russian supplies to reduce the import dependence. Management is looking toward other supply sources for spares and raw material in case Russian supply fails, which has a low probability of happening in management's opinion," said a report by ICICI Securities.

That said, analysts say investors need to keep an eye on payment mechanism as Russian banks have been banned from the SWIFT system. 

"Previously, payments were made through PSU banks -- UCO Bank and Syndicate Bank in India and Sber Bank in Russia. Discussions are ongoing with the RBI and PSU banks to pay for defence purchases," said ICICI Securities.

InCred added: As per management, future supplies would not be impacted significantly if the payment mechanism with Russia is sorted out by the Indian government. HAL is working on indigenization or on finding an alternate source of procurement of materials - which are procured not only from Russia but also from other western countries. 

From a long-term perspective, analysts see up to 96 per cent upside in HAL stock as the company has a strong order book and has the potential book to bill at 5x at FY23-end.

HAL's outstanding order book position stood at Rs 79,230 crore at the end of December, 2021 (Q3FY22), and following platforms for which Acceptance of Necessity (AoN) has been granted by the Ministry of Defence (MoD),the order book is expected to strengthen by Rs 30,000 crore over FY23. 

Management is expecting Su-30s orders to be finalised by Q1FY23. Further, the company is expecting orders of more than 200, AL-31FP engines and ~60, RD-33 engines. The contract value should be Rs 25,000-30,000 crore. The order should have delivery timeline of six years for AL-31, starting 24 months from the date of the order.  

"We raise our FY22 EPS estimates by 3 per cent, but lower FY23/24 EPS by 1-5 per cent on lower sales. Order pipeline is solid, but order finalization timeline is vital to maintain growth momentum in FY23 as service revenue growth moderates and Tejas MK1A starts contributing from FY24F," said InCred Equities. 

The brokerage has 'Add' rating on the stock with a target of Rs 1,530. ICICI Securities (target of Rs 2,618) and CLSA (target of Rs 1,740), both, have 'Buy' rating on the stock.

Analysts, however, say delay on expected large new orders, setback on aircraft delivery and lower-than-estimated margins are downside risks.