New orders, improving execution to boost Hindustan Aeronautics' prospects

DAC's Rs 2.23 trillion proposal approval likely to pay rich dividends to HAL

A strong order book coupled with the recent approval by the Defence Acquisition Council (DAC) for proposals to enhance the operational capabilities of the Indian armed forces and expectations of better execution are some positive signs for Hindustan Aeronautics Limited (HAL). They have led to a 31 per cent rise in the stock of the defence major over the past month.

A key near-term trigger has been the approval by DAC, chaired by Defence Minister Rajnath Singh, to projects worth Rs 2.23 trillion that include procurement of 97 Tejas light combat aircraft and 156 Prachand combat helicopters.

HAL is expected to be a key beneficiary in this, given that the proposals include the procurement of Light Combat Helicopters for the Indian Army, light combat aircraft for the Indian Air Force, and the upgradation of Su-30 MKI aircraft.

The company’s order book at the end of FY23 is pegged at Rs 82,000 crore which offers a revenue visibility of three times its trailing twelve-month revenues.

The order book has seen a bump up after having received an order worth Rs 480 billion for 83 LCA Tejas aircraft in FY22, whose delivery is expected to begin in FY24, says Antique Stock Broking. The brokerage believes that the long-term order pipeline remains robust with a business opportunity of Rs 4.5 trillion over the next decade. It has a buy rating on HAL with a target price of Rs 2,589 a share.

In addition to this, improved execution is another trigger for the company. PhillipCapital Research has highlighted that the company will receive a substantial boost in revenue as it is planning to deliver planes from 83 LCA Mk-1A contract to customers by FY28, at least one year ahead of the original schedule.

Hence, HAL is planning to expand its production capacity from 16 to 24 planes per year by adding a new line at Nashik facility, prompting Umesh Raut and Tanay Rasal of PhillipCapital Research to increase their sales estimate by 5 per cent each for FY25 and FY26.

Further plans to create a maintenance, repair and overhaul or MRO facility, to be completed by November next year, for A320 aircraft after a tie-up with Airbus should help reduce the maintenance cost and improve turnaround time for Indian aviation majors. This would be an incremental revenue opportunity for the company.

Exports is another area which the company is looking at with prospective markets including the Philippines and Egypt for Tejas, advanced light helicopter and anti-ship missiles.

The brokerage has also increased its price-to-earnings multiple to 25 times (currently 22 times) on the back of a deal for the manufacturing of complex fighter jet engines. The deal will provide HAL with autonomy for the development of future fighter jet programmes and its transition from a player that is dependent on technology transfers, to self-designed programmes that offer robust ordering prospects over the next decade. PhillipCapital Research has a target price of Rs 2,952 which, given the current price, translates to an upside of 16 per cent.