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Flying high…

About the stock: Hindustan Aeronautics (HAL), the largest defence PSU in India, is engaged in design, development, manufacture, repair, overhaul, upgrade and servicing of a wide range of products including, aircraft, helicopters, aero-engines, avionics, accessories and aerospace structures.

* The company has delivered revenue, EBITDA and PAT CAGR of 7.4%, 12% and 26.5%, respectively, in FY18-22. In FY22, repair & overhaul contributed ~64% to total revenues while manufacturing contributed~30%

Key triggers for future price performance:

* Increasing capital outlay in defence with indigenisation has been the focus area of government considering requirement of armed forces of faster procurement of modern equipment

* HAL caters to a large spectrum of aerospace business, which includes design, development, manufacturing and maintenance, repair & overhaul (MRO) of different types of aircraft/helicopters and engines

* Healthy order-book position at | 82,153 crore (~3.3x FY22 revenues), of which manufacturing segment order backlog is at | 61,564 crore (75% of total OB) led by large scale orders of LCA, LCH and ALH). Strong pipeline of | 1.24 lakh crore worth of orders in manufacturing for the next three to four years led by LUH, LCH and engines for Su-30 & MiG-29

* LCA Tejas MK1A deliveries to IAF will start from FY25E; execution of large order backlog of manufacturing and sustained growth in MRO will drive revenue growth in double digits

What should investors do? We expect HAL to deliver revenue and EBITDA CAGR of 6.8% and 11.8%, respectively, in FY22-24E. PBT is likely to grow at 7.7% CAGR during FY22-24E. Increase in profitability with strong asset turnover is expected to result in healthy return ratios over FY23-24E.

* We initiate coverage with a BUY recommendation on the stock

Target Price & Valuation: We value HAL at | 2,200 on 16x P/E on FY24E EPS basis.

Alternate Stock Idea: Besides HAL, we also like Bharat Electronics (BEL) in the defence space.

* Strong growth in profitability led by well executed healthy order backlog and sustained margins. Strong balance sheet, double digit returns ratios

* BUY with a target price of | 290/share

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