IGI Logo

Strong earnings visibility on large orders in pipeline

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%

Conference call Highlights:

* Key orders in the pipeline for the next one to two years include 70 HTT-40, 25 advanced light helicopters (ALH) for Army, six Dornier aircraft, 12 light utility helicopters (LUH), 12 Sukhoi-30 MKI and 240 AL-31 engines for Sukhoi-30 MKI aircraft

* In the longer term (three to five years), key orders in the pipeline are 145 LCH, 175 LUH, 60 Marine ALH, 36 HTT-40, 18 RD-33 engines for MiG-29 and medium weight fighter (Tejas MK2)

What should investors do: We expect HAL to deliver revenue and EBITDA CAGR of 7.7% and 14.1%, respectively, in FY22-24E. PAT likely to grow at ~10% CAGR (FY21-24E). Increase in profitability with strong asset turnover will result in healthy return ratios over FY23-24E

* We continue to remain positive and retain our BUY rating on the stock

Target Price and Valuation: We value HAL at | 2,860 i.e. 20x PE on FY24E EPS.

Key triggers for future price performance:

* Healthy order book position (| 84800 crore; ~3.2x TTM revenues) led by large scale orders in manufacturing aircraft/helicopters (LCA, LCH and ALH)

* Continuous order inflow in maintenance, repair & overhaul (MRO) with strong order pipeline of ~| 1.2 lakh crore in manufacturing in next three to four years (led by LUH, LCH, ALH, Dornier, HTT-40, engines for Su-30, MiG-29)

* LCA Tejas MK1A, largest order in manufacturing, deliveries to IAF expected from FY25E. Moreover, execution of other key orders and sustained growth in MRO will drive revenue growth in double digits from FY25E

Alternate Stock Idea: We also like Bharat Dynamics (BDL) in the defence space.

* Strong earnings growth of ~25% CAGR expected over FY22-24E led by execution of existing strong order-book primarily comprising manufacturing of various types of indigenous missiles & torpedoes

* BUY with a target price of | 1070/share

To Read Complete Report & Disclaimer Click Here

https://secure.icicidirect.com/Content/StaticData/Disclaimer.html

SEBI Registration number INZ000183631

Views express by all participants are for information & academic purpose only. Kindly read disclaimer before referring below views. Click Here For Disclaimer