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Our take

Hindustan Aeronautics Ltd. (HAL) is the largest Defence Public Sector Unit (DPSU). It has been conferred with “Navratna” status by the Government of India (GOI) in June 2007. HAL is of strategic importance to the Indian defence forces on account of it being sole domestic supplier of aircrafts, helicopters, engines, avionics and other accessories. Both military and commercial aerospace sectors have good growth potential in India and the defence budget allocation has been continuously increasing over the years.

The GoI’s increased focus on indigenisation with the Make in India and Atama Nirbhar Bharat policies augur well for the company’s future growth. HAL has a robust order book of Rs. 80,640 crore which translates into ~3.5x FY21 revenues. The declining order book trend reversed on the back of newly awarded 83 LCA (Tejas) in Feb 2021.

The company anticipates new order for 12 Sukhoi Su30 in the near term. As a part of Modi government vision for “USD 5 trillion GDP by 2025”, India should begin producing its own military aircraft. The successfully won new order of LCA, Make in India program, and deficit of aircraft & helicopter in Indian forces provides multiples years of opportunity worth US$93bn to HAL.

Valuation and recommendation

With monopoly in Indian aerospace, HAL is ready to take off to capture the multi decade opportunity. After decades of R&D, the company recently won the country’s biggest order in February-2021 which not only opened bigger pipeline but also reversed its declining order book. We estimate long term Revenue /EBITDA/ PAT will grow at CAGR 13%/14%/14% on account of the robust order book, decades of opportunity, and control over operating costs.

HAL could be clear beneficiary of a shift from imports to domestic production. The real growth story should start in FY25, when its newly-won LCA Mk1A contract, which accounts for 45% of its current order book, begins to contribute materially i.e. ->10% of revenues.The stock is currently trading at PE 10.2x FY23E EPS. Given strong balance sheet, robust order book and execution capabilities, we feel investor can buy stock on LTP and add more on dips to Rs. 900-920 band (8.5x FY23E EPS) for the base target of Rs. 1300 (12x FY23E EPS) and bull case target of 1461 (13.5x FY23E EPS) over the next four quarters. HAL operates in an industry with high-entry barriers, enabling it to deliver high ROE. HAL is not involved in controversial weapons.

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