Accumulate Hindustan Aeronautics Ltd for Target Rs. 2975 By Elara Capital
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AoNs to fuel inflow sustenance
Revenue jumps 7% in Q3FY24, led by manufacturing
Hindustan Aeronautics (HNAL IN) revenue rose 7% YoY to INR 60.6bn in Q3FY24, in line with our estimates. Manufacturing revenue may have grown faster than repair & overhaul (ROH) in Q3FY24. Management expects FY24 revenue to grow by 8-9%, and by 10-11% in FY25. It expects sustained growth of 14-15% from FY27.
Adjusted EBITDA margin improves 640bp YoY to 23.8% in Q3
Gross margin contracted 280bp YoY to 53.2%, likely due to lower share of ROH revenue. Employee expenses rose 14% while operating expenses declined 54% on account of a 70% drop in provision. EBITDA rose 47% to INR 14.4bn in Q3FY24, 6% ahead of our estimates. EBITDA margin improved 640bp YoY to 23.8% on lower provisioning. Other income rose 44% YoY INR 4.6bn on higher cash and equivalents while depreciation fell 21%. Adjusted net profit rose 74% YoY to INR 12.7bn, 15% ahead of our estimates.
DAC approval drives momentum in the medium term
In November 2023, the Defence Acquisition Council (DAC) accorded Acceptance of Necessity (AoN) to procure additional units of light combat helicopters (LCH; likely 15 nos.) and light combat aircraft (LCA) Tejas Mk-1A (likely 97 nos.) from HNAL. It also approved upgrading of the Su-30 MKI fleet (initial plan likely for 84 nos.). These orders may be placed during FY25-27E.
Valuation: revise to Accumulate with a higher TP of INR 2,975
We raise our EPS by 2% for FY24E, 1% for FY25E and 4% for FY26E based on higher Other income. We revise to Accumulate from Buy, with a higher TP of INR 2,975 from INR 2,500 based on 28x (from 25x) December 2025E P/E as we roll forward. Our revised TP is driven by expectations from a new stream of the exports business, surge in inflows, stable margin, and sustained double-digit earnings growth. We believe rising share of indigenization along with unexplored exports opportunity in the aircraft & helicopter industry warrant a rerating. We expect an earnings CAGR of 14% during FY23-26E with a ROE of 24% during FY24-26E. Key risks to our call include lower spend in the defence capital budget, less domestic procurement allocation, increased competition from the private sector, and a significant rise in commodity prices.
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SEBI Registration number is INH000000933
