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Too compelling to ignore; worth a look

* Hindustan Aeronautics (HAL) reported in-line 3Q numbers vs. street revenue/EBITDA but beat PAT by 8% led by higher other income (37% of PBT).

* FY25 was a record order-intake year for HAL as we see medium-term pipeline skewed towards BEL/BDL (QRSAM, Project Kusha, P-75I, AWACS, AMCA).

* Maintain ADD rating with a lower TP of Rs4,800 as we assign 30x target P/E on Mar 2028F (30% discount to BEL). We continue to prefer BEL over HAL.

Nearly ~40% of earnings in 9MFY26 came from higher other income

Hindustan Aeronautics (HAL) 3QFY26 revenue grew by 10.7% YoY to Rs76.9bn. Gross margin came in at 53.6% (vs. 50.8% in 3QFY25). EBITDA margin was flattish YoY at 24.3% whereas absolute EBITDA grew by 10.8% YoY to Rs18.7bn. Adjusted PAT grew by 29.3% YoY to Rs18.5bn led by higher other income (advances of front-loading of orders received over the last 12-15 months). Backlog shall be approx. ~Rs2.7tr (8.7x on FY25 sales).

Macros in favour, micro remains mixed

While defence capex outlay for FY26RE rose by 4% to Rs1.86tr now, we see an 18% YoY growth in FY27RE to Rs2.19tr whereas 22% YoY growth vs. FY26BE. While this is positive for the whole space, benefiting right from PSUs (OEMs; project integrators) to private companies (sub-system, component beneficiaries) across the value chain, we feel that a higher allocation shall shift towards Indian Air Force & Indian Navy, given programs such as Kusha (India’s S-400), Vishnu/Dhvani (hypersonic missiles), Rudra M2-3 (anti-radiation missiles), AMCA (5th generation fighter jet), Ghatak (UCAV), TAPAS BH-201 (MALE UAV), QRSAM (part of India’s iron dome), AWACS, P-75I etc. in focus over next 12-18 months.

Counting on timely execution

Market is counting on timely Tejas Mk1A deliveries, given company’s strong Rs2.7tr backlog providing a long runway of visibility. While HAL’s recent knockout from AMCA prototype program (Rs150bn for five aircraft) was a huge disappointment, we don’t believe it’s completely out of the race yet, as production phase to start only post- 2032F. Slower execution rate due to supply-chain bottlenecks, particularly around GE F404 engine deliveries, have tempered topline growth in past; however, progress on clearing bottlenecks (bombing trials) & expanding facilities (new Tejas lines at Nashik/Bengaluru units) are expected to accelerate deliveries over the next two-to-three years, in our view.

Outlook and valuation

On the back of coverage transfer, we upgrade FY26F EPS by 8% (higher other income) whereas cut FY27F/28F EPS by 5%/12%, respectively, as we feel a higher product delivery mix apart from MRO’s 10-12% growth p.a. should trump margins going ahead whereas Rs150bn capex plan over four-to-five years shall weigh on cash accruals. Maintain ADD rating with a lower target price of Rs4,800, as we assign 30x on Mar-2028F EPS. Downside risks: Supply chain problems, fierce competition, lower-than-anticipated margins etc.

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