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Q4FY24 Performance Update: Revenue for the quarter increased to Rs 147.7 billion, marking an impressive 18.2% year-over-year (YoY) jump and a staggering 143.7% surge quarter-over-quarter (QoQ) from Rs 124.9 billion in the same period last year. This exceptional growth was fueled by the successful execution of major orders, including Dornier aircraft, Twin Seater LCA Tejas, and Tejas Mk-1A. Gross profit soared by 28% YoY, hitting Rs 99.2 billion, thanks to a significant increase in IOC contract value, which added Rs 15 billion in Q4. This pushed the gross margin up by 524 basis points (bps) YoY to a remarkable 67.2%, well above our estimate of 58.5%. EBITDA skyrocketed by 82% YoY to Rs 59.1 billion, far exceeding our expectations of Rs 33.4 billion. The EBITDA margin improved by an astounding 1,398 bps YoY to 40%, driven by stringent cost control measures. Profit after tax (PAT) saw a spectacular jump of 51.5% YoY, reaching Rs 43.1 billion, beating our estimates of Rs 28.8 billion. This jump was propelled by higher other income and lower interest costs, with PAT margins standing strong at 29.2%, an improvement of 641 bps.

*  A strategic shift from Local to Global player: The company signed MoU with Western giants like Airbus for establish an integrated MRO services & SAFRAN to produce LEAP (Leading Edge Aviation Propulsion, powering Airbus A320 Neo family and Boeing 737 Max) engine Forgings at its Foundry & Forge facility. They are also going to co-design and co-produce the next generation to carter Indian IMRH & DBMRH program and global demand. HAL is also in advance talks with General Electric to setup GE F-404 engine manufacturing to carter local as well as International demand. Furthermore, HAL is in talks with various countries like Egypt and the Philippines, offering Tejas Mk1 with BrahMos-NG combo to the Philippines Air Force and proposing transfer of technology for local assembly of Tejas mk1A fighter jets to Egypt and the Philippines, along with discussions to offer ALHDhruv helicopters to the Philippines.

*  Tejas Mk-1A & Su-30MKI will be a part of major manufacturing revenue during FY25-28E: In the recent past, the company delivered the first Tejas Mk-1A fighter jet to the defense forces and expects to complete the delivery of all 83 Tejas Mk-1A fighter jets by 2029. The production capacity at HAL’s facility in Bengaluru is 16 LCA Mk-1A jets annually. However, it has begun setting up a third production line in Nashik to increase the capacity to 24 jets per year starting from FY26. Additional acquisition plans are underway to potentially place orders for an additional 97 Tejas Mk-1A fighter jets by this financial year. Additionally, the MoD placed an order for 12 Su-30MKI jets worth over Rs 115bn last year. We expect that in the near future, the majority of our manufacturing revenue will come from these two platforms.

*  View and valuation: We have a bullish outlook on HAL, given its strong market position and limited competition from the private sector, largely due to the high capital requirements and lengthy development timelines in this industry. HAL's strategic diversification into the civilian sector and anticipation of major future orders for platforms like LCA Tejas Mk-1A, LCA Tejas Mk-2, LUH, LCH, Su30, and HTT-40 in the near to medium term further bolster its growth prospects. The company is strategically positioned as the sole domestic supplier and has formed valuable collaborations with industry giants such as Safran, Airbus, and GE. Moreover, HAL's impressive order book, standing at approximately Rs.940 billion—about 3.1 times the FY24 revenue—reinforces its robust growth narrative. Given these strengths, we rate the stock as “BUY” with a target price of Rs.5,042, based on a 38x of FY26E EPS. This valuation reflects the expected influx of new orders like Tejas Mk-1A, Sukhoi-30MKI upgrades, ALH Dhruv helicopters, and various aerospace structures for PSLV and GSLV, along with a sharp focus on export opportunities.

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