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Good Q3 but engine woes continue

Hindustan Aeronautics (HNAL IN) revenue saw a positive surprise in Q3FY25, likely driven by delivery of trainer aircraft and helicopters. The company expects 12 Tejas Mk1A aircraft to be delivered by FY26. But our checks with suppliers indicate possible headwinds to this target. Thus, we lower our TP to INR 5,160 on 40x December FY26E P/E, but we retain Buy due to robust order visibility of ~INR 1.7tn in FY26 with positive surprises potentially in exports.

Sales surprise in Q3 on higher manufacturing and services contribution: Revenue rose 15% YoY to INR 69.6bn in Q3FY25, 9% higher than our estimates, likely led by delivery of trainer aircraft (Tejas & HTT-40) and helicopters (advance light helicopter [ALH] and light utility helicopter [LUH]) along with a rise in repair & overhaul (ROH) services. ROH revenue may have risen in the low double digits while manufacturing may have posted robust double-digit growth. EBITDA margin saw a 40bp YoY increase to 24.2% in Q3. Higher other income up 37% driven by strong order inflows of INR 556bn in 9MFY25 was offset by rise in tax rate to 29.5% in Q3FY25 vs 25% in Q3FY24. Thus, adjusted net profit grew by 13% YoY to INR 14.4bn in Q3FY25

Tejas deliveries likely by end-FY25: Management states receipt of the GE-404 engines for the Tejas Mk 1A fighter aircraft are likely to commence by March 2025. It expects to deliver 12 aircraft in FY26 vs 16 earlier. But our checks at the Aero India 2025 exhibition with component suppliers for the Tejas Mk 1A reveal orders for subsystems from these suppliers likely to be placed in H1FY26. As a result, overall delivery schedule is unchanged, but near-term delivery schedule for a year continues to be clouded with uncertainty

Orderbook guidance of INR 2.6tn for FY26: Management expects FY26 orderbook at INR 2.5-2.6tn, up from INR 1.3tn as on December 2024. This would be led by two large orders for 97 light combat aircraft (LCA) Tejas Mk 1A in addition to 83 already ordered, and 156 light combat helicopters (LCH) Prachand together worth INR 1.3tn, which are likely to materialize in the next 3-6 months. Additionally, orders worth INR 350bn are set to accrue for Su-30MKI upgrade, Indian Multi-Role Helicopter (IMRH) design & development, and ROH orders, taking the total expected inflows to ~INR 1.7tn for FY26.

Reiterate Buy with a lower TP of INR 5,160: We reduce our EPS by 6% each in FY25E and FY26E to factor in further delay in delivery of Tejas Mk 1A aircraft. We lower our TP to INR 5,160 from INR 5,465 on 40x (from 42x) December FY26E P/E due to delayed delivery. However, we retain Buy, due to robust order visibility led by rising share of indigenization with unexplored exports opportunity in the aircraft & helicopter industry, which is positive for HNAL in the long term. We expect an earnings CAGR of 14% during FY24-27E with a 23% ROE during FY25-27E.

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