Buy Hindustan Aeronautics Ltd For Target Rs. 5,500 By Prabhudas Liladhar Capital Ltd
Hindustan Aeronautics (HAL) reported a 10.8% YoY growth in revenue likely due to better execution, with EBITDA margin improving by 382bps YoY to 26.6%. HAL continues to strengthen its position as a key player in India’s defence and aerospace, backed by robust prospect pipeline of ~Rs1.0trn over the next few years. Ongoing investments in capacity, capability, and infrastructure—particularly for programs like LCA Mk2, GE-414 engines, IMRH engines and AMCA—highlight HAL’s commitment to advancing India’s defense indigenization efforts. Operationally, HAL is set to deliver the first LCA Tejas Mk1A to the IAF in coming months and has already received the second F-404 engine from GE, with 10 more scheduled for delivery this fiscal. The IAF’s plan to procure an additional 97 LCA Tejas Mk1A aircraft from HAL further enhances long-term revenue visibility. Additionally, the recent contract to manufacture the SSLV developed by ISRO marks HAL’s strategic entry into the space technology domain, diversifying its portfolio and opening up new growth avenues. The stock is currently trading at a P/E of 34.8x/32.1x on FY26/27E earnings. We upgrade the stock from ‘Accumulate’ to ‘Buy’ given the recent correction in the stock price and value the stock at a PE of 40x Mar’27E (same as earlier) arriving at a TP of Rs5,500 (same as earlier).
The long term outlook remains intact: We believe HAL’s execution on the deliveries of Tejas Mk1A aircrafts will be a key monitorable in the coming quarters, however its long-term play on the growing strength & modernization of India’s air defense given 1) it is the primary supplier of India’s military aircraft, 2) long-term sustainable demand opportunity owing to government’s push on indigenous procurement of defense aircraft, 3) a robust order book with a 2-year pipeline of Rs1.0trn+, 4) leap in HAL’s technological capabilities due to development of advanced platforms (Tejas, AMCA, GE-414 & IMRH engines, etc.), and 5) improvement in profitability via scale & operating leverage.
Higher pension contribution resulted in a jump in employee costs: Consolidated revenue increased by 10.8% YoY to Rs48.2bn (PLe: Rs47.2bn). Gross margin increased by 141bps YoY to 68.0% (PLe: 67.1%). EBITDA increased by 29.4% YoY to Rs12.8bn (PLe: Rs10.7bn). EBITDA margin increased by 382bps YoY to 26.6% (PLe: 22.7%) primarily due to higher gross margin and lower other expenses (- 241bps YoY as % of sales). Adj. PBT remained flat at Rs18.4bn (PLe: Rs14.7bn) Adj. PAT increased 27.0% YoY to Rs13.8bn (PLe: Rs11.4bn) aided by increase in other income (+36.5% YoY to Rs7.5bn).
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