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Engine supplies ramping up

Hindustan Aeronautics (HAL) reported a decent quarter with a slight miss on revenue, which was offset by better-than-expected margins and higher other income. This resulted in a beat at the PAT level. EBITDA margin at 26.6% was aided by improved gross margin and sharply lower provisions. With engine supplies ramping up from GE for the Tejas Mk1A aircraft order, we expect aircraft deliveries to accelerate in the coming quarters. We also anticipate a strong manufacturing order book to support its execution growth. We maintain our estimates and roll forward our TP to INR5,800 based on the average of DCF and 32x Sep’27E earnings. The stock has come off from the highs in the last quarter and is currently trading at attractive valuations of 31x/27x P/E on FY26/27E earnings. HAL’s growth catalysts are emerging from the Tejas aircraft deliveries and the finalization of orders for 97 Tejas-Mk1A. Reiterate BUY.

Beat on profitability

HAL reported a decent set of numbers in 1QFY26 with a beat on PAT, in-line EBITDA, and a miss on revenue. Revenue grew 11% YoY to INR48.2b vs. our estimate of INR52.5b. Gross margin improved 140bp YoY to 68% in 1QFY26 vs. our estimate of 66%. Absolute EBITDA grew 29% YoY to INR12.8b, which was in line, while EBITDA margin expanded 580bp YoY to 26.6% during the quarter vs. our estimate of 24.0%. Margin improved and was above our estimate, mainly fueled by lower-than-expected provisions made during the year. HAL’s PAT was down 4% YoY at INR13.8b but was still 10% ahead of our estimate of INR12.6b. The beat on PAT was primarily driven by 1) better-than-expected margins, 2) lower-than-expected depreciation, and 3) higher other income.

Update on the Tejas Mk1A project

In a boost to the Tejas Mk 1A program, HAL has begun receiving vital components from the domestic industry, notably the first batch of wing assemblies from L&T, highlighting increasing private-sector collaboration under the Make-in-India initiative. On the engine front, delivery of GE F-404-IN20 engines is now firmly back on track, with two engines already delivered and one more expected this month. GE is now targeting to deliver two engines per month from Oct’25 onwards, which will ease earlier bottlenecks and support HAL’s aim to deliver 12 jets in FY26. HAL has also formally issued a Letter of Intent to Israel’s ELTA Systems for supplying radar and electronic warfare systems, choosing imported technology over the indigenous Uttam AESA radar due to certification delays. With supply chain challenges now resolved and testing validated, HAL expects a smooth ramp-up in production and deliveries in the years ahead. Our estimates bake in eight aircraft deliveries for FY26 and 16 aircraft from FY27 onwards.

Increasing the indigenous portion in aircraft

HAL and GE signed an MoU to co-produce the F-414 engines in India, with an ambitious 80% technology transfer encompassing critical features like hot-section coatings, single-crystal turbine blades, and laser drilling techniques. Following this, technical and commercial discussions have been rigorous and ongoing. The breakthrough came in Jul’25, when HAL signed a Manufacturing License Agreement (MLA) with GE, formalizing the ToT structure and enabling local production of the F414 engine. This ToT from the US to India is estimated to be worth ~USD1b and will result in the new fighter jet having an indigenous content of around 75%. This move lays the foundation for the indigenous production of high-thrust engines for upcoming fighter programs such as Tejas Mk 2 and AMCA, reducing import dependencies and enhancing long-term self-reliance.

Strengthening the space sector role by ToT for SSLV

HAL recently reached a critical milestone in its collaboration with ISRO by securing an INR5b transfer of technology (ToT) deal for the Small Satellite Launch Vehicle (SSLV). This agreement grants HAL full rights to build, own, market, and operate the SSLV, with ISRO providing hand-holding support over the next two years. Further emphasizing HAL’s expanding role in India’s space sector, the company played a vital part in the July 30 launch of the NASA-ISRO NISAR satellite by supplying essential components. In the long term, SSLV production will open new commercial avenues for HAL in the rapidly growing global small-satellite launch market, diversify its revenue base beyond aerospace and defense platforms, and position it as a strategic partner for domestic and international space customers. This move also aligns with India’s ambition to expand its space economy to USD40b by 2040, giving HAL leverage on upcoming satellite constellation and space station projects.

Financial outlook

We project the overall revenue to record a CAGR of 24% over FY25-28, primarily driven by a scale-up in manufacturing revenue. We project its EBITDA margin to remain strong at 29.8%/28.6%/27.3% for FY26/FY27, fueled by indigenization efforts taken by the company as well as lower provisions. With an annual capex of INR40b/ INR50b/INR60b over FY26/FY27/FY28 and comfortable working capital, we expect its PAT to register a 17% CAGR over FY25-28. With improving revenue and stable margins, we expect the RoE/RoCE to remain comfortable, reaching 22.2%/22.6% by FY28.

Valuation and view

HAL is currently trading at 31.2x/27.3x FY26E/FY27E EPS. We maintain our estimates and reiterate our BUY rating on the stock with a revised TP of INR5,800 (earlier INR5,750) based on the average of DCF and 32x Sep’27E earnings.

Key risks and concerns

Key risks would include 1) slower-than-expected finalization of large platform orders, 2) further delays in deliveries of key components such as engines for Tejas Mk1A, 3) delays in payments from MoD, and 4) increased involvement of the private sector

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