Buy Hindustan Aeronautics Ltd For the Target Rs. 5,000 by Choice Broking Ltd
Delivery of First GE F404 - IN20 Engine for Tejas Mark- 1A is Sentimentally Positive
Recently, GE Aerospace successfully delivered the first F404-IN20 engine to HNAL, marking the commencement of a contract signed in August 2021 for 99 engines. With this milestone, HNAL is set to deliver 12 Tejas Mark-1A fighter aircraft this calendar year, with an annual production rate of 24 aircraft expected from next year onward. This positive development is likely to bolster investor confidence in the near to medium term. Additionally, the company may soon secure an additional order for 97 Tejas Mark-1A aircraft.
However, GE F- 414 Engine for Tejas Mark 2 & AMCA Program Has Encountered Delays
The Tejas Mark 2, which depends on the F414 engine's 98 kN thrust, is scheduled for flight testing in 2026, with production slated for the late 2020s. Similarly, the AMCA Mark 1, powered by the F414, and the more powerful 110 kN engine planned and AMCA Mark 2, is slated for late 2020s. Any delay, impacts India’s ability to compete with China’s advanced fighter fleet, particularly the J-20, and potentially weakening its strategic deterrence capabilities.
The GE- HNAL agreement for an 80% Transfer of Technology (ToT) on the F- 414 engine has encountered delays owing to technical discussions and government reviews in both India and the US. The deal involves critical technologies like single-crystal turbine blades, advanced coatings, and laser drilling, aimed at boosting India’s domestic jet engine manufacturing capabilities. However, complications around technology sharing, intellectual property rights, and manufacturing processes, along with required approval from the US government under ITAR (International Traffic in Arms Regulations), have slowed progress. The finalization of these negotiations, particularly with the Indian government and international partners, could further drive positive market sentiment.
Our View:
As of Dec 2024, HNAL had a robust order book of ~INR 1,330 Bn (~4.15x TTM revenue) and we expect INR 2,500 Bn order book by FY26, owing to its involvement in major defense programs such as Tejas Mark 2, AMCA, TEDBF, LUH, LCH Prachand, and IMRH. While LUH, LCH, and IMRH (details below) are progressing as planned, Tejas Mark 2, AMCA, and TEDBF have faced delays. Our investment view remains unchanged (BUY with the target price of INR 5,000); as in our last report dated Feb 13, 2024 with Tejas Mark 2 engine agreement being the catalyst to watch out in the coming months. We have not considered appx. order value of INR 2,738 - 4,620 Bn through Tejas Mark 2, AMCA & TEDBF in our assumptions.
In addition to the current order book pipeline, we expect significant order inflows from the Su-30MKI Upgradation program, CATS Warrior project, and aircraft ROH services. These contracts are expected to substantially enhance the company's financial performance
Key Investor Question: What is the Impact on HNAL; considering increase in Private Sector Involvement in Major Programs?
We have come across investors questioning about private sector participation in defense programs. In our view, HNAL's dominance is likely to remain intact due to its unmatched infrastructure, expertise, and role as the final integrator for major projects. While private firms contribute to subsystems, HNAL retains control, ensuring its strategic and financial strength. Its strong government ties, execution track record, and leadership in indigenous programs like Tejas Mark 2, AMCA, and LCH Prachand further reinforce its position. With robust order visibility, and a unique role in India's defense sector, HNAL's leadership is unlikely to be challenged in the foreseeable future.
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SEBI Registration no.: INZ 000160131
