Buy Hindustan Aeronautics Ltd for the Target Rs. 5,507 By Prabhudas Liladhar Capital Ltd
Quick Pointers:
* HAL posted a revenue growth of 10.9% YoY to Rs66.3bn while EBITDA margin contracted by 394bps YoY due to lower gross margin and higher provisions.
* During the quarter, HAL secured the ~Rs620bn order for 97 LCA Tejas Mk1A.
Hindustan Aeronautics (HAL) delivered a 10.9% YoY revenue growth, likely supported by improved execution, though EBITDA margin contracted by 394bps YoY owing to higher provisions. The company further reinforced its leadership in India’s defence and aerospace ecosystem by securing the long-awaited order for 97 LCA Tejas Mk1A aircraft valued at ~Rs620bn, alongside a $1.0bn contract with GE Aerospace for 113 F404-IN20 engines to power these jets. During the quarter, HAL’s Nashik division achieved a major milestone with the maiden flight of its first Tejas Mk1A. On the strategic front, HAL is leading a consortium bidding for the AMCA program, which, if awarded, could be a transformative opportunity for the next decade. Additionally, the company entered the passenger aircraft manufacturing segment through an MoU with Russia’s UAC to produce the Sukhoi Superjet 100 (SJ-100) domestically, marking a significant diversification into civil aviation. However, the pace of F404 engine deliveries from GE remains a concern, with HAL receiving only four out of twelve engines committed for the year. The stock is currently trading at a P/E of 34.4x/31.3x on FY27/28E earnings. We maintain ‘Buy’ rating and roll forward to Sep’27E valuing the stock at a PE of 38x Sep’27E (40x Mar’27E earlier) arriving at a TP of Rs5,507 (Rs5,500 earlier).
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 provisions weighed on profitability: Consolidated revenue increased by 10.9% YoY to Rs66.3bn (PLe: Rs65.1bn). EBITDA declined by 5.0% YoY to Rs15.6bn (PLe: Rs17.5bn). EBITDA margin contracted by 394bps YoY to 23.5% primarily due to lower gross margin (-302bps YoY to 56.1%) and higher provisions (+106.5% YoY to Rs5.2bn). Adj. PAT increased by 10.8% YoY to Rs16.7bn (PLe: Rs16.4bn) aided by higher other income (+63.7% YoY to Rs8.9bn).
H1FY26 Performance: Revenue increased by 10.9% YoY to Rs114.5bn. Gross margin contracted by 116bps YoY to 61.1%. EBITDA increased by 8.0% YoY to Rs28.4bn while EBITDA margin contracted by 67bps YoY to 24.8%. Adj. PAT increased by 9.4% YoY to Rs30.5bn aided by higher other income (+50.0% YoY to Rs16.3bn).?
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