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* Hindustan Aeronautics (HAL), a Maharatna PSU and one of the largest Defence manufacturers in India, is engaged in the design, development, manufacture, repair, overhaul, upgrade and servicing of a wide range of aerial and aeronautical platforms and products including, aircraft, helicopters, aero-engines, avionics, accessories and aerospace structures.

* Of the order book worth `940bn (FY24) – the LCA Mk1A Tejas continues to remain the firm’s largest order at `480bn. Diwali came early for investors as HAL’s strategic expansion to its Nashik production line along with transitioning to an integrator role vis-à-vis the defacto end-to-end manufacturer role was reflected in the stock’s price rocketing to `5,000. However, the fireworks were short-lived as the geo-political tensions limited supply of key components required by GE/HAL for manufacturing the 414 engines, which powers the Mk1A Tejas. Recent efforts to use domestic suppliers for the engine will play a key role in ensuring a relatively timely delivery and revenue recognition.

* Given the shorter turnaround time, we believe HAL will continue emulating its role as an integrator given the Rs.1.6-1.7 tn worth of contracts that are expected to be awarded to the firm over the next 3-5 years – contracts for the LCA Mk2, AMCA, deck based multi-role helicopters for the Navy, etc. The large pipeline of orders and projects ensures sufficient visibility and financial growth for the company in the coming years.

* Furthermore, HAL’s `200-210bn annual MRO contracts with the Armed Forces continues to remain a high-margin recurring revenue generator ensuring highquality earnings.

* On the non-defense side – HAL’s partnership with Airbus for MRO services to domestic operators for the A320 model (~60% of India’s airlines’ fleet) will continue reaping fruit as the recurring incremental income in this higher-margin business will bolster profitability and HAL’s standing as a strong international MRO provider.

* Over the last couple of months, raw material supplies have been strongly impacted by the international geo-political tensions causing delayed order fulfillments and revenue booking. This has been emphatically brought out for the recent GE-414 engines order, which will power the new LCA-Mk1A fighter jets. The recent fall in the stock prices reflect this bearish sentiment. However, we believe this to be a blip in the larger scheme of things and as supplies improve – we expect the trend to strongly reverse. Given the large order book, IAF’s mandate to refresh the fleet, and the large number of civilian Airbus aircrafts in use – we believe that HAL is firing on all engines and will continue to grow strength to strength.

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