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Hindustan Aeronautics – Powered by Tejas

Updated: Feb 15, 2023

Company NameHindustan Aeronautics Ltd (HAL)

Current Share PriceINR 2,403 (February 10, 2023)

Market CapINR 80,352 cr


1. What is interesting about the stock?

Did you hear about China's balloon flying over the US for gathering intelligence? It has created a stir all over the world and shown that we are heading toward another cold war. Defense spending is set to increase in the next decade due to this development.

Fighter aircraft are a crucial component of a country's defense and essential for maintaining national security and protecting its citizens and assets.

  • Fighter aircraft play a crucial role in a country's defense for several reasons:

  • Air Dominance: Fighter aircraft are designed to provide air dominance to a country's armed forces. They allow a country to control its airspace, making it difficult for enemy aircraft to penetrate and carry out attacks.

  • Air-to-Air Combat: Fighter aircraft are equipped with air-to-air missiles and other weapons that enable them to engage and defeat enemy aircraft in combat. This is essential in protecting a country's assets and maintaining air superiority.

  • Ground Attack Capabilities: In addition to air-to-air combat, many fighter aircraft are also equipped with air-to-ground weapons and can be used to support ground troops by carrying out precision strikes against enemy targets.

  • Reconnaissance: Fighter aircraft can be used for reconnaissance missions, allowing a country to gather intelligence and maintain situational awareness.

  • Strategic Deterrence: The presence of a strong air force, including fighter aircraft, can act as a deterrent to potential aggressors, helping to maintain peace and stability.

Hindustan Aeronautics Ltd is a Bengaluru-based Defense Public Sector Undertaking that designs, develops, produces, repairs, overhauls, upgrades, and supports a wide range of products, including planes, helicopters, aero-engines, avionics, and aerospace structures. HAL operates 20 production divisions, 10 research and development centers, and one facility management division around the country. It has developed 17 types of aircraft in-house and 14 types under license so far. The Tejas Light Combat Aircraft, the Dornier Do-228 Light Transport Aircraft, the Dhruv Advanced Light Helicopter, the Light Combat Helicopter (LCH), and the Light Utility Helicopter (LUH), as well as associated engines, avionics, and accessories, are all manufactured by HAL. HAL now provides repair and overhaul for 12 aircraft/helicopters and 14 engine types. HAL's business has also expanded to include aerospace structures and industrial, and marine gas turbines.

The Hindustan Aeronautics (HAL) and Larsen & Toubro Ltd (L&T) partnership have been chosen as the first bidder for the Indian Space Research Organization's (ISRO) Polar Space Launch Vehicles (PSLVs). This is a crucial step ahead in the transition of PSLV-XL production outside of the Indian Space Research Organisation.

The order book remains strong, supported by the order for 83 Light Combat Aircraft (LCA) with a total value aggregating to INR 36,500 cr received in Q4FY2021, resulting in a closing order book position of ~INR 84,000 cr as of December 31, 2022. India is actively scouting for the export potential for the indigenous LCA Tejas at a vanilla price of just INR 309 cr per aircraft, as countries from Southeast Asia and the Middle East have evinced interest.

LCA Tejas MK1A, the largest order in manufacturing, deliveries to IAF are expected from the FY24 end. Moreover, execution of other key orders and sustained growth in MRO to drive revenue growth in double digits.

The construction of the LCH by HAL will provide the Atmanirbhar Bharat plan with a boost and raise the country's defense output and defense industry's grade. To meet the Make in India policy's goal of USD 5 billion in defense exports by 2025, HAL plans to establish logistic hubs in Indonesia, Malaysia, Sri Lanka, and Vietnam, with a focus on the Southeast Asian, West Asian, and North African markets. It would not only help promote HAL products but also operate as a service center for Soviet/Russian-made equipment.

In addition, the Company has partnered with Israel Aerospace Industries in India to convert civil (passenger) planes into multi-mission tanker transport planes (MMTT). Conversions from passenger to cargo aircraft and MMTT conversions are also part of the partnership's ambit. The MMTT conversion industry has been highlighted as one of HAL's primary diversification areas.

Company operations have not been impacted by the Russia-Ukraine as it had maintained an inventory of Russian spare parts.

Key Strengths

  • As of December 2022, the Government of India is HAL's primary stakeholder, with ~75% ownership. Because it is the sole domestic provider of aircraft, helicopters, engines, avionics, and other accessories, the Company is vital to the Indian defense services, including the Indian Army, Indian Airforce, Indian Navy, and Indian Coast Guard.

  • Due to the high capital intensity and extended development periods for building manufacturing capabilities in the area, the Company faces minimal competition from the private sector. While long-term competition from the private sector is projected to grow, HAL's long-standing partnership with the Indian military and the Defence Research and Development Organization, established production facilities, and skilled labor base will remain critical moats of the business.

  • The Company had a strong order pipeline, with an outstanding order book of ~INR 84,000 crore (~3.2x of TTM revenue) at the end of Q3FY23, and the order book is expected to rise by INR 30,000 crore, owing to platforms for which the Ministry of Defence (MoD) has obtained Acceptance of Necessity (AoN).

  • In FY2021, HAL received large payments from its customers, which continued in H1FY2022. As a result, the debt was entirely repaid as of September 30, 2021. It also has cash balances of ~INR 17,000 crore, which are pre-dominantly advances received for the order book.

Key Weaknesses

  • Sales to the Indian defense forces account for more than 90% of the Company's revenue. These contracts are contingent on the Ministry of Defense receiving budgetary support and distributing the funds to the various Indian Defense Forces wings. The Company has previously faced delays in payments from the Ministry of Defense, resulting in a build-up of receivables and a need for external finance.

  • As orders have strict execution schedules and predetermined margins, the Company's operations and profitability remain vulnerable to time and cost overruns. Any material cost rises as a result of HAL's delays might impact overall profitability.

Key competitors

Lockheed Martin (F series), Boeing (F series), Dassault Aviation (Rafale), Airbus (Eurofighter), Saab, and Russian manufacturers (Sukhoi) are major competitors of the Company.

On September 1, 2018, R. Madhavan was promoted to the Chairman and Managing Director (CMD) of Hindustan Aeronautics Limited (HAL). He began his career with HAL in July 1982 as a Management Trainee (Technical) and has worked for the organization for almost 39 years.

2. Key Historical Financials

HAL reported its highest-ever revenue of nearly INR 24,620 crore for the fiscal year ending March 31, 2022, up 8% from the previous fiscal year. HAL claimed it set a new income record with the manufacture of 84 new engines, 44 new helicopters/aircraft, refurbishing of 203 aircraft/helicopters, and 478 engines. In the coming quarters, further helicopter and LCA (Light-Combat Aircraft) orders are expected. Revenue growth has been 6-8% in the last few years which doesn't look good. A major portion of the revenue jump from LCA is expected in FY24.

EBITDA margin fell in FY22 but the net profit margin expanded significantly due to higher other income, lower interest cost (owing to debt repayment), and lower effective tax rate.

Revenue was flat in Q3FY23 on a YoY basis with the fall in EBITDA margins due to higher provisions. Other income helped the Company in delivering growth at the PAT level.

ROCE/ROE has been quite healthy at 30%/29% in FY22.

Cash flow from operations is lumpy as it depends on the project delivery and Indian government finances. With debt completely repaid, the Company would be generating high free cash which can be used to provide dividends.

3. What is my view on company valuation?

HAL is currently trading at an EV/EBITDA (TTM) ratio of c. 8.6x and a P/E (TTM) ratio of c. 13.2x.

The stock gained momentum in April-Sep 2022, with the share price rising from INR 1,400 to INR 2,400.

Government of India owns ~75% of the firm, while Institutions (Domestic and Foreign) control ~21%.

I believe, HAL is a solid and robust business but is currently in the overbought zone with a current EV/EBITDA of 8.6x vs a 5-year average ratio of ~6x. HAL has the potential to be a rewarding investment. Global macroeconomic situation (recession risk) could pull the market down and that may provide an opportunity for investors to add the stock at the right levels.

4. What are the risks to the investment analysis?

  • Increased rivalry from foreign firms due to the planned increase in the FDI limit from 49% to 74%.

  • Covid-19 particular hazards include economic downturns, reductions in defense spending, supply chain interruptions, vendor failures, legal issues, and so on.

  • Consumers' choices in defense have evolved from a single provider to more than one provider in each domain, so the share of the wallet gets fragmented.


About the Author

I write about the stock market, cryptocurrency, and blockchain. I have a Bachelor of Arts degree with more than 10 years of experience in finance and cryptocurrencies.


I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.

I am not a SEBI registered advisor. This article is purely for educational purposes is and not to be construed as investment advice. Please consult your financial advisor before acting on it.

I have used publicly available information while writing this article.


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