- HAL reports 7.0% YoY revenue growth in Q3FY24 with EBITDA margin expanding by 629bps YoY.
- Defense Acquisition Council approves acquisition of ~97 Tejas Mk1A aircraft & ~156 LCH Prachand helicopters by HAL.
- Interim budget FY25 allocates 44% increase in capital outlay for defense aircraft and aeroengines, amounting to Rs 408 billion.
- HAL identified as primary supplier of India’s military aircraft, benefiting from government emphasis on indigenous defense procurement.
- HAL technological advancements include development of advanced platforms like Tejas and AMCA, fostering sustainable demand.
- Prabhudas Lilladher downgrades HAL to ‘Hold’ from ‘BUY’ due to steep valuation, setting revised TP of Rs 2,787.
- Despite downgrade, HAL upward revision in FY24E EPS by +4.0% YoY reflects resilience and potential in aerospace and defense sector.
Introduction:
Prabhudas Lilladher, a prominent research firm, maintains a hold recommendation on Hindustan Aeronautics (HAL) with a target price of Rs 2787 in its most recent report dated February 13, 2024. Let’s have a look at Prabhudas Lilladher’s analysis of HAL’s current performance and prospects.
HAL’s Q3 FY24 Performance:
Hindustan Aeronautics (HAL) reported a remarkable 7.0% year-on-year (YoY) sales growth in Q3 FY24. Furthermore, the profits before interest, taxes, depreciation, and amortisation (EBITDA) margin increased by 629 basis points year on year to 23.7%. This growth was mostly due to lower provisions.
Key Developments and Opportunities:
The Defence Acquisition Council’s permission for HAL to acquire roughly 97 Tejas Mk1A aircraft, approximately 156 LCH Prachand helicopters, and to upgrade approximately 84 Su-30MKI aircraft indigenously highlights significant opportunities ahead. Furthermore, the intermediate budget for FY25 included a significant 44% rise in capital expenditure for defence aircraft and aeroengines, totaling Rs 408 billion, up from Rs 282 billion in FY24BE. These changes improve HAL long-term revenue visibility and position the company as a key player in India’s air defence modernization initiatives.
Investment rationale:
Prabhudas Lilladher sees HAL as a crucial long-term investment, citing various factors.
1.HAL key role as India’s major supplier of military aircraft.
Sustainable demand is being fuelled by the government’s emphasis on domestic defence procurement.
3.Technological breakthroughs proven by the creation of advanced platforms such as Tejas and AMCA.
4.A healthy order book and a promising 5-year pipeline worth more than Rs 2 trillion.
5.The potential for increased profitability through size and operational leverage.
Valuation and recommendations:
HAL stock is currently trading at a price-to-earnings (P/E) ratio of 32.1x/28.3x for FY25/26E earnings, indicating a high valuation. Prabhudas Lilladher downgrades its rating from ‘BUY’ to ‘Hold’ due to the huge increase in valuation. This modification is reflected in the updated target price of Rs 2,787, which was earlier set at Rs 2,266.
Forecast:
Despite the downgrade, Prabhudas Lilladher remains confident about HAL’s future potential. The +4.0% YoY increase in FY24E EPS forecast, owing to greater other income, demonstrates the company‘s durability and potential for long-term growth in the aerospace and defence sectors.
Conclusion:
Hindustan Aeronautics (HAL) emerges as a promising participant in India’s defence environment, well-positioned to capitalise on the country’s modernization ambitions. While investors should exercise caution given the current valuation, HAL long-term development trajectory and strategic placement make it a stock to watch for future chances.