A detailed equity research report on Hindustan Aeronautics Limited

Summary

Diversified revenue mix of Hindustan Aeronautics Limited and healthy liquidity profile are expected to act as principal growth enablers. Established track record and large manufacturing capacities of the company with adequate pool of trained manpower should continue support revenue growth.

Hindustan Aeronautics Limited

Hindustan Aeronautics Limited is an Indian public sector aerospace and defence company, having its headquartered in Bangalore. It had its origin as Hindustan Aircraft Limited which was incorporated on 23 Dec 1940 at Bangalore in association with then Government of Mysore, targeting manufacturing aircraft in India. In March 1941, Government of India decided to become one of shareholders in the company and subsequently they took over management in 1942. In collaboration with Inter Continental Aircraft Company of USA, it started its business of manufacturing of Harlow Trainer, Curtiss Hawk Fighter and Vultee Bomber Aircraft.

In January 1951, Ministry of Defence, Government of India took administrative control of Hindustan Aircraft Limited. Amalgamation of 2 different companies i.e. Hindustan Aircraft Limited and Aeronautics India Limited was effective on 1^st Oct 1964 and the company after amalgamation was named "Hindustan Aeronautics Limited (HAL).

Business model of Hindustan Aeronautics Limited

Hindustan Aeronautics Limited is in business of manufacturing aerospace and defence. Simply put, it designs, develops, manufactures, repairs and overhauls aircrafts, helicopters, engines and related systems such as avionics, instruments and accessories.

It has a comprehensive Design and Development capability in business of aerospace.  Out of 31 types of aircrafts which have been produced so far, 17 were of indigenous design. It has long experience in designing and manufacturing of diversified range of aircraft together with its systems.

Track record of management of Hindustan Aeronautics Limited

Shri C.B. Ananthakrishnan: He was appointed as Director (Finance) & CFO of Hindustan Aeronautics Limited with effect from August 1, 2018.  He is a commerce graduate and has post graduate in business administration from Madras University. Apart from this, he is a fellow member of Institute of Cost Accountants of India. He has additional charge of Chairman and Managing Director. Before appointment as Director (Finance), he used to oversee post of Executive Director (Finance) in Corporate Office of the company and was responsible for handling overall Financial Planning and strategy, treasury management and taxation.

Shri Jayadeva E. P: Shri Jayadeva E. P., who is Director (Operations), holds bachelor’s degree in Electrical Engineering from University Visvesvaraya College of Engineering, Bangalore. He did his Masters from IIT Madras in Aircraft Production Engineering. He joined the company in 1987 as Management Trainee, and has ~33 years of experience in fields of Manufacturing, Assembly, Overhaul, Upgrades, Customer support, etc.

Dr. D. K. Sunil: He is Director (Engg and R&D) of Hindustan Aeronautics Limited and has focussed on new areas including Engine Control Systems, Design Perspective Plan and accelerating collaboration with IITs and startups.

Financial performance of Hindustan Aeronautics Limited

In FY23, Hindustan Aeronautics Limited saw highest ever turnover of INR26,36,056 lakh, experiencing strong growth of 8% on year-over-year basis INR24,36,166 lakh. Profit Before Tax  of the company saw growth of 24% from INR5,23,115 lakh to INR6,49,294 lakh while its PAT went up by 14% from INR5,08,650 lakh to INR5,81,117 lakh. Order book position of the company remained healthy at INR81,78,400 lakh as on 31^st March, 2023.

During FY23, it produced 22 numbers of new aircrafts and helicopters, covering LCA Tejas, Dornier Do228, ALH Dhruv, Light Combat Helicopter (LCH) and Light Utility Helicopter (LUH) apart from production of 51 new engines and accessories, at HAL’s various divisions. It overhauled 216 Aircraft / Helicopters and 535 engines during FY23.

Despite challenges related to supply chain as a result of geo-political situations, the company was able to achieve targeted growth in revenues. This was due to higher thrust on indigenization and with available inventory. During FY23, the company saw fresh contracts of ~INR26,000 crores, including manufacturing contracts for 70 HTT-40, 6 Do-228 Aircraft and PSLV launch vehicles. Apart from this, on ROH front, the company saw fresh order of INR16,600 crores during FY23. Cash flow of the company saw a significant improvement with payments of ~INR25,000 crores received from several defence customers during FY23.

Future prospects of Hindustan Aeronautics Limited

With significant efforts focused on achieving self-reliance “Atmanirbharta” in Aerospace & Defence industry in India, Hindustan Aeronautics Limited is expected to remain involved in helping startup companies, SMEs/ MSMEs, Tier – II and III vendors. The company will keep handholding vendors and suppliers in research and development, capability development and extended employment generation.

In near future, Indian Defence market should act as a prime revenue source for Hindustan Aeronautics Limited because of projects such as LCA Mk1A, LCH, LUH and HTT-40. The company took a range of initiatives which focus on making systems more agile, effective, cost efficient and competitive. Enhancement of the company’s capability is being planned so that above projects can be catered. Plans are there to install new production line for HTT-40 and LCA Mk1A production.

Over medium term, the company plans to diversify and increase presence in UAV, Civil MRO & allied operations, Digital Solutions and new space segments. Focus of the company is on strengthening marketing efforts, expanding geographical presence and making alliances with Indian Industry / Global OEMs to increase export sales.

Industry analysis

Indian Defence Sector, which was categorised as strategic sector, continues to gradually develop as an economic sector which seems to be capable to contribute to economic growth of India. Under Atmanirbhar Bharat initiative, Indian government continues to facilitate development of Indian industry to decrease defence import and dependence on foreign OEMs. A range of initiatives of GoI gave thrust on indigenization and indigenous procurement of defence equipment. In upcoming 5 -10 years, such initiatives should equally help defence PSUs and private industry in achieving self-sustaining defence industry in country.

After COVID-19, Aerospace & Defence (A&D) industry continues to recover in both civil and defence sectors. Defence Sector should continue to grow in 2023-24 because global geopolitical conflicts have forced numerous countries to significantly increase defence budgets so that their military capabilities can be strengthened. Experts believe that global Aerospace & Defence market should be able to grow from $796 billion in 2022 to $855 billion in 2023, exhibiting a growth of ~7.4%. Growth is expected to be supported by the companies recovering their operations from COVID-19 impact, and defence budget allocation in several countries. In Union Budget 2023-24, INR5,93,537.64 crores have been earmarked for defence.

Risks

Over 90% of revenues of Hindustan Aeronautics Limited come from sales to Indian defence forces. While the company continues to try to diversify its revenue base by improving share of orders from other clients and exports, their contribution remains low which is matter of concern. The company has a huge dependency on contracts from Ministry of Defence.

Operations and profitability of the company can get impacted due to time and cost overruns. This is because orders have tough execution timelines and predefined margins. Any significant cost overruns due to delays on the company’s front can adversely affect margins.

Hindustan Aeronautics Limited is dependent on foreign OEMs regarding supply of critical components and spares which are required for manufacturing and overhaul of aircraft/ helicopters. Apart from this, the company has dependency on certain customers for new contracts.

Shareholding pattern of Hindustan Aeronautics Limited

Promoters of the company make up ~71.64% of total shareholding of Hindustan Aeronautics Limited, while FIIs and DIIs form ~11.90% and 10.64%, respectively at June 2023 end. Because majority of portion is being owned by its promoters, interests of promoters are aligned with interests of shareholders. It means that the company’s promoters are optimistic about future prospects of the company.

By June 2023 end, there was an increase in shareholding of FIIs, which means that foreign investors have confidence in growth opportunities available in front of the company.

Valuation and investment rationale

Stock of Hindustan Aeronautics Limited currently trades at ~21.4x of FY23 EPS, which is at a discount to sectoral average of ~31.2x. This hints that investors should consider going long on this stock as significant upside is expected in stock price.

Growth in stock price is expected to be supported by its strong order book, healthy future order pipeline, strong financial profile, continued improvement in working capital position, etc. The company’s strong financial profile stems from healthy profit margins, return indicators, nil borrowings, and healthy liquidity profile. Its strong order book position indicates the company’s healthy competitive and strategic positioning. It faces limited competition from private sector because of high capital intensity and long gestation periods for development of manufacturing capabilities in sector.