MUMBAI
: Investors in Hindustan Aeronautics Ltd (HAL) are upbeat, given the government’s sharp focus on defense indigenization. On Monday, the HAL stock hit a new 52-week high of ₹2.167. The company is a key supplier of India’s military aircraft.
However, the investor optimism comes in the background of weak results from the September quarter (Q2FY24). Weak execution and higher costs led to a lower than expected profit after tax of ₹1,235.3 crores.
Higher raw material costs and increased expenses squeezed operating margins by more than 400 basis points a year (joy) to 21.7%. Revenue growth of 9.5% indeed ₹5,636 crore is behind expectations as well. Product revenue may have grown faster than the high-margin repair and overhaul (ROH) segment, analysts said.
On the bright side, HAL’s order pipeline is strong, bringing visibility of long-term revenue growth. For FY24, HAL guided for an order inflow of approx ₹48,000 crore, which is 85% higher than in FY23.
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“The company has a healthy order book of ~Rs 82,000 crore (FY23) with more than three years of revenue visibility. Once the execution of large orders like LCA (Mk1A) accelerates, the company could post double-digit revenue by FY2025E, and it should stabilize at 14-15% sales growth from FY2026,” said Sharekhan of BNP Paribas.
LCA stands for India’s light combat aircraft which HAL manufactures.
HAL expects revenue to grow by 7-8% in FY24, and 10-11% in FY25. “HAL has guided for moderate revenue growth for FY24 as production revenues are expected to witness good momentum from FY25 onwards as delivery for LCA Tejas MK I gains traction. Until then, RoH will dominate the revenue mix, leading to muted revenue growth of 9% for FY24,” Antique Stock Broking Ltd said.
In this calendar year so far, HAL’s stock is up 70%. For now, positives seem to outweigh the negatives. But investors should note that orders translating into revenue happen gradually.
HAL is seen as a potential beneficiary of the government’s structural reforms in defence, but there are risks such as lower government expenditure on defence, less allocation towards domestic procurement, increased competition from the private sector and a significant increase in commodity prices.
Meanwhile, to diversify its revenue stream and drive long-term growth opportunities, HAL signed pacts with the largest European aircraft manufacturer Airbus and Safran Aircraft Engines in France.