Hindustan Aeronautics Ltd (HAL) share price has surged 45 per cent so far in 2022. The defence PSU company stock has outperformed benchmark Nifty 50 which has tanked around 10 per cent so far this year. Domestic brokerage firm ICICIDirect has initiated coverage on the stock with ‘buy’ rating. Analysts value the stock at Rs 2,200 on 16x P/E on FY24E EPS basis, implying 22% upside from 28 June closing price of Rs 1,810. HAL stock was up marginally on Thursday, day after the company said that its board has recommended a final dividend of Rs 10 per equity share for the financial year 2021-22.
HAL stock rating: Buy
Target: Rs 2200; Upside: 22%
Target Period: 12-18 months
At market price of Rs 1,801, the stock is trading at attractive valuations of 13.x on FY24E earnings. Analysts at ICICIDirect expect HAL to deliver revenue and EBITDA CAGR of 6.8% and 11.8%, respectively, in FY22-24E. PBT is likely to grow at 7.7% CAGR during FY22-24E. Increase in profitability with strong asset turnover is expected to result in healthy return ratios over FY23-24E. “HAL would start delivering double digit revenue growth from FY25E onwards. Moreover, a healthy balance sheet, improvement in working capital cycle and strong return ratios make HAL an attractive investment. We initiate coverage on the stock with a BUY rating with a target price of Rs 2,200/ share based on 16x FY24E earnings. the brokerage said.
Key triggers for future price performance:
- Increasing capital outlay in defence with indigenisation has been the focus area of government considering requirement of armed forces of faster procurement of modern equipment
- HAL caters to a large spectrum of aerospace business, which includes design, development, manufacturing and maintenance, repair & overhaul (MRO) of different types of aircraft/helicopters and engines
- Healthy order-book position at Rs 82,153 crore, of which manufacturing segment order backlog is at Rs 61,564 crore (75% of total OB), led by large scale orders of LCA, LCH and ALH). Strong pipeline of Rs 1.24 lakh crore worth of orders in manufacturing for the next three to four years led by LUH, LCH and engines for Su-30 & MiG-29
Key risks to upside target
Heavily dependent on contracts from GoI, associated entities: According to the brokerage report, HAL derives a significant portion of total sales from contracts with Government of India entities (~92% of total sales in FY21) and will continue to cater to GoI entities. Any decline or re-prioritisation of funding in the Indian defence budget, that of customers including the Indian Army, Air Force and Navy, Coast Guard, BSF, CRPF and Paramilitary forces or any delays in the budget process can impact the company’s profitability and cash flows, it said. The company is also exposed to various risks like stricter regulatory requirements from the government.
Delay in advances from customers may impact execution: HAL gets advances from customers in the range of 20-25% of the contract value at the beginning of project. Any delay in these advances or lower disbursement can impact execution of the project and, thus, profitability and cash flows, according to analysts at ICICIDirect.
Evolving technologies risks in evaluation of future prospects: Military aircraft, helicopters and other technologies that the company offers are sold in new and rapidly evolving markets. Accordingly, HAL’s business and future prospects are difficult to evaluate considering the evolving technologies and markets, the brokerage noted.
Dependent on key technology licensors, OEMs, suppliers, subcontractors: HAL substantially relies on licence of technology from domestic and international licensors and OEMs. The company depends on certain prime contractors, supplying agency and OEM relationships for technical know-how to manufacture aircraft, helicopters and engines and MRO for the products manufactured under license. The PSU’s business can be impacted by the price, quality, availability and timely delivery of the component parts that are used to manufacture the products, which further can impact execution of contracts and, thus, profitability and cash flows, according to analysts.
BEL among other bet in defence space
Besides HAL, analysts at ICICIDirect also like Bharat Electronics (BEL) in the defence space given strong growth in profitability led by well executed healthy order backlog and sustained margins. Strong balance sheet, double digit returns ratios are other positives. “BUY with a target price of Rs 290 per share,” it said.
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