Hindustan Aeronautics Ltd (HAL) shares have soared 35% so far this year, outperforming NSE Nifty 50 index which has fallen 7%. In the past one year, HAL share price has surged 67% and analysts at ICICI Securities see a further upside of up to 72% going forward. “We maintain BUY with a DCF target price of Rs 2,618/share. HAL remains on the strategic DPSU and (in our view) can potentially garner 50% of Indian defence order inflow (i.e Rs 2.5 trn) over next 5 years. The stock remains inexpensive,” the brokerage said in its note. This comes after the state-owned aerospace and defence company on Friday reported a 90.7% surge in net profit at Rs 3,101.96 crore for the quarter ended 31 March, 2022. HAL shares were trading at Rs 1,681 apiece on BSE, down 0.6% intraday.
HAL Financials, Growth outlook
For the quarter ended March 2022, HAL’s revenue from operations was up 6.4% at Rs 11,561.1 crore for the quarter under review as against Rs 10,866.5 crore in the same quarter last fiscal. The EBITDA, or earnings before interest, taxes, depreciation, and amortization was down 7.9% at Rs 2,499.7 crore as against Rs 2,714.2 crore in Q4FY21 while the EBITDA margin fell 340 basis points to 21.6% versus 25% on-year. On its outlook, HAL stated that it expects to recover the carrying amount of intangible assets, inventories, property, plant and equipment, lease, financial instruments, trade receivables etc. “Efforts are being made to minimize the impact. The company will continue to closely monitor the developments, the future economic and business outlook and its impact on the company’s future financial statements with a view to minimize the Covid impact,” it said.
Lack of diversification: Key risk to upside
According to analysts at ICICI Securities, the key risk to the upside is lack of diversification. “As cashflow accumulates, we are witnessing a trend of vertical integration (latest two examples are Lockheed acquisition of Aerojet Rocketdyne and merger between Raytheon and UTC). HAL may also have to think about business diversification sooner or later,” they said.
The brokerage in its report further stated that faster ramp-up of unmanned vehicles through the IAI, Dynamatic JV, focused entry into civilian space with LUH offering, trying to enter into MRO for civilian space, trying to leverage the knowledge of propulsion systems to move towards integration of the same in hypersonic missiles – are some of the potential areas of diversification for the company, apart from increasing the production rate of the existing platforms.
Other key risks include, global aerospace defence primes like Lockheed Martin being rated in high risk category (Score of 30.6) by Sustainalytics with industry group rank of 15 out of 91. “Similarly, we see Lockheed not selected in S&P 500 ESG index and the reason for exclusion shown as ‘involved in controversial weapons’ – similar predicaments for Boeing. MSCI on the other hand has assigned an A rating on Lockheed Martin, with 17% of the MSCI AWCI constituents in aerospace and defence getting an A rating,” it noted. Meanwhile, HAL is currently not rated by any agency.
‘Buy’ with a target of Rs 2,618 per share
The brokerage maintained BUY rating with a target price of Rs 2,618. The biggest certainty to their valuation is the order book which is expected to cross Rs 1,00,000 crore by FY22/23E. “There are hardly any defence primes in the world which manufacture combat aircraft and have an equivalent book to bill,” it said.
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