Hindustan Aeronautics may fly higher on GE deal, F&O inclusion

Rallies 29% in 7 days; analysts say firm well placed to execute order book

Shares of Hindustan Aeronautics (HAL) have been hitting new 52-week highs ever since news broke of the aerospace major signing a $716-million deal with GE Aviation for supply of engines. The stock’s inclusion in the futures and options (F&O) segment has also fueled the rally.

On Friday, HAL’s stock hit a new one-year high of Rs 1,398.10 intraday, before closing at Rs 1,381.10 on the BSE Sensex, up 7.2 per cent over the previous day. It’s all-time high, on intra-day basis, is Rs 1,424 made on August 14, 2020.

In the past seven trading days, the market price of HAL has swelled over 29 per cent after the company signed the deal with GE Aviation for procurement of 99 engines for manufacturing 83 Tejas Light Combat Aircraft (LCA) for Indian Air Force (IAF).

While the company clarified to exchanges on August 20 regarding the GE deal, it had on February 3 already informed exchanges that the government had formally sealed the deal of around Rs 48,000 crore for procuring 73 indigenous LCA Tejas Mk-1A fighter aircraft and 10 LCA Tejas Mk-1 trainer aircraft from the company.

The order boosted the company’s order book position to Rs 80,639 crore as on March 31. The latest news, however, indicates that the company has taken further steps towards execution of the deal. There is also strong visibility of future orders with new ones anticipated in the near to medium term, said analysts.

Defence projects, policies and funding of government of India play crucial roles in the growth of the aerospace and defence (A&D) industry in India and HAL, in turn, because of its major dependence on the Defence sector.

On August 16, analysts at ICICI Securities had recommended a ‘buy’ on the stock with a target price of Rs 2,618.

They said HAL’s first quarter (Q1FY22) numbers were muted, with execution impacted by the Covid-19 pandemic. Top line declined 7 per cent year-on-year (YoY) while Ebitda (earnings before interest, taxes, depreciation, and amortization) declined 29 per cent YoY. But added that there is no apparent risk to FY22 execution guidance given the current orderbook, and the management expects to maintain the growth path with sufficient workload.

“LCA deliveries are expected to start from March 2024. HAL will start seeing double-digit growth from FY24. Order book position stood at Rs 80,640 crore as on March 31, of which, manufacturing was Rs 65,500 crore, repair and overhaul (ROH) and spares added up to Rs 14,500 crore and remaining orders were from development and exports,” Abhijit Mitra, research analyst at ICICI Securities, noted in his report.

The company is also sufficiently placed in terms of cash, which the brokerage pegs at Rs 7,000-8,000 crore in FY22 (net cash surplus).

In April, credit rating agency ICRA had upgraded the long-term rating of HAL with revised outlook to positive from stable, factoring in the significant improvement in business risk profile supported by new order inflows and significant collections from customers in FY21 resulting in negative net debt position at the end of last fiscal.

The ratings also positively factored in the expected build-up in the order book in FY22 with many large orders expected to be secured. The new order inflows provide high revenue visibility in the medium to long term, while also indicating HAL’s strong competitive and strategic positioning. Brokerages peg the order book-to-bill ratio at over 5x based on FY22 projections.