In Hindustan Aeronautics' hangar: Orders and execution ready for takeoff

With a 55% stock rise, defence major is taxiing towards growth, and brokerages have upgraded their earnings forecasts

Notwithstanding a 55 per cent rise in the stock of Hindustan Aeronautics (HAL), the largest publicly traded defence company, brokerages believe the stock still has considerable ammo. Analysts’ optimistic outlook following the 2024-25 (FY25) first-quarter results is underpinned by a strong order book, promising growth prospects, margin improvements, and enhanced execution. Consequently, several brokerages have upgraded their earnings forecasts.

The defence giant reported revenues of Rs 4,348 crore, reflecting an 11 per cent year-on-year (Y-o-Y) increase and aligning broadly with projections. This growth was primarily driven by manufacturing, which outpaced the repair and overhaul (ROH) segment. The company has projected double-digit revenue growth for FY25, buoyed by the timely delivery of the light combat aircraft (LCA).

The status of LCA Tejas Mk1A deliveries is critical, as supply-chain issues at GE Aerospace have caused delays in providing the General Electric (GE) F404 engine.

GE had aimed to deliver 16 engines annually starting in 2022–23, but none have been supplied as of August 2024. This delay has pushed back HAL’s LCA Mk1A deliveries, originally slated for the fourth quarter of 2023-24 (FY24). Consequently, Nomura Research has adjusted its forecast from 14 to 10 aircraft for FY25.

Despite these setbacks, the brokerage maintains a ‘buy’ rating on the stock, highlighting that performance in the April-June quarter exceeded expectations. However, analysts Umesh Raut and Tanay Rasal of the brokerage do not foresee an upward revision in FY25 revenue due to concerns about the supply chain for the LCA Mk1A. Nonetheless, some suppliers suggest that there may not be major delays in aircraft deliveries for FY25.

Jefferies Research also maintains a ‘buy’ rating, asserting that a strong order book provides confidence in double-digit growth over the next three to five years. The brokerage anticipates that margin volatility will improve in the latter half of the year due to increased revenues.

The company’s order backlog stands at Rs 94,000 crore, representing a 15 per cent Y-o-Y increase. The order pipeline looks promising, with projected contracts for an additional 97 LCA Mk1A, 156 LCH (light combat helicopter) Prachand, 43 ALH (advanced light helicopter) Dhruv, and 60 utility helicopters for marine and Dornier upgrades. UBS Research expects the company to secure orders worth Rs 1 trillion in FY25.

Margins contracted by 720 basis points (bps) at the gross level due to a reduced share of the higher-margin ROH segment. Increased employee and operating expenses resulted in a 7 per cent decline in operating profit. Margins fell by 450 bps to 22.8 per cent, though the gross level impact was offset by higher operating leverage.

Looking forward, margins are expected to remain stable as management anticipates the ROH-to-manufacturing ratio to persist at 60:40. Despite an increase in manufacturing revenue from 32 per cent in FY24 to 42 per cent in FY25, operating leverage is expected to sustain margins.

Analysts at Antique Stock Broking, led by Dhirendra Tiwari, forecast a 14.5 per cent increase in operating profit and a 17.6 per cent rise in net profit from FY24 to 2026-27 (FY27).

Although Elara Securities has reduced its 2025–26 earnings estimates by 1 per cent, they have reaffirmed their ‘buy’ recommendation. Analysts Harshit Kapadia and Nemish Sundar believe the growing share of indigenisation and untapped export opportunities in the aircraft and helicopter sectors warrant a rerating. They project earnings growth of 15 per cent from FY24–27, with a 24 per cent return on equity over FY25–27.