This defense stock has zoomed 144% so far in FY24, 77% post stock split

Shares of Hindustan Aeronautics (HAL) hit a new high of Rs 3,334.45, gaining 3 per cent on the BSE in Thursday's intraday trade, after the company announced that an amendment to the light combat aircraft (LCA) initial operating capability (IOC) contract has been made with an upward revision in the contract value. The value of the contract has, now, been revised to Rs 5,077.95 crore from Rs 2,700.87 crore, it added.

The government of India (GoI) held a majority stake of 71.64 per cent in the company, while 1.59 per cent was held by the Life Insurance Corporation of India as on December 31, 2023. HAL is engaged in carrying out design, development, manufacture, repair and overhaul of aircraft, helicopter, engines and related systems like avionics, instruments and accessories primarily serving the Indian defence programme. It also manufactures structural parts of various satellite launch vehicles of the Indian Space Research Organisation (Isro).

Last month, HAL signed a contract for manufacture and supply of RD-33 Aero Engines for MiG-29 aircraft at a cost of Rs 5,249.72 crore.

These Aero Engines are expected to fulfill the need of the Indian Air Force (lAF) to sustain the operational capability of the MiG-29 fleet for the residual service life. The aero-engines will be manufactured under Transfer of Technology (TOT) license from the Russian OEM.

The programme will focus on indigenisation of several high value critical components, which would help increase the indigenous content of future Repair and Overhaul (ROH) tasks of RD-33 aero-engines, HAL said in a statement.

Thus far in the financial year 2023-24 (FY24), the stock price of HAL has more than doubled, zooming 144 per cent. Since September 29, 2023, that is post the stock split, the market price of the company has appreciated by 76 per cent.

With a view to encourage wider participation of small investors and to enhance the liquidity of the equity shares at the stock market, HAL had subdivided the face value of equity shares of the company from Rs 10 to Rs 5.

CARE Ratings believes that HAL will continue to benefit from its strategic importance to the Indian defence forces resulting in maintaining its leadership position in the Indian Aerospace and Defence industry supported by long track record of operations and high entry barriers along with maintaining its highly comfortable financial risk profile.

The order book of HAL remains healthy at Rs 84,814 crore as on December 31, 2023 (Rs 83,858 crore as on September 30, 2022) including manufacturing orders mainly for various models of helicopters and aircraft of around Rs 56,569 crore which provides long-term revenue visibility. The ROH order book where the gross margins are relatively higher has also remained healthy at Rs 28,277 crore, providing stability to its revenue.

"Going ahead, as strongly articulated by the company, HAL's collection period is expected to remain under control which would result in continued low reliance on debt and maintenance of significant surplus liquidity notwithstanding the dividend pay-out. The ratings also take note of HAL's high dependence on the Ministry of Defence, GoI, for the contracts and the annual budget allocation towards strengthening the defence infrastructure, apart from the risk associated with time or cost overrun in execution which might impact profitability," CARE Ratings said in a rationale.