Better execution can push up Hindustan Aeronautics stock to higher altitude

Analysts stay bullish on HAL despite weak Q4 as strong order pipeline supports outlook

A disappointing performance in the March quarter (Q4) of FY26 led to a big sell-off for Hindustan Aeronautics (HAL) but many analysts remain bullish.  

The defence equipment supplier has a huge order book. 

But there have been persistent issues with the supply chain, especially for jet engines. 

The order book is at ₹2.6 trillion and HAL sees a pipeline of ₹90,000 crore of fresh orders in the next two years.  

Q4 saw order inflows of ₹97,000 crore, including manufacturing orders of ₹69,700 crore and repair & overhaul (RoH) orders of ₹26,500 crore. 

In Q4FY26, HAL received manufacturing contracts for 10 Dhruv Helicopters (₹1,800 crore), 8 Do-228 aircraft (₹2,300 crore) and ALH Mk2 Marine (₹2,900 crore). 

Expected orders include 143 Advance light Helicopters (ALH), 40 upgrades for Dornier Do-228, and Su-30 MK1 upgrades and 12 new Su-30. 

Q4FY26’s earnings before interest, taxes, depreciation and amortisation (Ebitda) of ₹5,060 crore was up 170 per cent quarter-on-quarter (Q-o-Q) from a low Q3 base, but down 4.5 per cent year-on-year (Y-o-Y). 

Ebitda margin fell 230 basis points (bps) Y-o-Y to 36.3 per cent.  

Revenue grew only 1.8 per cent Y-o-Y to ₹13,940 crore in Q4FY26 with Q-o-Q rise of 81 per cent, reflecting typical lumpiness of defence contracts  . 

Gross margin compressed to 54 per cent (from 63.7 per cent in Q4FY25) as RoH revenue share grew alongside provisioning. 

Capex was ₹2,390 crore in FY26 with research and development (R&D) expenditure at ₹2,790 crore at about 8–9 per cent of revenue. 

Gross margin declined due to the margin differential between repair and manufacturing segments, along with higher liquidated damages (LD) provisions on Tejas Mk-1A delays.  

Other income rose 76.6 per cent Y-o-Y to ₹1,150 crore, due to interest income derived on HAL's cash balance. Profit after tax (PAT) stood at ₹4,180 crore, up 5.7 per cent Y-o-Y. 

For FY26, HAL reported revenue of ₹33,100 crore, up 7 per cent Y-o-Y. RoH revenues contributed ₹20,500 crore. 

Manufacturing revenues were ₹9,300 crore, up 31 per cent Y-o-Y. Export revenues grew 25 per cent Y-o-Y to ₹500 crore.

HAL targets delivery of 20 Tejas Mk1A aircraft in FY27, contingent on engine supply from GE.  

The management says 21-22 LCA structures are fully built with engine ground runs completed. The bottlenecks are in engine supply. 

HAL is betting on the commercial airline space. If the government considers an alternative fifth-generation stealth fighter (SU-57), partial production may be jointly managed by HAL.  

But where the development of Advanced Medium Combat Aircraft (AMCA) is concerned, HAL will most likely be only a component supplier. 

HAL is guiding 10-12 per cent revenue growth in FY27, which excludes possible 20 Tejas Mk1 deliveries. 

The management guided for 10–12 per cent revenue growth for FY27 with Ebitda margin of 30–31 per cent. Capital expenditure (capex) of ₹12,000 crore is planned through FY30. 

 

The Tejas Mk-2 prototype structure assembly is ongoing with rollout targeted by Q4FY27. A rotary prototype of Unmanned Aerial Vehicle (UAV) is built with tests ongoing. Commercial airline maintenance, repair and operation (MRO) facility certification is expected by FY27.  

RoH revenue is expected at broadly similar levels in FY27, but it will rise significantly once LCA Mk-1A enters the RoH cycle and ALH fleet expands. 

GE has committed to supplying 15-20 F404 engines in FY27 which would solve the supply issue and HAL is targeting 20 Tejas Mk1A deliveries in FY27 on this assumption.  

Other key concerns revolve around delays in the delivery of existing 83 Tejas Mk1A orders and higher raw material prices. 

The Honeywell (HTT-40) engine deliveries were disrupted, but the supply chain is stabilised, and engines deliveries will start June 26. 

HAL has a very strong balance sheet with estimated cash balance of ₹29,000 crore by end-Q4FY26. Debt is negligible at ₹500 crore. HAL has initiated liquidated damages proceedings against GE under the purchase order but quantum of impact is not quantifiable. 

Defence orders can lead to very lumpy revenues depending on execution and delivery schedules. In FY26, HAL scaled up execution across ALH, AL31-FP, and RD-33 engines and platforms and grew manufacturing revenue by 30 per cent Y-o-Y. 

Revenue visibility is good with a huge order book and pipeline. But execution will be a key monitorable given the supply problems. If those are solved, there could be upside surprises. 

According to Bloomberg, 20 of the 26 analysts polled post Q4 are bullish, while four are bearish and two are neutral on the stock. Their average one-year target price is ₹5,172.46, translating into an upside potential of a little under 20 per cent from current level of ₹4,326.45.