F404-IN20 engine delivery bodes well for HAL's revenue outlook: Analysts

HAL share price: The delivery of the first F404-IN20 engine irons out supply chain issues for HAL. ICICI Securities has upgrades HAL stock to 'Buy' from 'Add'

HAL share price: The delivery of the first F404-IN20 engines to Hindustan Aeronautics Ltd (HAL) should allay investors' execution risk concerns, and provide revenue visibility, analysts said on Thursday. On the bourses, HAL share price today advanced 2 per cent on the BSE, rising to ₹4,209 per share, in the intraday trade.

 

On Wednesday, GE Aerospace delivered the first of the 99 F404-IN20 engines, scheduled to be delivered, to Hindustan Aeronautics for the Tejas Mk 1A fighter aircraft. The engine, HAL clarified, has been handed over to the company's Freight Forwarder in the US, which is expected to be received at HAL premises within a week's time.

 

 

Notably, HAL received an order for 83 Tejas Mk-1A (Light Combat Aircraft) in FY21, delivery of which was expected to start in FY24. However, non-availability of the engines impacted the company's delivery timeline, in turn impacting its revenue booking.

 

The delivery of the first F404-IN20 engine, thus, irons out supply chain issues for HAL. Moreover, with the infrastructure in place for supplying 16 Tejas Mk-1A aircraft on an annualised basis, which can be further scaled up to 24 aircraft annually, analysts believe HAL's manufacturing revenue should see material improvement FY26 onwards. 

 

"We see this is as a vital development for HAL that allays execution risk concerns. At Aero India, HAL expressed confidence in receiving 12 F404-IN20 engines for the LCA Mk 1A this year. While it has the capacity to manufacture 24 Tejas Mk 1A, we estimate only a gradual ramp-up from 10 in FY26 to 24 by FY30. We estimate revenue growth of 25 per cent and 28 per cent year-on-year in FY26 and FY27, respectively, resulting in an EPS CAGR of 39 per cent through to FY27E (from FY25E level)," said ICICI Securities in its report.

 

The brokerage has upgraded HAL stock to 'Buy' from 'Add' with a share price target of ₹5,000. This suggests HAL shareholders may reap 21.12 per cent returns from their investment in HAL stock over the next one year.

 

On its part, GE Aerospace is required to deliver two engines per month to HAL, as per the contract, and consistent supply of the same can lead to the Indian Air Force (IAF) placing an incremental order for 97 Tejas Mk1A aircraft. HAL is helping IAF scale up the latter's fighter aircraft inventory to a targeted 42 squadrons, which currently stands depleted at 32 squadrons.

 

HAL Order Book

At the end of the previous financial year (FY24), HAL's order book stood at around ₹94,000 crore, providing revenue visibility of 3.2x its FY24 revenue. The order book was further bolstered by 12 Su-30 MKI aircraft order worth ₹13,500 crore, and a ₹26,000-crore order for 240 aero engines of the Su-30 MKI aircraft, leading to a calculated order backlog of ₹1.35 trillion (4.2x its TTM revenue).

 

"Incrementally, the order pipeline looks extremely healthy with orders for additional Tejas Mk-1A (97), ALH (25), LUH (12), and RD-33 engines (80) being expected to materialise in the near to medium term. Subsequently, an order worth ₹18,000 crore is expected to materialize on the RoH front," said those at Antique Stock Broking.

 

On a long-term basis, too, the brokerage said HAL's order pipeline remains robust with projects like Tejas MK II, AMCA, TEDBF, IMRH, LCH, and ALH expected to provide HAL with a business opportunity of ₹4.5 trillion over the next decade. Given this, the brokerage maintains a 'Buy' rating on the stock with a share price target of ₹4,887 per share, valuing it on a price-to-earnings (PE) multiple of 40x FY27E earnings.

 

About Hindustan Aeronautics Ltd

Hindustan Aeronautics Limited (HAL) is a Public Sector Enterprise (PSE), engaged in the design, development, manufacture, repair, overhaul, upgrade, and servicing of a wide range of products including aircraft, helicopters, aero-engines, avionics, accessories, and aerospace structures.

 

HAL listed on the stock exchanges on March 28, 2018. It has a market capitalisation of ₹2.78 trillion. HAL stock hit a record high of ₹5,675 on July 9, 2024. It hit an all-time low of ₹224 on March 24, 2020.