Moneycontrol Pro Panorama | Orders pile up for HAL, but execution risks remain

As HAL executes multiple large orders, it should increase its focus on project execution.

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Shares of Hindustan Aeronautics (HAL) gained 3 percent in Tuesday trade after the government approved procurement of aircraft engines from the company for Rs 26,000 crore. The latest orders will send the company’s order book to well above Rs 1 lakh crore, a remarkable rise from Rs 58,588 crore order backlog in March 2019. At the beginning of the current fiscal, HAL has indicated prospective orders of Rs 47,000 crore in manufacturing and Rs 20,000 crore in repair and overhaul (services). The latest order places the company well on track to achieve order inflow guidance.

HAL received the Rs 26,000 crore engines order as part of the ‘Buy Indian’ programme of the government. The engines will have indigenous content of over 54 percent. The government’s continuous focus on indigenisation and the prospect of large orders have driven up shares of other defence PSUs also. Business opportunities or order pipeline for HAL is pegged at Rs 1.5 lakh crore over the next 2-3 years. The current order backlog of around Rs 1 lakh crore is about three times FY24 sales and provides revenue visibility for HAL.

Even so, investors should also give due importance to execution and not just orders. Despite a notable rise in order inflows in FY19 to FY24, compound annual sales of HAL increased by less than 8 percent. Sales at peer Bharat Electronics rose by more than 10 percent per annum during the period. Bharat Electronics outperformed HAL on revenue growth between FY14 and FY24 also.

HAL has guided for double-digit growth or at least 10 percent expansion in sales in FY25 and exuded confidence of maintaining growth rates in the next couple of years. Still, the low double-digit revenue growth target is a low bar for the HAL stock that is trading at 37 times estimated FY26 earnings.

A case in point is the light combat aircraft Mk1A. Execution of this large order is delayed due to supply chain issues at engines supplier GE Aerospace. This can impact delivery of the light combat aircraft in FY25 and revenue recognition of the contract. “Our channel checks indicate that the delay in delivery is due to adverse impact on the supply of engines by GE owing to global supply chain disruption,” analysts at ICICI Securities said in a note.

As HAL executes multiple large orders, it should increase its focus on project execution. Minimal delays and timely revenue recognition will go a long way in generating shareholder returns in the long run.

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