Buy Hindustan Aeronautics; target of Rs 2266: Prabhudas Lilladher

Prabhudas Lilladher's research report on Hindustan Aeronautics

Hindustan Aeronautics (HAL) reported revenue growth of 9.5% YoY in Q2FY24. EBITDA margin contracted by 441bps YoY to 27.1%, led by a sharp decline in gross margin. Fall in direct input to WIP/expenses capitalized largely offset the gross margin contraction, but EBITDA was still impacted by decrease in expenses relating to capital & other accounts, which is subtracted from operating expenses. HAL’s JV with Safran (‘SAFHAL Helicopter Engines’) to design, develop & produce helicopter engines for IMRH & DBMRH projects has been formally incorporated. The company also signed a contract with Airbus to establish a Civil MRO Facility for A-320 aircrafts at Nashik. We believe HAL is a long-term play on the growing strength & modernization of India’s air defence given 1) its position as the primary supplier of India’s military aircraft, 2) long-term sustainable demand opportunity, owing to the government’s push on procurement of indigenous defence aircraft, 3) leap in HAL’s technological capabilities due to development of more advanced platforms (Tejas, AMCA, etc.), 4) robust order book of Rs818bn with further 5- year pipeline of ~Rs2trn, and 5) improvement in profitability through scale and operating leverage.

Outlook

The stock is currently trading at a P/E of 26.0x/22.7x/20.0x on FY24/25/26E earnings. We maintain a ‘BUY’ rating with a TP of Rs2,266 (same as earlier), using an equal-weighted averaged of a DCF-derived price and a PE-derived price based on 23x Sep-25E (same as earlier).

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