HAL on course to re-rate like BHEL, says UBS; sets target at Rs 3,600

HAL’s Tejas aircraft is gaining acceptance among India’s military, UBS has said. (file photo)

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Hindustan Aeronautics Limited (HAL) is a credible defence compounder in the making, foreign broking firm UBS said on January 5 as it initiated coverage on the stock at Rs 3,600. The target price indicates a 23 percent upside from current levels.

"We expect the depletion of India's military aircraft strength in the coming few years, geopolitics and a need for greater aircraft availability to accelerate ordering and lead to a manufacturing ramp-up at HAL versus the past decade," UBS said in a report.

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HAL's order book stood at Rs 80,000 crore in FY23 and UBS expects it to triple to Rs 2.4 lakh crore in FY26, on the back of increased defence expenditure. In the Budget 23-24, defence got an outlay of Rs 5.94 lakh crore, a jump of 13 percent over the previous year.

UBS said HAL has expanded its Tejas Mk1A fighter aircraft manufacturing capacity from eight to 16 per year and take it to 24.

"It has also expanded its rotary wing platform's manufacturing capacity to meet growing demand for locally designed and manufactured aircraft. We believe consensus estimates have not yet built in faster order completions, HAL's ability to ramp up production and improved manufacturing value add," UBS analysts said in the report.

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HAL has also been cutting its dependence on imports. Its import component now stands at 77 percent compared to 85 percent in FY13. "Several HAL-designed aircraft platforms, such as Tejas Mk1A, gaining acceptance from the Indian military," said UBS.

On back of this, it believes HAL is on course to re-rate by a similar magnitude to BHEL in the past decade if it gets its execution right.

On January 4, the stock closed 1.43 percent higher at Rs 2,910.95 on the NSE.