i nsight

uick HINDUSTAN AERONAUTICS LTD (HAL)

Aerospace & Defense CMP : `3,272.9 MCAP : ~`1.09tn BUY 05th June 2023

Buy Range `3000 – 3100

Target `3900 – 4000
Recommendation BUY
Highlights o Strong collaboration with the Armed Forces – Since inception, the company has delivered over
4,000 aircrafts and 5,000 aero-engines, while it has overhauled 11,550 aircrafts and 34,600 aero-
engines for the Indian Armed Forces and for foreign-friendly countries. The company is integral to
the Indian Armed Forces because it provides support to approximately 75% of the aerial fleet,
including aircrafts produced by other OEMs.
o Shift from imports to domestic production to provide strong impetus – The government has
taken several policy initiatives in the recent years and brought in reforms to encourage indigenous
design, development, and manufacture of defense equipment in the country in lieu of importing
them from foreign OEMs, thereby expanding production of indigenous defense equipment. Among
these initiatives, the release of four positive indigenization lists (PILs) for indigenization of 4,600+
components is significant as it cements the government’s commitment with definite, actionable
guidelines.
o R&D continues to be a key moat – HAL’s R&D business has been at the centre of various
successful aeronautical systems including the latest LCA Tejas Mk-1 / Mk-1Aplatforms.The
government has liberalized defence based R&D for industrial players, start-ups, and for academia
with 25% of defense R&D budget earmarked to promote development of defense technology in the
country. This has allowed HAL to leverage the R&D capabilities and competencies so as to deliver
better and stronger platforms.
o Manufacturing Orders to Keep Engagement Elevated – The IAF has strongly indicated its
intention to upgrade its squadrons and expand its fleet with new aircrafts as well. While HAL’s
manufacturing order book of `820bn+ will be executed over the next 4-5 years, it’s pipeline
includes orders worth `480bn which will keep the machine churning for a large part of this decade.
o Change in scope and better efficiency to offset price and margin cuts – D-PSUs receive cash
and recognize revenue at pre-defined milestones. Since most of HAL’s orders are on a nomination
basis, which has a PBT margin of ~7.5%, it receives an advance of 15% of contract value at the
time of contract signing. This ensures a smooth working capital execution cycle throughout the
lifecycle of the order and enables HAL to generate strong bottomline numbers.

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 i nsight
uick HINDUSTAN AERONAUTICS LTD (HAL)
Aerospace & Defense CMP : `3,272.9 MCAP : ~`1.09tn BUY 05th June 2023

HINDUSTAN AERONAUTICS LTD (HAL) Important Data

Company Background Nifty 18,626
Sensex 62,883
Hindustan Aeronautics Ltd (HAL) is a “Navratna” conferred Defence Public Sector
Undertaking (DPSU) involved in the design, development, manufacture, repair, overhaul, Key Stock Data
upgrade and servicing of a wide range of aero products and platforms, including aircrafts, CMP `3272.9
helicopters, aero-engines, avionics, accessories and aerospace structures. HAL caters Market Cap (` tn) 1.09
primarily to platforms and components for defence and military applications, with 90-95% of 52W High/Low `3,281/1,699
the order book comprising orders from one customer – Ministry of Defence. Shares o/s (cr) 33.4
Daily Vol. (3M NSE Avg.) 4,659,789
These are developed either indigenously or under license with foreign OEMs.
BSE Code 541154
Indigenously designed and developed platforms include: NSE Code HAL
o Aircraft platforms such as LCA Tejas (Mk1 and Mk1A), HAL Ajeet, HF-24 Marut, HPT-32 Bloomberg Code HNAL:IN
Deepak HJT-16 Kiran.
o Helicopter platforms such as ALH (Advanced Light Helicopter), LCH (Light Combat Shareholding Pattern (%) – Mar’23
Helicopter), LUH (Light Utility Helicopter) Promoter 71.65
DIIs 9.07
Platforms and products produced under license from foreign OEMs include: FIIs 13.93
o The MiG-21 (Mikoyan), MiG-27, Avro-748 (Avro), Jaguar (SEPECAT), Dornier 228 Public& Others 5.35
(Dornier GmbH), Su-30 Mk1 (Sukhoi), Hawk Mk132 (BAE Systems), Cheetah
(Aérospatiale) and Chetak (Sud Aviation). Financials & Valuations
o Many of these foreign OEMs also collaborate with HAL for the design, development, FY20 FY21 FY22
Operating Revenue 21,520 22,755 24,620
repair and overhaul of their aero engines – many of which do duty on the IAF fleet as well.
EBITDA 4,927 5,349 5,409
Margin (%) 23 24 22
Net Profit 2,770 3,239 5,080
EPS 83 97 152
DPS 33 30 50
RoE (%) 21 21 26
RoCE (%) 22 29 22
P/E (x) 39.4 33.7 21.5
P/BV (x) 22.9 19.2 17.7
EV / EBITDA (x) 8.3 7.2 5.7

FY23P FY24E FY25E

Operating Revenue 26,928 28,185 31,587
EBITDA 6,680 7,425 8,619
Margin (%) 24.8 26.3 27.3
Net Profit 5,828 5,381 6,277
Source: Company Data, Way2Wealth
EPS 174 161 188
DPS 40 52 57
Investment Rationale RoE (%) 25 20 21
1. Monopoly in Aero Defence-Platform Production RoCE (%) 20 23 25
P/E (x) 18.8 20.3 17.4
P/BV (x) 13.4 11.9 10.2
(i) HAL is the country’s sole design-to-production aircraft platform manufacturer.
EV / EBITDA (x) 4.6 4.2 3.7
Since inception, it has delivered over 4,150 aircrafts and 5,250 aero-engines and Source: Company, Way2Wealth
has also overhauled 11,550 aircrafts and 34,600 aero-engines for the Indian Air
Force and for foreign-friendly countries. Relative performance
(ii) Currently, the company provides support services, such as MRO (Maintenance,
21000 3,500.00
Repair and Overhaul) services to ~75% of India’s aero-fleet, including all of the 3,000.00
19000
Army’s and Coast Guard’s helicopters, ~90% of the fighters and 39% of the 2,500.00
helicopters in the IAF. 17000
2,000.00
(iii) However, this relationship is poised to get significantly stronger as the Armed 15000 1,500.00
Forces look to replace the aging fleet of Cheetah and Chetak helicopters with
01-Oct-22

01-Feb-23
01-Mar-23
01-Apr-23
01-May-23
01-Jun-22
01-Jul-22
01-Aug-22
01-Sep-22

01-Nov-22
01-Dec-22
01-Jan-23

01-Jun-23

HAL’s ALH and LUH helicopters, and replace the aging MiG-21 aircrafts with
HAL’s Tejas aircrafts. CNX Nifty HAL
(iv) As a part of its vision to make India a “US$ 5 trillion economy by 2025 / US$ 7 Source: Company Data, Way2Wealth
trillion economy by 2030”, the government has decided to increase its investment
in defense programs. This Make in India initiative coupled with various geopolitical
Analyst
issues has propelled the growth for locally-produced platforms.
Jayakanth Kasthuri
(v) The high-tech and complex nature of the defence-aerospace industry results in Research Analyst
high-entry barriers. HAL thus enjoys a natural monopoly and becomes a significant jayakanthk@way2wealth.com
benefactor of the Make in India program.

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 i nsightuick HINDUSTAN AERONAUTICS LTD (HAL)
Aerospace & Defense CMP : `3,272.9 MCAP : ~`1.09tn BUY 05th June 2023

2. Large Order book, Pipeline to provide Tailwinds

(i) 90-95% of HAL’s order book comprises of orders from one customer – Ministry of
Defence (India). The order book, as on Mar’ 23, stood at `820bn
(ii) In Feb, 2021 HAL secured an order worth `470bn for 83 units of its latest LCA
Tejas Mk-1A platform (`380bn towards production, `90bn towards ground and
support equipment). This paved the way for orders of its other recently developed
platforms. In recent years, HAL has received multiple orders for its latest platforms
including an order for 70 units of its HTT-40 trainer aircraft worth `70bn, 15 units of
LCH (Light Combat Helicopter) worth `39bn, 12 units of LUH (Light Utility
Helicopter) as a Limited Series Production and 25 units of its ALH Mk-III for `39bn.
(iii) During FY-24, HAL expects `480bn worth of manufacturing order accretion, lead
by 240 units of AL31-FP engines worth `260bn, 80 units of RD-33 engines worth
`45bn, 25 units of ALH worth `35bn, 12units of LUH worth `25bn and 12 units of
Su-30 worth `120bn.
(iv) In the long term, the success of these LCH and LUH orders will provide the basis
for the government placing future larger orders (145 units of LCH and 175 units of
LUH) as the Armed Forces phase out the older Chetak and Cheetah fleet with
these new platforms.
(v) HAL in collaboration with ADA (Aeronautical Development Agency) is currently
developing a multi-role successor to LCA Tejas-Mk1A, dubbed LCA Tejas Mk2, in
addition to the country’s first Fifth Generation combat aircraft – AMCA (Advanced
Medium Combat Aircraft). As a fifth-generation fighter, the AMCA is expected to
have the most advanced technologies, avionics, defence and offence systems built
into it. Currently, only few countries have proven the ability to produce their own
fifth-generation aircraft. With the roll out of AMCA, India too will become a part of
this elite list of countries.
(vi) It is also developing a versatile helicopter (IMRH) to replace the current fleet of Mi-
17. Currently in various stages of design and development, these upcoming
platforms will likely see the light of day after 3-5 years, but will ensure that the
future of HAL remains bright for the coming decade.
(vii) On the non-defence front, HAL works closely with ISRO and recently won a `8.6bn
order for 5 units of PSLV (Polar Satellite Launch Vehicles). Its Hindustan-228
aircraft has received type certification from the DGCA making it eligible for
civilian/commercial operations.

3. Growth in the MRO Segment - A High Margin, Annuity Business

(i) HAL provides maintenance, repair and overhaul (MRO) services for various aero
platforms, including its indigenously designed platforms, foreign-licensed platforms
and for aero-defence platforms procured directly from foreign OEMs. Given the
elongated life of the country’s aero fleets, MRO becomes a significant tool in
ensuring that the fleet remains air and combat worthy.
(ii) Compared to its Manufacturing segment, HAL’s MRO business is able to generate
higher margins due to better contractual rates and greater operating leverage.
(iii) The Armed Forces have a large inventory of aircraft/helicopters, at present, which
are in need of MRO support, providing a strong tailwind to this segment for the
foreseeable future. While the company has a 2-3 year visibility of the MRO orders,
its order book consists of MRO orders that are executable over the coming 12
months only. Currently, HAL estimates annual MRO execution to be ~`18,000-
19,000cr, for the coming years. We estimate billings in this segment will continue to
move upwards as efficiencies and execution timelines continue to improve.

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Aerospace & Defense CMP : `3,272.9 MCAP : ~`1.09tn BUY 05th June 2023

MRO Revenue (` Cr) & % of Total Revenue

70%
63%

54% 55%
49%
40% 40% 18,817
15,536
11,682 12,460
9,761
7,144 7,386

FY-17 FY-18 FY-19 FY-20 FY-21 FY-22 FY-23

Source: Company Data, Way2Wealth

4. Increased Operational Efficiency

(i) HAL will begin the production of the new Tejas Mk-1A iteration in FY-24. To expedite
production, it plans to outsource a substantial part, while continuing to be the final
integrator of all the components.
(ii) With the old LCA Tejas Mk-1 orders coming to a close, the company’s production
lines will be able to take this up. HAL also plans to setup another production line at
its Nagpur centre for the platform.
(iii) Eventually, the pace of production will ramp up to 16 aircrafts per year vs. the pace
of 6-7 aircrafts per year witnessed during the previous Tejas Mk-1 order.
(iv) The new Helicopter facility at Tumkur, Bangalore which can produce 3-12 ton
helicopters, will be used to produce the current and future units of the LUH, LCH and
ALH orders, thus ensuring simultaneous, seamless and swift execution of all orders.

5. Established Relationships with Foreign OEMs

(i) Initially, HAL began as an aircraft design and development company, manufacturing
150 aircrafts in 1951. However, at the time, the country had decided to import the
latest version of global Fighter Aircarfts& Helicopters in order to have a military
advantage. Thus, HAL’s business model shifted to assembling and repairing based
on a transfer of technology (ToT) basis. While this limited its flexibility to innovate, it
allowed the company’s R&D unit to upgrade its competency and expertise in aircraft
design and development, while establishing strong relationships with foreign OEMs.
(ii) HAL is now capitalizing on these relationships under the “Make in India” banner,
tying up with various foreign OEMs as an engine and component maker. HAL
continues to be one of the few enterprises which has an MRO license for Russia’s
Su-30 MK aircraft. This license provides a strong leverage for potential export orders
to foreign friendly countries with a fleet of Su-30 aircrafts.
(iii) HAL recently contracted fresh tie-ups with:
(iv) Rollys Royce, UK for Adour, Orpheus, Avon, DART and Gnome series engines.
(v) Garrett engines of Honey Well Co., USA,
(vi) Safran Helicopter Engines (aka. Turbomeca), France for the development of engines
to be used in the IMRH and for the Artouste and Ardiden engine series which are
doing duty in the current fleet of Dhruv Mk-3, Rudra, Cheetah, Lancer and Chetak
helicopters.

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 i nsight
uick HINDUSTAN AERONAUTICS LTD (HAL)
Aerospace & Defense CMP : `3,272.9 MCAP : ~`1.09tn BUY 05th June 2023

6. Strong R&D Capabilities Integrated With Pan-India Manufacturing Facilities

(i) HAL’s R&D business has been at the centre of various successful aeronautical
systems including the Ajeet, Marut, HPT-32, Kiran, Tejas LCA and ALH. The R&D
centre is currently working on developing new aircraft platforms such as the touted
fifth-generation aircraft system – AMCA (Advance Medium Combat Aircraft) and a
heavy-class multi-role helicopter – IMRH (Indian Multi-Role Helicopter).
(ii) The centre has also developed 2 aero-engines recently, the HTFE-25 - a 25 KW
turbo-fan engine being developed for trainer aircrafts, small business jets and drones
weighing up to 5 tons and the HTSE-1200 –a 1200 KW turbo-shaft engine for
helicopters weighing between 3 and 6.5 tons.
(iii) HAL has ~11 dedicated R&D centres across the country which allow the company to
develop a wide range of new and innovative products, upgrade existing products
with combat operational capability and develop a pipeline of products for future
needs.
(iv) The funding for the research, design and development activities is sourced either
through customer-funded contracts or internal accruals – 10% of the operating net
profit of the preceding year is allocated towards R&D expenses.
(v) HAL’s operations are split across five complexes, which together house its 11 R&D
centres and 20 production divisions.

Source- Company, Way2Wealth

(vi) HAL’s operations can be classified into five broad-based segments:
(vii) The Aircraft segment comprises of the manufacturing of the company’s portfolio of
indigenous and under-license aircrafts such as the Sukhoi Su-30 MKI, MiG 21/27M,
Hawk Mk 132, Dornier 228 / Hindustan-228, LCA Tejas (Mk1 / Mk1A), Jaguar and
Mirage 2000.
(viii) The Helicopter segment includes the production, maintenance, repair and overhaul
facilities, and caters to the ALH (Advanced Light Helicopter) Mk III “Dhruv”, ALH Mk
IV “Rudra”, Light Combat Helicopter ("LCH"), Cheetal helicopter, Cheetah, Chetak
and Lancer.
(ix) The Engines segment pertains to the manufacturing, repair, overhaul and servicing
of aero-engines and related components, including critical discs, shafts, blades,

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5
 i nsight
uick HINDUSTAN AERONAUTICS LTD (HAL)
Aerospace & Defense CMP : `3,272.9 MCAP : ~`1.09tn BUY 05th June 2023

forgings and castings. The portfolio includes Adour Mk 871- 07 / Mk 804E/811, AL-
31FP, Shakti 1H1, Garrett TPE-331-5, Artouste IIIB and PTAE-7.
(x) Under the Navigation and communication equipment segment, the company designs
and manufactures various avionic equipment such as airborne radars,
communication and navigation equipment, on-board computers and display systems
such as the Advanced Communication System (ACS-235), VHF Omni Range and
Instrument Landing System (VOR/ILS) and Tactical Air Navigation (TACAN).
(xi) These systems are either developed indigenously (usually in collaboration with other
D-PSUs such as BEL) or under license from foreign OEMs.
(xii) Aircraft accessories
1) Major accessories for aircraft, helicopters and aero-engines
manufactured by us are as follows:
i. Hydraulic Systems and Power Control
ii. Environment Control Systems
iii. Engine Fuel Systems
iv. Instruments
v. Electrical Power Generation and Control Systems
vi. Landing Gear Systems
(xiii) HAL undertakes R&D across all five segments, developing newer platforms, combat
vehicles, aerial defence systems, aero-engines and related components.

Risks

(i) Development of new aircrafts / avionics witnesses a long gestation period as these
require multiple approvals at every stage, even before an order is placed.
(ii) The recent spat of crashes of the new ALH Mk-III “Dhruv” helicopter across all the
branches of the Armed Forces and the speculation around sub-standard material being
used has sown the seed of doubt towards HAL’s capabilities to deliver world-class
platforms.
(iii) HAL is the main Indian OEM which provides MRO services for various Russian aircrafts,
such as the MiGs and Su-30 MKI, which make up a significant part of the IAF’s fleet.
(iv) Given the economic sanctions placed on Russia, as a consequence of the war, the
import of spares and supplies for these aircrafts has been hindered, limiting HAL’s ability
to perform repair, upgrade and other MRO services on these aircrafts.
(v) HAL’s internal policy to maintain 6 months worth of MRO inventory along with various
inter-government strategies to maintain continuous trade of products and services has
been key in the smooth sailing of the MRO business. However, we remain vigil towards
any change that may negatively impact the business.

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 i nsight
uick HINDUSTAN AERONAUTICS LTD (HAL)
Aerospace & Defense CMP : `3,272.9 MCAP : ~`1.09tn BUY 05th June 2023

View

(i) HAL’s strong order visibility on both fronts – manufacturing and ROH – provides comfort
in the firm’s ability to generate marquee products for the armed forces.
(ii) With the previous LCA Tejas Mk-1 orders nearing completion and production lines
freeing up, HAL will go all out on the manufacturing of its recent orders, such as the LCA
Tejas Mk-1A and the recently awarded LUH and ALH orders. Pipeline orders to the tune
of `480bn will keep order book levels elevated for the foreseeable future. HAL’s next
generation aerial combat vehicles such as LCA Tejas-Mk II, AMCA and IMRH, which are
currently under development, have strong domestic and export use case.
(iii) In addition to this, HAL will continue to execute its MRO (Maintenance, Repair and
Overhaul) orders at an average pace of `180bn per year. The high-margin ROH
segment will continue be the bellwether for profitability.
(iv) As new foreign trade avenues are being undertaken by the govt., HAL will tide over the
issue around sanctions on Russian imports.
(v) Fundamentally, its monopolistic position, strong integration with the armed forces and its
ability to remain profitable with surplus cash while delivering world-class defence
platforms and solutions has made it a marquee stock in our books and we recommend
investors to BUY at the current level with target range `3900 – 4000.

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i nsight
uick HINDUSTAN AERONAUTICS LTD (HAL)
Aerospace & Defense CMP : `3,272.9 MCAP : ~`1.09tn BUY 05th June 2023

FINANCIALS

26,927
24,620
22,755 3,371
21,445 1,709
20,008 1,732
17,950 18,519 1,294
1,820
1,460 1,869
11,682 12,460 15,536 18,817
` CR

7,144 7,386 9,761

9,346 9,264 8,427 8,469 8,564 7,375

4,740

FY-17 FY-18 FY-19 FY-20 FY-21 FY-22 FY-23

Manufacturing ROH Exports, Others .

(` Cr)
Particulars Q4FY23 Q4FY22 Y-o-Y FY23 FY22 Y-o-Y
Revenue 12,495 11,561 8% 26,927 24,620 9%
EBITDA 3,246 2,500 30% 6,679 5,409 23%
% Margin 26% 22% 25% 22%
PBT 2,857 2,576 11% 6,507 5,225 25%
PAT 2,831 3,105 -9% 5,828 5,080 15%
% Margin 23% 27% 22% 21%
EPS (`) 85 93 (9)% 174 152 15%
RoE (%) 48% 64% -25% 25% 26% -6%
RoCE (%) 49% 54% -9% 28% 27% 2%
Source – Company, Way2Wealth
(` Cr)
Particulars FY20 FY21 FY22 FY23P FY24E FY25E
Revenue 21,520 22,755 24,620 26,927 28,185 31,567
Raw Mat Cost 9,463 11,044 10,001 10,102 10,000 11,680
% of Revenue 44% 49% 41% 38% 32% 37%
Op-ex 16,594 17,405 19,211 20,248 20,760 22,948
EBITDA 4,927 5,349 5,409 6,679 7,425 8,619
Margin 23% 24% 22% 25% 26% 27%
EBIT 3,928 4,171 4,298 4,894 6,125 7,269
(+) Other Income 294 358 985 1,670 1,050 1,100
PBT 3,874 4,270 5,225 6,507 7,175 8,369
PAT 2,770 3,239 5,080 5,825 5,381 6,277
Margin 13% 14% 21% 22% 19.1% 20%
Net Worth 13,249 15,188 19,313 23,572 26,263 29,401
EPS 82.9 97.0 151.9 174.2 161.1 187.9
DPS 33 30 50 40 52 57
RoE 21% 21% 26% 25% 20% 21%
RoCE 22% 29% 22% 21% 23% 25%
Net Worth 13,249 15,188 19,313 23,572 26,263 29,401
Receivable Days 191 90 69 64 60 60
Inventory Days 335 270 266 443 255 245
Cash Balances 3,166 7,177 14,348 20,317 21,410 22,585
FCF 147 13,945 8,532 7,049 2,682 2,793
Net D/E (x) 0.5 (0.4) (0.7) (0.8) (0.8) (0.7)
P/E (x) 39.4 33.7 21.5 18.8 20.3 17.4
EV/EBITDA (x) 22.9 19.2 17.7 13.4 11.9 10.2
P/BV (x) 8.3 7.2 5.7 4.6 4.2 3.7
Source – Company, Way2Wealth

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 i nsight
uick HINDUSTAN AERONAUTICS LTD (HAL)
Aerospace & Defense CMP : `3,272.9 MCAP : ~`1.09tn BUY 05th June 2023

TECHNICAL VIEW

HAL moved up sharply on heavy volumes above its critical resistance level of 2807. It now faces a resistance at 3400 and 3550 levels and should have
a minimum upside till that level. Technically, the trend indicator ADX indicates the current trend is expected to witness further upside. Our argument is
further validated after the stock gave an upside breakout from 2914 as the price broke through the top of a trading range. The oscillators are picking up
momentum, with RSI showing good strength above 50 levels with expecting some kind of higher-level profit booking. The daily chart structure looks
positive in near term. With good volume support seen, a break above 3185-3200 levels will signify a continuing strength amongst the bulls and we could
see the stock testing 3550 and 3600 levels in short to medium term. Going forward, Overall, we advocate to Buy and Accumulate HAL around 3000-
3100 range. Add on dips till 2760 for a first level 3600 and a decisive move above this level can take it to our above mentioned target of `4000
around. On the downside 2600 would act as strong support and slip below that would negate above positive view.

Source: Falcon7

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i nsight
uick HINDUSTAN AERONAUTICS LTD (HAL)
Aerospace & Defense CMP : `3,272.9 MCAP : ~`1.09tn BUY 05th June 2023

Disclaimer

Analyst Certification: I, Jayakanth Kasthuri, the research analyst and author of this report, hereby certify that the views expressed in this research
report accurately reflect our personal views about the subject securities, issuers, products, sectors or industries. It is also certified that no part of the
compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research.
The analyst(s), principally responsible for the preparation of this research report, receives compensation based on overall revenues of the company
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endorsement of the views expressed in the report.

Disclosure of Interest Statement in HINDUSTAN AERONAUTICS LTD (HAL) as on 5th June 2023

Name of the Security HINDUSTAN AERONAUTICS LTD (HAL)

Name of the analyst Jayakanth Kasthuri
Analysts’ ownership of any stock related to the information contained NIL

Financial Interest
Analyst : No
Analyst’s Relative : Yes / No No
Analyst’s Associate/Firm : Yes/No No
Conflict of Interest No
Receipt of Compensation No
Way2Wealth ownership of any stock related to the information
NIL
contained
Broking relationship with company covered NIL
Investment Banking relationship with company covered NIL
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