Target: ₹5,170
CMP: ₹4,769.20
Hindustan Aeronautics’ (HAL) performance missed street’s estimates mainly on the back of weak execution.
Key points: EBITDA rose 13 per cent YoY to ₹990 crore (highest-ever for Q1); EBITDA margin was at a healthy level of 22.8 per cent; An income tax refund of ₹440 crore resulted in PAT growth of 77 per cent YoY; and HAL made two investments worth (cumulatively) ₹4.96 crore with other defence companies.
In our view, HAL’s firm order book and a robust order funnel (potential orders), including now near-finalisation 97 nos. of additional Tejas Mk-1A provide it a long runway for growth. However, manufacturing momentum is expected to pick up only from execution of 83 nos. LCA Mk-1A. That said, we expect RoH revenue to grow at 8–10 per cent p.a., providing stability to earnings and better margins.
We retain our ADD rating on HAL with an unchanged TP of ₹5,170 (DCF-based methodology).
Key risks: Delay in execution of existing 83 nos. Tejas Mk-1A orders; Delay in receipt of further orders for which AoN has been executed; Margin decline owing to higher raw material prices.