Hindustan Aeronautics: A Strong Defence Play, Target Price ₹4,692

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Hindustan Aeronautics is one of the mainstays of India's defence manufacturing sector and has, through the years, exhibited resilience and growth against market change. Prabhudas Lilladher has upgraded its rating on HAL to "Accumulate" with a revised target price of ₹4,692 on an underlying basis, appreciating the QoQ strong performance and the severe strategic developments putting HAL as a long-term player in India's defence ecosystem.

Q2FY25 Highlights

HAL performs stable performance during the quarter Q2FY25. It follows the company's operational efficiency and strategic management focus trend:

• Revenue Growth

At 6.0% year-on-year growth, HAL's revenue experienced resilience, improving even as uncertainties in the international defence space mounted.

• EBITDA Margins

The company delivered an EBITDA margin of 27.4%, which registered a growth of 33 basis points from the same quarter last year. This was well supported by cost control and operational efficiency.

• Large Order Booked

HAL has bagged a large order of about ₹260 billion for 240 AL 31-FP engines, which would power the Sukhoi Su-30 fighter aircraft. Deliveries are spread over an eight-year horizon, starting from September 2025. However, below are some headwinds which may dent its near-term profitability  

Current and Stock-based Metrics Major Headwind

Delayed F-404 Engines:

 Drying the much-needed F-404 engines from GE Aerospace- essential for the Tejas Mk1A programme over. But those aren't arriving on schedule. The first of the three engines ordered is expected only in March 2025, a couple of years behind schedule.

Delaying F-414 ToT agreement:

The ToT agreement for F-414 engines, that would power the Tejas Mk2, has been further delayed until mid-2025 from December 2024. It can delay timelines on critical defence projects Strategic positioning and growth triggers Despite the challenges, HAL remains one of India's best-positioned players in the value chain of defence manufacturing. Some factors strengthen long-term growth potential at HAL indicating Prabhudas Lilladher.

1. Lead provider of military aircraft

 The lead provider of military aircraft to the Indian armed forces, HAL is at the heart of India's air defence modernization process. Increasing government demand for indigenous procurement bodes well for HAL as it sits well within the company's capabilities and maintains a steady stream of demand.

2. Strong Order Book

The order book of HAL is over ₹2 trillion, with robust revenue visibility three years out. The pipeline is marked with some serious projects like the Tejas Light Combat Aircraft (LCA), Advanced Medium Combat Aircraft (AMCA), and other advanced platforms.

3. Technological Advancements

The investments made by the company in leading-edge technology platforms such as Tejas, AMCA, and GE 414 engines are setting the company into the top position in the aerospace innovation track. On the other hand, HAL is also developing the IMRH of the Indian Multi-Roles Helicopter, which further expands the product portfolio of the company.

4. Operating Leverage and Profitability

Scale is efficiency. The ability of HAL to utilize its size and increase profitability through cost optimization and operational efficiency marks a significant growth driver over time, which will enhance margins and shareholder value.

5. Government Support

The drive by the Indian government through schemes like "Make in India" for self-reliance in defence manufacturing and increased budgetary allocations for defence procurements underlines the growth trajectory of HAL.

Valuation and Revised Target Price

The stock of HAL is quoting at a Price-to-Earnings (P/E) ratio of 41.9x for FY25, 36.5x for FY26, and 32.2x for FY27 estimated earnings. Prabhudas Lilladher rolled forward its valuation to September 2026 and assigned a P/E of 40x on the revised estimates, thus arriving at a new target price of ₹4,692 (up from ₹4,515 earlier). According to the report, at present, with the correction in the HAL stock price, it is a good time for investors to get into a company with sound fundamentals and long-term growth potential.

• Sukhoi Engines Order:

The ₹260 billion orders for AL 31-FP engines give revenue visibility while consolidating the position of HAL as an indispensable supplier for India's air defence programmes. This long-term project will support steady-generation revenue over the next eight years. While the issue of delays in deliveries of the engine creates short-term challenges, these programs are still very important to HAL's order book. Successful execution will help reinforce HAL's image and create opportunities for exports to other countries as well.

• Focus on Indigenous manufacturing: 

With its current focus on achieving lower reliance on imports from foreign vendors, the current program supports the strategic direction of HAL. Projects AMCA and IMRH are expected to further strengthen HAL's position in domestic defence production.

• The rationale for Investment:

This would put HAL in an advantageous position due to increased defence spending by India, which is increasingly driven by geopolitics and the imperative for self-reliance in strategic sectors. A strong product portfolio with a good order book will be a solid long-term value proposition.

Strategic Partnerships and Global Outlook

An international collaboration of HAL with major global players such as GE Aerospace and its focus on advanced platforms put it among the stronger players in the international defence industry. The export potential is another opportunity for the growth of the company. Threats and Challenges: Even though the prospects of growth of HAL are very promising, the investor must be cautious regarding the following risks: Program Delays: Delays in key programs like Tejas Mk1A and Mk2 would impact revenue and profitability in the short term. Geopolitical Factors: The sector is intrinsically vulnerable to the dynamics of geopolitics. Changes in government policy or, for that matter, international relations would bring variations to the operations of HAL.  

Dependence on Key Partners: 

The dependence of HAL on partners like GE Aerospace in developing engines and transferring technology integrates the need for diversification in case of any disruptions that might arise. Despite changing market conditions, Hindustan Aeronautics Limited remains resilient and one to watch. Its solid order book, a string of strategic initiatives, and strong support from the government ensure that the company continues to clock in seamless growth, more so when short-term issues such as program delays continue to surface in the near term. Prabhudas Lilladher has increased the target price to ₹4,692, driven by a view that the company will be very well positioned to cash in on the modernization process of defence systems through the modernization efforts of India. For an investor looking for a ticket into the defence space, HAL presents an attractive opportunity to cash in on its market leadership, innovative abilities, and strong financials. In light of the intense Indian government focus on a self-reliant and Indigenous manufacturing-driven defence industry in the country, it is no surprise that HAL is poised to remain relevant going forward. That said, as the player is significant, it should be considered a stock to accumulate, with long-term value creation.