Set to soar
GE Aerospace has delivered the first of 99 (nos.) F404-IN20 engines to HAL for the light combat aircraft Tejas Mk 1A (Delivering for India Today and Into the Future | GE Aerospace News). In our view, this development allays concerns on the execution front. We expect revenue growth of 25–28% through to FY27E, based on the order book (OB) estimated at more than INR 1.3trn. Besides, there are further orders of 97 (nos.) Tejas Mk 1A and 156 (nos.) LCH Prachand in the pipeline. As a result of reduced execution concerns and lower risk on our earnings estimates, we roll back our WACC to 11% (earlier 12%), resulting in a revised TP of INR 5,000 (earlier INR 4,065). We upgrade HAL to BUY (from Add) and recommend it as our top pick among DPSUs.
The wait ends
GE Aerospace has delivered the first of 99 (nos.) F404-IN20 engines to HAL for Tejas Mk 1A. We see this is a vital development that allays execution risk concerns. At Aero India, HAL expressed confidence in receiving 12 (nos.) F404- IN20 engines for the LCA Mk 1A this year. While it has the capacity to manufacture 24 (nos.) Tejas Mk 1A, we estimate only a gradual ramp-up from 10 (nos.) in FY26 to 24 (nos.) by FY30. We estimate revenue growth of 25%/28% YoY in FY26/FY27, resulting in an EPS CAGR of 39% through to FY27E (from FY25E level). We also see the commencement of execution of Tejas Mk-1A order as a positive for other defence companies in our coverage – BEL and Astra Microwave (involved in Uttam AESA radar and EW system from 43rd plane onwards); Dynamatic Technologies (front fuselage supplier).
Other sweeteners in store
We believe, HAL’s OB is likely to get a leg-up with further order of 97 (nos.) Tejas Mk 1A and 156 (nos.) LCH Prachand. IAF Chief Air Chief Marshal A. P. Singh recently emphasised on the urgency to add 35–40 fighter jets annually to address existing shortages. Besides, HAL aims to complete the assembly of first Tejas Mk-II aircraft by Oct’25 and achieve its maiden flight by end-Mar’26 (HAL Nears Completion of First Tejas MkII Aircraft as Assembly Progresses Swiftly – Indian Defence Research Wing). Currently, the discussion between HAL and GE pertaining to ToT of F-414 engine is ongoing.
Outlook: First engine delivered; a monumental step
We believe that the delivery of the first F-404 engine by GE represents a significant step towards assuaging the execution concerns for HAL. Besides, we believe that HAL is set for the long haul as manufacturing gathers steam with possible additional orders for LCA Tejas Mk-1A in the near term. Besides, the progress on development of Tejas Mk-II and AMCA is on. We also believe that the execution of Tejas Mk-1A would be beneficial for other companies involved in the supply chain such as BEL, Astra Microwave and Dynamatic Technologies. Taking cognizance of lower risk on execution, we roll back WACC to 11% (earlier 12%), resulting in a revised TP of INR 5,000 (earlier INR 4,065) on a DCF-based methodology. Upgrade to BUY (earlier Add).
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.
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