Buy Hindustan Aeronautics for Target Price of Rs 2655: ICICI Securities

Strong order visibility and competitive positioning

Hindustan Aeronautics (HAL) highlighted visibility on orders worth ~Rs1,500bn over next three years, with Rs450bn of manufacturing orders expected in FY23- H1FY24. Management is confident of maintaining 24-25% EBITDA margins. Supply chain of Russian spares has been managed effectively and the company is looking at ~Rs130bn of Repair and overhaul (ROH) revenues in FY23. Management highlighted its internal target of Rs25bn in export revenues by FY25. Current orderbook stands at ~Rs850bn including a fresh order of ~Rs60bn in Q1FY23. Current surplus cash balance stands at ~Rs140bn. Maintain BUY with a target price of Rs2,655/share (previous target of Rs2,618/share).

 Rs450bn-worth potential manufacturing order inflow over next 1 year. Order pipeline for the next 1 year comprises: 70 HTT40, 75 ALH for Indian Army, 6 LTADornier, 12 LUH, 12 Sukoi30 and 240 AL31SP engines for the Sukoi30. The aggregate value of these orders stands at Rs450bn and is expected to take the current orderbook position to >Rs1,000bn. There are other orders in the pipeline – e.g. 80 RD33 engines, 145 LCH, 175 LUH, 60 UHF and LCA Mk2 programs – which will further add Rs600bn-700bn. The orders will take 3-5 years to be signed. The contract for 15 LCHs has already been signed in Mar’21 (HAL has delivered 6 LCHs to date and the rest 9 will be delivered in FY23). Company is expecting an order for 147 LCHs which amounts to Rs250bn and will take around 2-3 years to materialise. 80 RD33 engines order for Mig29 is under process with RFP expected soon and will be tendered in FY24. RFP has been issued for 240 AL31FP engines for Su-30 MKI and the tender is expected to conclude in FY23.

 Key new initiatives. Production of Light Utility Helicopter (LUH) Mk1 has started and is ready for rollout from the new greenfield helicopter factory at Tumakuru. Light transport aircraft (LTA) Dornier attained civil certification from DGCA in May’22. In GAGANYAN project HAL has delivered crew model ferrying and truck transportation structure to ISRO in Aug’22. First flight of Light Combat Aircraft (LCA) Mk1A has been completed and deliveries would start from Feb’23. HAL has signed an MoU with Safran for a JV intended for internal development, production and sales of helicopter, and support for helicopter engines for India as well as the global market. Company also entered into an MoU with Israel Aerospace Industries (IAI) in Mar’22 to convert civil passenger aircraft into multi-mission tanker aircraft.

 Significant strides in indigenisation. During FY22, of the 34 new platforms that were manufactured and delivered, 30 were indigenously designed and developed. All the major platforms of HAL – such as LCA, LTA-Dornier, LCH, LUH, etc. – are part of the positive list notified by MoD. Recently, the third positive indigenisation list (containing ~780 LRUs, systems + sub-systems, and components) has ~50% from HAL platforms. HAL has increased its contribution to R&D reserve from ~10% to ~15% of operating PAT.