HAL has strong growth visibility on healthy orders flow. Buy for target price of Rs 3300 (28% upside): ICICI Direct

Strong growth visibility on healthy orders flow…

About the stock: Hindustan Aeronautics (HAL), the largest defence PSU in India, is engaged in design, development, manufacture, repair, overhaul, upgrade and servicing of a wide range of products including, aircraft, helicopters, aero-engines, avionics, accessories and aerospace structures  The company has delivered revenue, EBITDA and PAT CAGR of 7.4%, 12% and 26.5%, respectively, in FY18-22. In FY22, repair & overhaul contributed ~64% to total revenues while manufacturing contributed~30%

Q2FY23 Result: Margins improved YoY led by higher share of repair & maintenance.

► Revenue declined 7.3% YoY to Rs 5144.8 crore on account of higher base. Execution has been more uniform in H1FY23 as compared to H1FY22 (which was impacted due to lockdown)

► EBITDA margin improved by 919 bps YoY to 31.5% on lower others cost; which led to 30.8% YoY growth in EBITDA to Rs 1621.6 crore

► PAT increased 44.2% YoY to Rs 1221.2 crore

What should investors do? We expect HAL to deliver revenue and EBITDA CAGR of 10.3% and 14.7%, respectively, over FY22-25E. PAT is likely to grow at 14.2% CAGR (FY21-25E). Increase in profitability with strong asset turnover is expected to result in healthy return ratios over FY23-25E.

► We continue to remain positive and retain our BUY rating on the stock Target Price and Valuation: We value HAL at Rs 3300 i.e. 20x PE on FY25E EPS.

Key triggers for future price performance:

► Healthy order-book position (Rs 83800 crore; ~3.2x TTM revenues) led by large scale orders in manufacturing aircraft/helicopters (LCA, LCH, ALH)

► Continuous order inflows in MRO (maintenance, repair & overhaul) with strong order pipeline of in manufacturing for next three to four years (led by LUH, LCH, ALH, Dornier, HTT-40 and engines for Su-30 & MiG-29)

► LCA Tejas MK1A, largest order in manufacturing, deliveries to IAF expected from FY24E end. Moreover, execution of other key orders and sustained growth in MRO will drive revenue growth in double digits from FY25E

Alternate Stock Idea: We also like Bharat Dynamics (BDL) in the defence space.

► Strong earnings growth of ~25% CAGR expected over FY22-24E led by execution of existing strong order-book primarily comprising manufacturing various types of indigenous missiles & torpedoes

► BUY with a target price of Rs 1200/share