PL Stock Report - Hindustan Aeronautics (HNAL IN) - Q2FY24 Result Update - Reasonable quarter; long-term story intact - BUY

Hindustan Aeronautics (HNAL IN) – Amit Anwani – Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: BUY | CMP: Rs2,059 | TP: Rs2,266

Q2FY24 Result Update – Reasonable quarter; long-term story intact

Quick Pointers:

§ Gross margin contraction drove decline in EBITDA margin by 441bps.

§ Higher other income at Rs4.7bn (up 81.3% YoY) aided marginal PAT growth.

Hindustan Aeronautics (HAL) reported revenue growth of 9.5% YoY in Q2FY24. EBITDA margin contracted by 441bps YoY to 27.1%, led by a sharp decline in gross margin. Fall in direct input to WIP/expenses capitalized largely offset the gross margin contraction, but EBITDA was still impacted by decrease in expenses relating to capital & other accounts, which is subtracted from operating expenses. HAL’s JV with Safran (‘SAFHAL Helicopter Engines’) to design, develop & produce helicopter engines for IMRH & DBMRH projects has been formally incorporated. The company also signed a contract with Airbus to establish a Civil MRO Facility for A-320 aircrafts at Nashik.

We believe HAL is a long-term play on the growing strength & modernization of India’s air defence given 1) its position as the primary supplier of India’s military aircraft, 2) long-term sustainable demand opportunity, owing to the government’s push on procurement of indigenous defence aircraft, 3) leap in HAL’s technological capabilities due to development of more advanced platforms (Tejas, AMCA, etc.), 4) robust order book of Rs818bn with further 5-year pipeline of ~Rs2trn, and 5) improvement in profitability through scale and operating leverage. The stock is currently trading at a P/E of 26.0x/22.7x/20.0x on FY24/25/26E earnings. We maintain a ‘BUY’ rating with a TP of Rs2,266 (same as earlier), using an equal-weighted averaged of a DCF-derived price and a PE-derived price based on 23x Sep-25E (same as earlier).

Decent top-line growth, but margins contract: Consolidated revenue rose 9.5% YoY to Rs56.4bn, while gross margin declined by 565bps YoY to 58.3%. EBITDA fell 5.8% YoY to Rs15.3bn, with EBITDA margin contracting by 441bps YoY to 27.1%, driven by gross margin contraction & a 40.4% YoY fall in expenses relating to capital & other accounts to Rs2.9bn (down 437bps YoY as a % of sales), which is subtracted from operating expenses. This was partially offset by lower direct Input to WIP/expenses capitalised, which came in at Rs695mn vs Rs3.5bn in Q2FY23 (down 562bps YoY as a % of sales). PAT rose slightly by 1.3% YoY to Rs12.4bn, aided by higher other income (up 81.3% YoY to Rs4.7bn), despite a 38.8% YoY increase in depreciation & amortization expenses to Rs3.5bn.

Durable demand for modern indigenous military aircraft: India’s strength of 31 fighter jet squadrons falls short of the sanctioned total of 42. This will be exacerbated by the phasing out of aging aircraft such as Mig-21, Mig-29, Jaguar, and Mirage. With HAL’s monopoly-like position in India’s defence aerospace sector coupled with the government’s push to procure indigenously designed & developed defence aircraft, the company is in a sweet spot to benefit from a long-term demand opportunity. HAL is involved in several major fighter jet projects (Tejas Mk2, AMCA, TEDBF) and helicopter projects (LUH, LCH, IMRH) which will replace various outgoing fleets. It’s manufacturing revenue is set to accelerate FY25 onwards.

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