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Hindustan Aeronautics Click here for Rating Reckoner
Making aircrafts to protect Indian sky
(15 Mar 2018)
CM RATING43/100
Incorporated in 1963 and promoted by the Union government, Hindustan Aeronautics (HAL) is a defence public sector undertaking (DPSU) engaged in the design, development, manufacture, repair, overhaul, upgrade and servicing of a wide range of products including, aircraft, helicopters, aero-engines, avionics, accessories and aerospace structures.

HAL is 'Navratna' company since June 2007 and the largest DPSU in India. It is the 39th largest aerospace company in the world in terms of revenue. The company was also awarded Raksha Mantri's Award for excellence in performance under institutional category in FY 2008, FY 2010, FY 2011, FY 2013 and FY 2016.

It has diversified product portfolio offerings which include fighter aircraft, trainer aircraft, transport aircraft, military helicopter and civil helicopters and their engines, avionics and accessories. The company has five decades of experience in research, design and development, manufacturing and maintenance, repair and overhaul services. HAL has entered into 13 commercial joint ventures to grow operations. 

The company has 20 production divisions and 11 R&D centres located across India. It owns one trademark, seven patents, six design registrations and 44 copyrights. R&D expense constitutes 6.9% of revenues of FY 2017.

It relies on indigenous research as well as enters into technology transfer and licence agreements to manufacture products. It has entered into license agreements with Russian suppliers and western companies to receive technology. Some of the aircrafts manufactured through such license agreements include Sukhoi Su-30 MKI, Dornier-228, Hawk Mk-132 Aircraft

As of December 31, 2017, HAL's order book was Rs. 68461 crore which generally includes products and services to be manufactured and delivered and excludes anticipated revenues from joint ventures and subsidiaries.

HAL's sales to Indian defense services accounts for nearly 91.4% and 93.3% of its revenues for H1 of FY 2018 and for FY 2017, respectively. It also sell its products and provide services to state governments, para-military forces and corporates.

Products account for around 67% of total revenue, 31% comes from services and rest 2% from other segments as on FY 2017.

The company aims to further leverage its defence expertise in civil aircraft segment with penetration for both manufacturing and servicing opportunities

The Offer and the Objects

The offer comprises offer for sale by the Union government of 34107525 shares, which at lower price band of Rs 1215 per share, works out to Rs 4144.06 crore and at higher price band of Rs 1240, the issue size works out to Rs 4229.33 crore.

The minimum bid lot is 15 equity shares and in multiples of 15 equity shares.

The objects of the issue is to carry out the divestment program of the government of India apart from the benefits of listing the equity shares on the BSE and the NSE and to enhance its visibility and brand image and provide liquidity to its existing shareholders.

Government of India will hold 89.8% of total paid up equity share capital of the company post listing.

Strengths

India has the third largest military in the world and is the 6th largest spender in the defence sector.

60% of total defence requirements of India as on today is met from imports. HAL is poised to gain under the 'Buy and Make (Indian)' procurement category. The company has all the necessary capabilities and technology (including licensed technology) to capture maximum relevant defence budget spend going ahead.

As of December 31, 2017, HAL's order book was Rs. 68461 crore which generally includes products and services to be manufactured and delivered and excludes anticipated revenues from joint ventures and subsidiaries.

Indian armed forces plan to procure more than 1000 rotary wing aircrafts and will revamp their fleet in next 10-20 years.

The company has vast range of products and services to offer to Indian Defence Services (IDS). It has also backward integrated into engines (for aircrafts and helicopters) and avionic accessories such as Advanced Communication System, VHF Omni Range and Instrument Landing System, Tactical Air Navigation, Precision Approach Radar, Solid State Digital Video Recording System, Inertial Navigation and Global, Positioning System, Weapon Control System, Multi-Functional Display, Opto-Electric Sighting and Navigation Complex, Solid State Flight Data Recorder and Passive Phased Array Radar.

Weaknesses

Due to other pressing fund needs, the government's spend on defense (especially defense capex spend) is not growing to the desired extent and in fact coming down as a % of GDP.

Company works under complex programs of technology transfer and may take time to absorb the technology which can lead to delay in production and execution of orders. For example the Su-30 MKI program which represents 31% and 44% of total sales in H1 of FY 2018 and in FY 2017 has faced a number of delays in the production phase due to some challenges faced on account of technology transfer.

In view of the policies of the government such as the opening of foreign direct investment in the defense sector to encourage competition, the company's status as a nominated production agency will transition to that of a competitive bidder and due to such procurement policy and competition it may suffer loss of new business or lower margins.

Business and reputation can be significantly affected due to any unforeseen events like accidents of aircrafts or helicopters manufactured by it.

The MoD contracts are not always fully funded at inception and are subject to termination. Revenues under existing multi-year contracts are reliant on the continuing availability of budgetary appropriations and any disruptions to the availability of such appropriations could adversely affect the revenues.

Because of the basic nature of the business and its secrecy and confidentially, HAL may not fully comply with the Companies Act, Sebi listing requirements and other corporate governance regulations. Also ongoing disclosure on information post listing will also be limited and may not be shareholder friendly.

The MoD contracts contain provisions giving the IDS a variety of rights which may not be HAL shareholders friendly. Also MOD will always command their rule as compared to listing rules and other statutory provisions. Decisions like buyback and dividend policy are also governed by MoD. The company is required to pay a minimal annual dividend of 30% of our profit after tax or 5% of net worth, whichever is higher, unless an exemption is provided in accordance with guidelines issued by MoD.

ALH Dhruv Helicopters supplied to the Ecuadorean Air Force were involved in accidents and The Ecuadorean Ministry of Defence have designated the company as a default contractor and has barred it from bidding for future contracts. This can affect the future exports and company's ability to bid outside India.

Military aircraft, helicopters and other technologies that the company sell are in new and rapidly evolving markets. Business and future prospects are difficult to evaluate given continuous changing policies and technologies. Future growth depends on adapting existing products to new requirements and introducing new products that achieve acceptance of the IDS.

The aircraft such as MiG-21 variants, MiG-27 and the Su-30 MKI, as well as engines and other accessories, and repair and overhaul services for these aircraft that are manufactured in India are done through transfer of technology from Russian OEMs as well as pursuant to inter-governmental agreements with Russia. The United States, the United Nations Security Council and other jurisdictions and organizations have implemented comprehensive economic sanctions targeting Russia in recent years. This can have an adverse impact relating to the supply and support from Russian OEMs for the aircraft that HAL manufacture under transfer of technology with such OEMs

A major portion of its business is to cater to the upgrading of technology in aircraft and helicopters for the IDS. However, with the MoD and the IDS opting to phase out the older fleet of aircraft and helicopters and ordering new aircraft and helicopters with superior technology, HAL would need to step investment in research, design and development to manufacture indigenous aircraft and helicopters to remain competitive. Such R&D may not yield desired success or returns.

Valuation

For FY 2017, consolidated net sales were up 7% to Rs 17951.50 crore. The OPM stood at 18.1% up by 340 bps thus resulting in OP growth of 32% to Rs 3256.10 crore. Other income stood at Rs 388.90 crore down by 35%. Lower other income is due to lower interest income and buyback of shares. Thus, PBIDT growth was restricted to 6% to Rs 4298.10 crore. Interest cost stood at Rs 10.2 crore while depreciation was lower by 17% to Rs 712.90 crore. Thus PBT stood at Rs 3575 crore up by 12% YoY. After paying total tax of Rs 967 crore down by 20%, and with share of profits from associates at Rs 16.70 crore, consolidated PAT for FY 2017 stood at Rs 2624.70 crore, up by 31%.

For half year ended September 2017, consolidated net sales stood at Rs 5172.50 crore with OPM of 9.2% resulting in an OP of Rs 478.10 crore. Other income stood at Rs 388.90 crore. Interest cost was at Rs 1.20 crore and depreciation stood at Rs 257.50 crore thus resulting in PBT of Rs 608.30 crore. After providing for total tax of Rs 218.60 crore and share of profits of associates at Rs 1.30 crore, consolidated PAT stood at Rs 391 crore. Due to seasonality of business, half yearly earnings cannot be annualised.

At higher price band of Rs 1240, the P/E on FY 2017 EPS (on current diluted equity of Rs 334.39 crore) of Rs 78.5 works out to 15.8. There is no comparable listed player. HAL did buyback of 27,112,500 equity shares at a price of Rs 339.88 per share from the government on November 28, 2017.

Due to the nature of its business, there can be volatility in quarterly and yearly earnings and it has to maintain secrecy about its plans at the cost of investor friendliness, which may affect the P/E that it can command.

Hindustan Aeronautics: Issue highlights
Offer for sale ( in Rs crore)
- On lower price band4144.06
- On upper price band4229.33
Total Issue size for fresh issue ( in no of shares in lakhs)341.07
Price Band (Rs)1215-1240*
Bid size ( in no of shares)12.00
Post issue share capital (Rs crore) 334.39
Post-issue Promoter & Group shareholding (%)89.8%
Issue open date16-03-2018
Issue closed date20-03-2018
ListingBSE, NSE
Rating 43/100
*Discount of Rs 25 to retail investors

Hindustan Aeronautics: Consolidated Financials
1503(12)1603(12)1703(12)1709(06)
Net Sales15647.5016758.6017951.505172.50
OPM (%)5.4%14.7%18.1%9.2%
OP850.902468.003256.10478.10
Other in. 1714.001596.201042.00388.90
PBDIT2564.904064.204298.10867.00
Interest8.300.0010.201.20
PBDT2556.604064.204287.90865.80
Dep.883.20862.80712.90257.50
PBT 1673.403201.403575.00608.30
EO 0.000.000.000.00
PBT after EO1673.403201.403575.00608.30
Tax (including Deferred Tax)678.601209.00967.00218.60
PAT994.801992.402608.00389.70
Share of Associates-0.7011.9016.701.30
PAT after MI and share of Associates994.12004.32624.7391.00
EPS*29.759.978.5#
*EPS is on post issue equity capital of Rs 334.39 crore of face value of Rs 10 each
# EPS not annualised due to seasonality of business
Figures in crore
Source: Capitaline Database

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