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HAL – Steady quarter; Near term execution challenge but long-term outlook remains strong

ICICIdirect Research 16 Aug 2024 DISCLAIMER
  • HAL’s operational performance in Q1FY25 was largely steady with ~11% YoY revenue growth and EBITDA margin of ~23% (flattish YoY). However, PAT was up substantially by ~77% YoY led by Rs 445 crore of one-off income related to tax refund
  • Going ahead, we may see some impact on this year’s revenue growth as the deliveries of Tejas LCA Mk1A aircrafts (which constitute ~35% of total order backlog) are behind schedule due to delays in supply of engines from GE. As per the media reports, HAL has a back-up plan of installing used engines in the initial deliveries till the time GE starts supplying engines by October.
  • Execution in MRO segment and other manufacturing contracts are possibly better and driving the growth for HAL at present. MRO segment contributes ~22% to the total order book but contributing ~65% to revenues as the execution remains better in this segment
  • Total order backlog stood strong at ~Rs 94000 crore (3x TTM revenue) as of Mar-24, provides healthy visibility. However, execution pick-up for LCA MK1A would be the key trigger for revenue growth going ahead
  • We believe that HAL’s structural story remains intact considering the robust orders pipeline and gradual improvement in defence indigenous ecosystem
  • As per the management, Rs 1.6-1.7 lakh crore worth of contracts are expected to be placed with HAL in the coming 1.5-3 years (including 97 additional LCA Mk1A, 12 additional Sukhoi jets, 156 light helicopters, Sukhoi jet engines for upgradation, 60 utility helicopters  etc.). Additionally, there are number of large-scale platforms in development phase (like AMCA, deck-based fighters for Navy, multi role helicopters, unmanned aerial platforms like Tapas & Rustom etc) which will be given to HAL in the next 3-5 years.
  • We have a Buy rating on HAL with a target price of Rs 5700
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