BETTER THAN EXPECTED MARGINS LED TO STRONG PROFITABILITY GROWTH

News:

Revenue for the quarter came in at Rs 5144.8 crore (down 7.3% YoY); lower than our estimate of Rs 5822.3 crore. This is likely on account of lower than expected execution in both manufacturing and MRO contracts. Sequentially, the revenue increased by 42%. H1FY23 revenue is up 22.3% YoY as the revenue increased significantly in Q1FY23 (+124.2% YoY) due to lower base

·         Gross margins improved significantly by 1130 bps YoY to 64.2% (better than our estimate of 51.5%) on account of lower raw material cost which declined 29.7% YoY

·         EBITDA margins came in at 31.5% (vs estimate of 22.3%); improved by 919 bps YoY led by decline in raw material and others cost. Sequentially EBITDA margin improved by 871 bps on operating leverage benefits. H1FY23 EBITDA margin is also up by 724 bps YoY at 27.9%. EBITDA increased by 30.8% YoY (+96.3% QoQ) to Rs 1621.6 crore (I-direct estimate of Rs 1296.5 crore). H1FY23 EBITDA increased by 65.2% YoY to Rs 2447.9 crore 

·         PAT came in at Rs 1221.2 crore (up 44.2% YoY) led by sharp improvement in margins. Other income was up by 88.6% YoY to Rs 259.1 crore, which also supported the bottom-line. H1FY23 PAT is up by 76.8% YoY to Rs 1841.4 crore

View:

 Though revenues came lower than estimates (likely because of lower than expected execution in both manufacturing and MRO contracts), profitability was better than our expectations led by better margins. We believe that FY23-24 revenue growth would be ~7-9% YoY as the large amount of manufacturing order-book (which contributes over 60% to total order book) will get executed from FY25E onwards. Order-book position stood at | 84800 crore at the end of June-22 (~3.2x TTM revenues) led by large scale orders of LCA Tejas MK1A, Light Combat Helicopters (LCH), Light Utility Helicopters (LUH), HTT-40, Advanced Light Helicopters (ALH) and MRO contracts. Key orders in the pipeline for the next one to two years include 25 ALH for Army, six Dornier aircraft and 240 AL-31 engines for Sukhoi-30 MKI aircrafts. In the longer term (three to five years), key orders in the pipeline are 145 LCH, 175 LUH, 60 Marine ALH, 36 HTT-40 trainers, 18 RD-33 engines for MiG-29 and medium weight fighter (Tejas MK2). We believe that pick-up in execution of existing contracts, continuous order inflows in MRO and strong pipeline of orders in manufacturing will drive the earnings of HAL going ahead.

Impact:

Positive