UBS has lowered its rating on Hindustan Aeronautics Ltd. to 'neutral' from 'buy', citing limited near-term upside after a sharp run-up in the stock. HAL shares have rallied over 60% in the past three months and more than doubled in the past year, driven by optimism around defence sector orders and strong execution.
The brokerage has, however, raised its 12-month price target slightly to Rs 5,600 from Rs 5,440, primarily due to a roll-forward of earnings estimates.
Key short-term catalysts such as the resolution of the GE F404 engine issue, orders for Light Combat Helicopters, and the long-awaited 97-unit Tejas LCA MK1A order are now reflected in the price, according to UBS.
Risk-reward is "fair", it noted, adding that HAL's current valuation already factors in the recent manufacturing inflection.
Order Book Estimates Trimmed
UBS has cut its order book compound growth forecast for the upcoming two fiscals to 14%, down from 21%, after the company indicated longer timelines for two large programmes: the Su-30 MKI fighter upgrade and the LCA Mark 2. The firm now expects HAL's order book to reach Rs 2.8 lakh crore by fiscal 2028, compared to Rs 3.4 lakh crore earlier.
While the downgrade reflects caution on near-term stock performance, UBS acknowledges the structural growth underway. HAL's manufacturing revenue share is projected to rise from 23% to 40% of total revenues by fiscal 2028, with ramp-ups at its LCA and helicopter factories.
The newly commissioned Tumkuru unit, for instance, is expected to double annual output capacity of helicopters to 30 units.
Valuations Have Run Ahead
HAL's manufacturing business is now being valued at Rs 1 lakh crore, up from just Rs 84,000 crore six months ago, UBS pointed out. That translates to nearly 100 times the 12-month forward price to earnings ratio.
Despite the downgrade, UBS continues to see HAL as a strategic beneficiary of India's growing focus on defence self-reliance. The company has the highest share of around 40% of recently cleared defence programmes. Its robust maintenance, repair, and overhaul business also provides a dependable profit base, having grown at a 13% growth rate from fiscals 2020 to 2025.
Faster-than-expected conversion of large defence orders such as the Su-30 upgrade or LCA Mark 2 could swing sentiment, UBS noted. Its upside scenario pegs value at Rs 7,000, while a downside case could see it fall to Rs 3,900, assuming slower ramp-up and order delays.
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