Brokerage firm InCred has turned bearish on Hindustan Aeronautics (HAL) following the company's June quarter results, raising concerns over the quality of earnings despite a beat on key financial parameters. The brokerage believes the stock could correct and has indicated that it can be considered as a short, while continuing to prefer Bharat Electronics (BEL) over HAL.
HAL delivered a strong headline performance in first quarter of this fiscal, with revenue, Ebitda and net profit coming in ahead of InCred's estimates. However, the brokerage flagged concerns over lower gross margins, a significant decline in other operating expenses and higher other income.
HAL Q1 Results Beat Estimates
HAL's consolidated revenue increased 14.4% year-on-year to Rs 5,515 crore in Q1 FY27, compared with Rs 4,819 crore a year ago. The figure was also ahead of InCred's estimate of Rs 5,288 crore.
Ebitda surged 46.9% YoY to Rs 1,526 crore from Rs 1,039 crore, beating the brokerage's estimate of Rs 1,425 crore. The Ebitda margin expanded sharply to 27.7% from 21.6% in the year-ago quarter and was above the estimated 27%.
Net profit increased 14.9% YoY to Rs 1,590 crore from Rs 1,384 crore, also ahead of the estimated Rs 1,540 crore.
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The company delivered on management's guidance of 10-12% topline growth, while the Ebitda beat was supported by a 12% decline in raw material costs.
InCred Flags Earnings Quality Concerns
Despite the strong headline numbers, InCred said the earnings quality issue persists.
According to the brokerage, the margin beat was partly attributable to provision reversals, with other operating expenses significantly lower on a year-on-year basis. The exact quantum of these reversals remains unknown.
The brokerage also highlighted lower gross margins and the possibility of one-offs in other operating expenses, along with higher other income, as factors affecting the quality of reported earnings.
HAL's other income stood at Rs 900 crore in quarter ended June, compared with Rs 747 crore in the year-ago period.
"InCred believes the stock should correct" and sees the counter as a potential short, citing the persistence of earnings quality concerns.
Against this backdrop, InCred said it continues to remain positive on BEL over HAL.
The brokerage's preference indicates that while the broader defence sector outlook remains constructive, stock-specific earnings quality and valuation considerations are becoming increasingly important.
For HAL, the strong revenue growth and significant expansion in Ebitda margin provide positive headline indicators. However, investors may need to assess how sustainable the margin performance is once the impact of provision reversals, lower operating expenses and other income is stripped out.
The key monitorables for HAL going forward will therefore include gross margins, operating expenses, other income and the sustainability of its underlying profitability.
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