Hindustan Aeronautics Ltd (HAL), the state-run defence company, has recently seen a string of positive developments which strengthen the investment case in the company, according to Citi.
In recent weeks, HAL has had multiple developments with potentially both near- and medium-term implications, including the improvement in Tejas Mk1A engine supplies, fresh procurement clearances, moves towards greater private-sector outsourcing and engine development for future helicopter programs.
Citi believes these developments help provide incremental comfort on some of the key investment debates, which have weighed on trading multiples.
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On September 7, the Defence Acquisition Council accorded Acceptance of Necessity for Advanced Light Helicopters as part of proposals worth around Rs 1.1 lakh crore, of which 98% is expected to be sourced domestically. Citi noted ALH deliveries from HAL have been smoother vis-a-vis other platforms.
Earlier, HAL and Safran signed a contract with SAFAL joint venture to design, manufacture and support the 3,500-4,000 shp Aravalli engine which will power HAL's proposed 13-tonne Indian Multi-Role Helicopter and its naval variant.
Citi sees this as a incrementally improving the probability of eventual award of the IMRH program to HAL.
“Eventual award of both of these programs (ALH, IMRH) will enhance growth visibility even further in platforms where we anticipate execution to be relatively smoother,” Citi said.
Additionally, HAL is also taking steps to address manufacturing-capacity constraints, which should likely help preserve facility and supplier readiness ahead of the anticipated comprehensive Su-30 MKI upgrade programme order over the medium term.
According to the brokerage firm, while a section of the street remains concerned about private sector gaining market share from HAL, it may be under-estimating execution strengthening in HAL's key projects with private sector participation.
Further, the improvement in GE F404 engine deliveries should allow HAL to complete parked airframes and eventually begin deliveries of Tejas Mk1A to the Indian Air Force.
Re-Rating Scope
While timing of Tejas LCA Mk1A delivery start remains a key monitorable, Citi sees scope for re-rating once deliveries commence.
“With several airframes already structurally completed, and revenue recognition to follow post deliveries, the start of Tejas deliveries could ease an execution overhang and refocus investor attention on HAL's multi-year growth visibility backed by ~ 7x backlog/TTM sales, in our view,” Citi said.
HAL share price has started reflecting some of recent positives. The PSU defence stock has gained 5% in one week.
At valuations of ~ 31x FY28E PE, well below broader Indian defence peers, Citi believes risk-reward looks favourable and there is scope for further re-rating once LCA Tejas Mkla deliveries commence.
Citi reiterated its ‘Buy' rating on HAL shares with a target price of Rs 6,175 apiece, implying an upside potential of nearly 23% from Tuesday's closing price.
On Tuesday, HAL stock price ended 3.56% higher at Rs 5,029.00 apiece on the BSE.
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