Supply delay drags Hindustan Aeronautics’s near-term growth prospects

The September quarter (Q2FY25) earnings of HAL had some positives such as a robust order book. However, these have not allayed investors’ concerns about supply chain issues delaying the delivery of the much-awaited Tejas Mk-1A fighter aircraft. The state-owned company manufactures aircraft and helicopters, including engines, with the Indian Air Force as its major customer.

HAL delivered the first AL-31FP Aero Q Engine under the 240-engine contract for Su30MKI aircraft in the second quarter of FY25. It has secured an order valued at around ₹26,000 crore for 240 AL 31-FP engines to power Sukhoi Su-30 fleet, with deliveries scheduled over an eight-year period. With that, HAL has a strong medium-term revenue visibility with an estimated order book of ₹1.1 trillion, up 10% year-on-year and 3.5 times trailing 12 months’ sales.

This should help the company meet its guidance of order inflow of ₹47,000 crore in FY25. Further, the management expects revenue growth of 15-18% between FY25 and FY28, with repair and overhaul (ROH) services growing at 9-10%.

In Q2FY25, consolidated revenue and Ebitda growth were moderate at 6% and 7% year-on-year respectively, while net profit grew sharply by 20% aided by lower depreciation and higher other income. Ebitda stood at ₹1,640 crore, largely in -line with analysts’ estimates. Revenue growth was affected by continued delay in supply of engines from GE for the Tejas aircraft with geopolitical issues affecting the supply chain.

“HAL should deliver 18% earnings CAGR over FY24-27E supported by base assumption of resolution of supply-side challenges and timely execution of strong order backlog,” said analysts at Antique Stock Broking in an 18 November report. However, the report projects the company’s Ebitda margin to decline from 27% to 25-26%, with the high-margin ROH services segment expected to grow slower than manufacturing.

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Other than domestic defence market, the company is expanding its offering for the civil and export markets. It is setting up a maintenance, repair, and overhaul (MRO) facility in collaboration with Airbus to provide maintenance services for commercial aircraft.

It is also pursuing civil certification for its engine which will expand the market outside the defence sector. “With the rising share of indigenization with unexplored export opportunity in the aircraft and helicopter industry, HAL is well paced to capitalize on long-term growth prospects of ₹5.2 trillion pipeline (Rs1.5 trillion in the next two years),”said analysts at Elara Securities (India).

In October, HAL was elevated to ‘maharatna’ status by the government, enhancing its operational and financial autonomy. Meanwhile, this calendar year so far, HAL stock has rallied 44%, ahead of the Nifty50’s 9% returns. At FY26, price-to-earnings, the stock is trading at a multiple of 29x, shows Bloomberg data.

While the valuation multiple does not look expensive, the initiation of engine delivery for Mk-1A is a crucial trigger for earnings growth potential. 

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