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The HAL-mark of Indian Defence 🪖

Bollywood has made us fall patriotically in love with the Indian Armed Forces - whether it is Hrithik Roshan in Lakshya or Sharukh Khan in Main Hoon Na.


Little did we know that the Indian defence sector would also be romanticised in the stock market, with major defence stocks rallying by about a 100% on average in the past year!


Amongst these is the largest defence PSU of India, which is responsible for state-of-the-art aircrafts and helicopters that are now world-renowned - Hindustan Aeronautics!


And even after giving its investors a return of 4x in the past 5 years, there seems to be more runway left for HAL.


What’s Kept HAL Going?

Most of the rallying for HAL, and other defence stocks comes from three factors:


A growing defence budget - India set aside Rs. 5.94 lakh crore for defence spending, including a capital outlay which is higher by 8% compared to the previous year. The capital allocation is where money is spent on aircrafts, helicopters, missiles, etc.


Increasing indigenisation - India has reduced its import reliance from 70% of all defence equipment to now less than 50%. India’s defence production hit a high of Rs. 1 lakh crore in FY23, more than double the amount that was recorded in FY19


Higher exports - India’s defence exports have grown more than 10x in the last 6 years, and are set to hit a Rs. 35,000 mark in FY25 from the current Rs. 16,000 crore (28% 5 year CAGR)


Strong Visibility over the next Decade…

For HAL, the tailwinds have resulted in a strong order book of Rs. 82,000 crore, which is executable over the next 4-5 years. To add some perspective, HAL’s annual revenue in FY23 was almost Rs. 27,000 crore. The order book it is currently sitting on is more than 3x its current annual revenue.


Some notable orders making up for this large order book include:

  1. 83 units of the Tejas Mk-1A, which is India’s domestically made Light Combat Aircraft (LCA), worth Rs. 47,000 crore

  2. 70 units of the HTT-40 trainer aircraft worth Rs. 7,000 crore

  3. 15 units of a Light Combat Helicopter worth Rs. 3,900 crore

  4. 12 units of a Light Utility Helicopter, and 25 units of an Advanced Light Helicopter worth Rs. 3,900 crore

Additionally, the management of HAL has cited an additional order pipeline of Rs. 50,000 crore, which is yet to materialise. This order is expected to range across fighter jet engines, Advanced Light Helicopters, Light Utility Helicopters, and fighter aircrafts.


💡 A manufacturing order book of Rs. 82,000 crore, and a pipeline of Rs. 50,000 crore ensure strong revenue growth for HAL over the next decade at least


…Attributed to Recent Successes

A large part of the manufacturing order book for HAL has been coming from its success in new indigenously designed and developed platforms such as:

  • LCA - Light Combat Aircrafts

  • LCH - Light Combat Helicopter

  • LUH - Light Utility Helicopter

  • ALH - Advanced Light Helicopter

Additionally, it is also in the process of developing the country’s first Fifth Generation combat aircraft - AMCA (Advanced Medium Combat Aircraft), and a medium-lift helicopter IMRH (Indian Multi Role Helicopter). These platforms have been particularly successful not only because they are indigenised, but also because they strongly support India’s efforts to modernise its fleet.


Tejas aircrafts are set to replace the ageing MiG-21s. The success of recent orders can pave way for the replacement of 470 MiGs and Mirages that the Indian Armed Forces holds by 2040, and perhaps even add another 200 more to expand the fleet. Similarly, the LCH and LUH platforms are expected to replace the older Chetak and Cheetah fleets. If successful, the LCH and LUH platforms can result in 145 units and 175 units of orders.


💡 HAL is set for tremendous growth from now till 2040 as India modernises, expands and replaces its entire fleet with new and indigenously designed and developed platforms


Ramping up on Execution

While orders can keep coming in, if HAL isn’t able to execute orders, all that glam is pointless. There are multiple things done by HAL in order to be able to successfully ensure the conversion of this large order book into revenue growth:

  1. HAL has turned to outsourcing the production of a substantial part, and will act as the final integrator of all components. This is a common model in aviation (both civil and military) given the volume and complexity of parts

  2. HAL’s previous order of Tejas Mk1 coming to a close will free up some of its capacity to 16 per annum, from the previous 6-7 per year

  3. HAL has recently added its third facility in Nasik that will take its jet-manufacturing capacity from 16 planes a year to 24, with the aim to ramp this up to 40

  4. It has also started a facility in Karnataka in 2022 for its helicopters, taking production from 30 helicopters a year to 60, and aims to take this to 90 in the near future

💡 Manufacturing capacity for HAL is expected to at least triple across aircrafts and helicopters so it can fulfil all the orders over the coming years


Additional Boost from Maintenance

While we’ve been raving about new orders so much, it’s important to note that Manufacturing constitutes to just a quarter of HAL’s revenue, while the rest of the three-quarters is formed up by Maintenance, Repair and Overhaul (MRO).


HAL provides MRO services to 75% of India’s aircrafts and helicopters across the Army and Coast Guard. This brings in, and is expected to bring in Rs. 18,000-19,000 crore of revenue every year, over the coming years.


The MRO business provides stability and visibility, given the elongated life of the the aerospace fleet. Additionally, it also has the benefit of contractual rates, with profitability dependent on operating efficiency.


💡 As the fleet grows, so will the MRO revenue, providing stability in revenue, and a strong base to keep the books steady.


What Does All of This Mean in Numbers?

Over the last 5 years, HAL’s revenue has seen a CAGR of 8%. However, with the order book and capacity both going up, revenue CAGR over the next 5 years is set to double to a 16%.


Profitability can go up at a higher rate for HAL given cost efficiencies, a change in the manufacturing model, a change in composition from R&D to manufacturing, and higher operating efficiency. This can result in EBITDA margins going from the current 29% to 32% by FY27.


With this, the PAT CAGR for HAL can boost to 23% over the next 5 years, compared to 15% in the past 5 years.


The re-rating in HAL over the last couple of years has been led by several factors including:

  • Sectoral tailwinds driven by an increasing defence budget, higher capital outlay with the defence budget, a focus on modernising and expanding the fleet, increased focus on manufacturing in India, and higher exports with the success of new platforms

  • Strong order book which is currently 3x of the total annual revenue and 17x of the total manufacturing revenue for HAL, providing visibility of strong growth over the next 10 years at least

In terms of valuations, the stock has traded at an average 1-year forward PE of 10x, with it currently trading at a 16x multiple. Taking all of the above factors into consideration, and the fact that it trades at a PEG of 0.9x, we see there to be a potential for valuations to move to a PEG of >1x; in addition to the steady 20%+ PAT CAGR it has the potential to deliver over the next many years, resulting in a strong long term compounding story.


The defence sector play is here to stay for the long term, and HAL, with its name and actions screaming patriotism and expertise in making India rise up, might just be the veteran to back in this global war!




Disclaimer: Investment in securities market are subject to market risks. Read all the related documents carefully before investing. The securities quoted are for illustration only and are not recommendatory. Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.


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