Recommendation from Diversified Sector

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.

HINDUSTAN AERONAUTICS : IN A ‘SECURED’ STATE OF PROGRESS

HERE IS WHY
☛Good growth prospect
☛Strong order book
☛Strong research and development capabilities.

Hindustan Aeronautics Limited is into carrying out design, development, manufacture, repair and overhaul of aircrafts, helicopters, engines and related systems like avionics, instruments and accessories, primarily serving the Indian defence programme. It also manufactures the structural parts of various satellite launch vehicles (SLVs) of the Indian Space Research Organisation (ISRO). The manufacturing programs underway at HAL are production of SU-30 MKI, LCA and DO-228 aircraft and ALH-Dhruv, Chetak, Cheetal and LCH helicopters. HAL has 20 production units and 11 research and development centres in India.

Since HAL is mainly engaged with defence services, a major negative impact on the future business in the long term is not anticipated in the short run. However, past trend shows encouraging results. Downsizing of the defence budget and risk of economic recession can have an impact on the operations of the company. But on the positive side, ‘Atmanirbhar Bharat Abhiyan’ led by the government is providing a significant boost to self-reliance and local production which may favourably impact the operations of the company as the defence sector may demand HAL’s products. 

Additionally, the current India-China tension though subdued will not fade so fast and the government will have to ramp up defence infrastructure. In line with that, the government is procuring SU-30 MKI from HAL. The government will spend around Rs 10,730 crore for procuring 12 SU-30 MKI aircraft from HAL as part of defence portfolio build-up. The company’s order book continues to be healthy at Rs 52,965 crore as on March 31, 2020. Majority of the order book is into manufacturing – Rs 37,240 crore or 70.31 per cent. However, over the years the ROH and spares have started showing improvement in the order book share from 11.62 per cent in FY17 to 27.28 per cent in FY20. This will help in the long run as repair and overhaul activities are recurring in nature and thereby are more stable.

For the quarter ended March 2020, the company’s gross sales increased 1.67 per cent to Rs 10,323 crore in Q4FY20 from Rs 10,153.79 crore in Q4FY19. Total expenditure for Q4FY20 stood at Rs 7,819.97 crore as against Rs 7,553.70 crore in Q4FY19, showing an increase of 3.53 per cent. PBIDT, excluding other income, showed a decrease of 3.73 per cent to Rs 2,503.03 crore in Q4FY20 from Rs 2,600.09 crore in the same quarter last year. PBIDT margin, excluding other income, for Q4FY20 stood at 24.25 per cent as against 25.61 per cent in the same quarter last year. PAT for Q4FY20 stood at Rs 1,249.63 crore as against Rs 1,237.08 crore in the same quarter last year, showing an increase of 1.01 per cent. PAT margin for Q4FY20 stood at 12.11 per cent as against 12.18 per cent in the same quarter last year. The stock is trading at a PE multiple of 11.03x and a PB of 2.38x. ROE for FY20 stood at 23 per cent. The dividend pay out ratio for FY20 was around 47 per cent. The company has shown increase in sales and profit over the last three years along with margin improvements (PBIDTM and PATM). The current mood of making India self-reliant will help the company. By virtue of these factors, we recommend our reader-investors to BUY this stock.