1. Company profile:

Hindustan Aeronautics Limited is India's largest defense sector Navratna company that is involved in designing, developing, manufacturing, repairing, upgrading and overhauling avionics, aero-engines and aerospace structures. The company's biggest clientele in India is Indian Army.

The company also exports its product line mainly spares to over 13 nations including Afghanistan, Namibia, Seychelles, Ecuador, Mauritius, Maldives, and Nepal.

2. Issue details:

The complete OFS issue comprises sale of 3,41,07,525 equity shares by the President of India acting on behalf of the Department of Defence Production, Ministry of Defence. For employees, the reserved portion is kept at 6,68,775 equity shares. The face value of the share is fixed at Rs 10 per share. The issue price band for HAL IPO is Rs 1,215 to Rs 1,240 per share.

Retail investors and eligible employees of the company will get Rs. 25 discount on the offer price. The IPO remains open from March 16 to March 20, 2018. Investors can apply for a minimum of 12 equity shares and in and in multiples of 12 thereafter.

SBI Capital Markets and Axis Capital Limited are the books running lead managers to the HAL IPO. Karvy Computershare Private Limited is the registrar to the issue.

3. Issue objective:

Primarily the objective of the issue is disinvestment in the PSU by the government of 10% of the HAL's pre-offer paid up equity share capital. Also, the company aims to realize the benefits of listing on the exchanges. Being a complete offer for sale issue, Hindustan Aeronautics will not receive any proceeds from the share sale instead the selling shareholder will receive the proceeds.

4. Financials:

The company with no long-term debt reported CAGR of 8.9% in revenue from operations which stood at Rs 18,554.9 crore in FY17. The company's order book that generally comprises products and service to be manufactured and supplied but excludes expected revenues from incomplete tasks of ongoing contracts. As of December 2017, the order book of the company was Rs 68,461 crore.

Cash and cash equivalents of the company are reported to be Rs 11,699.2 crore as of September 2017.

Other than the Indian Defence Forces, the company sells products to state governments, para-military forces and corporates. In HYFY18, of the total sales, the company sold majorly i.e. 91.4% to Indian Defence Services.

5. Valuations:

The stock of HAL is suggested to be offered at a reasonable valuation of 15.8x FY17 EPS of Rs 78.5 calculated at the upper price band of Rs 1240 per share.

6. Conclusion:

Top brokerages have given a ‘subscribe' rating to the issue with a medium to long term perspective. Strong order book, huge growth potential in the defense space very well supports healthy growth of the company in the upcoming years. Further, it is to be noted that the company pays 30% of its annual earnings mandatorily as dividends to its shareholders.

Nonetheless, as iterated by ICICI Securities company's heavy dependence on funding needs from the defence budget as also MoD contracts cannot be ignored. Also in respect of key technologies it is dependent on domestic and foreign licensors.

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