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ICICI Securities maintains a buy call on the stock of Hindustan Aeronautics Ltd. (HAL) for a target price of Rs 3,170/share. According to the brokerage's given target price, the stock can surge 28% in 12 months from its current level. HAL is a large-cap state-run defence sector Navratna company having a market cap of Rs 82,994 crore.
HAL reported strong performance in Q2FY23. Key highlights: 1) EBITDA margin at 31% was ahead of the 25-26% guidance for FY23- FY25; 2) provisions during the quarter reverted to 7% (in line with the historical range of 6-7%); 3) in our view, repair and overhaul (RoH) and spares revenue must have dominated Q2FY23 execution to justify such a strong margin-accretive growth (gross margin was 64% in Q2FY23; 4) Board has recommended the first interim dividend of Rs20/share.
Stock Outlook, Returns, & Dividend
On the NSE, the stock is currently trading at Rs 2,490/share, today it opened at Rs 2,492/share. The 52-week high was recorded at Rs 2,638.35 on 12 September 2022 and the 52-week low at Rs 1,181.20 on 20 December 2021, respectively.
The HAL stock has fallen 4.21% in a week, whereas, in a month it jumped, giving a 6.26% positive return. In 3 months it gave 9.39% positive returns, whereas, in a year it gave 74.58% positive returns. It has maximum 208.76% multibagger returns in 3 years. Since its listing on 28 March 2018, it has given 118.61% multibagger returns on investments.
The Board of Directors of the HAL on 11 November 2022 announced the first interim dividend of Rs. 20 per equity share of Rs. 10/- each fully paid up (200%) for the Fiscal Year 2022-2023, the company has also released its Q2 results.
Splendid Q2FY23 performance
HAL reported its Q2FY23 EBITDA at Rs16.2bn (up 30.8% YoY, 96.3% QoQ). Key highlights: 1) gross margin at 64% was elevated for the second quarter in a row, possibly due to higher ROH and spares revenue; 2) provisions were down 21.2% YoY (25.4% QoQ) to Rs3.4bn - reverting to historical 6~7% level as there were no one-off incidents in FY22; 3) focus on exports remains intact as HAL has executed an MoU for establishing an office in Malaysia to tap new business opportunities for Fighter Lead-in Trainer (FLIT) LCA, Su-30 MKM and Hawk upgrades besides others; 4) Board has recommended an interim dividend of Rs20/share. "Going ahead, we believe, in the near term, ROH and spares revenue would aid margins while the firm orderbook and order funnel continue to be strong. Hence, we believe the company is at a vantage point to increase its earnings over the next few years," the brokerage has said.
Impressive orderbook and order funnel gives comfort
HAL's firm orderbook of US$7.3bn comprises: 83 nos. LCA MK-1A, 10 nos. LCA, 9 ALH, 9 LCH and upgrade opportunities. Besides the company has also concluded a contract with Indian Air Force for 70 nos. HTT-40 indigenous trainer aircraft worth Rs68bn. In the medium term (12-18 months), orders worth US$5bn are expected - comprising 25 nos. ALH, 12 nos. LUH, 12 SU-30, etc. In the longer term (3-5 years), the company is expecting orders worth Rs8.8bn comprising 145 nos. LCH, 175 nos. LUH, 60 UHMs, 36 HTTs among others. Besides, the company is targeting to derive 10% of its revenue from exports. Furthermore, HAL has increased its R&D reserve to 15% (from 10%) to focus on new programmes required in the future.
Outlook: Bright prospects, robust margins in the near term
ICICI Securities said, "We see HAL in a sweet spot, riding on the solid orderbook (highest among defence companies under our coverage). We reinitiate coverage with a BUY rating and target price of Rs3,170/share based on DCF methodology. Delay in execution is a key risk to our thesis."
Disclaimer
The stock has been picked from the brokerage report of ICICI Securities. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.
