Rs 15/Share Dividend, 1:2 Stock Split: Why, Buy Hindustan Aeronautics Shares In Defence Segment?

Aerospace and defence company, Hindustan Aeronautics (HAL) is jet-set ready to fly high on stock exchanges due to the growing strength & modernization of India's air defence segment. Brokerage Prabhudas Lilladher has initiated coverage on HAL shares and recommended buying for a target price of Rs 2,266. PL's coverage also comes after HAL underwent a stock split into a 1:2 ratio, becoming affordable and cheaper for investors. Before the stock sub-division, HAL shares turn ex-dividend for Rs 15 dividend per share. HAL has a strong pipeline in the defence segment ahead.

Amit Anwani - Research Analyst, Prabhudas Lilladher highlights four key pointers for buying HAL shares. These are:

1. Durable demand for modern indigenous military aircraft:

India's strength of 31 fighter jet squadrons falls short of the sanctioned total of 42 required for a potential two-front war with China & Pakistan. This will be exacerbated by the phasing out of ageing aircraft such as Mig-21, Mig-29, Jaguar, and Mirage. With HAL's monopolylike position in India's defence aerospace sector coupled with the government's push to procure indigenously designed & developed defence aircraft, the company is in a sweet spot to benefit from a long-term demand opportunity.

Currently, HAL is involved in several major fighter jet projects (Tejas Mk2, AMCA, TEDBF) and helicopter projects (LUH, LCH, IMRH) which are expected to replace various outgoing fleets.

2. Manufacturing revenue to accelerate from FY25 onwards:

HAL closed FY23 with an order book of Rs 818 billion. Manufacturing contracts account for Rs605 billion, including the landmark Rs457 billion order for 83 Tejas Mk 1As. There is also a highly visible Rs480 billion order pipeline for FY24. Most of these projects will start in full swing from FY25 onwards. Tejas Mk 1A deliveries will be the major revenue driver over FY25-29, while RoH & Spares and Design & Development will steadily supplement the top line.

According to Anwani, operating leverage from the growing manufacturing scale, coupled with normalizing provisions and higher interest income on cash advances will improve margins and net profitability.

3. Technology development to augment HAL's capabilities:

HAL has been scaling up its expenditure on R&D to ensure that the new platforms under development are state-of-the-art and comparable with global counterparts. Additionally, the MoU signed with GE Aerospace to co-produce GE-414 aero-engines will make HAL one of the few global companies to have the technological capability to build engines of such calibre.

Additionally, various other JVs and ToT licences enable HAL to gain access to advanced technologies and best practices to eventually design & develop cutting-edge platforms in-house for both domestic and export markets.

4. Exports offer an additional growth avenue:

The company is making proactive efforts to promote its international business with its indigenous range of LCA Tejas, ALH, LUH, and LCH. It recently signed an MoU to supply light & medium utility helicopters to Argentina's military and also has advanced leads with the Philippines and Egypt.

Also, recently, it opened an office in Malaysia to facilitate engagement with Southeast Asia.

Following this, Anwani in his research note said, "We estimate Revenue/Adj. PAT CAGR of 11.0%/14.2% over FY23-26E. The stock is currently trading at a P/E of 20.8x/18.3x on FY25/26E earnings. Initiate 'BUY."

Last week, on Friday, HAL shares ended at Rs 1929.10 apiece, up by 2.13% on BSE. Its market cap is over Rs 1.29 lakh crore.

Taking into consideration PL's target price, HAL has a potential of nearly 18% upside ahead.

HAL turned ex-split in the ratio of 1:2 -- which means that -- the company's equity shares which had a face value of Rs 10 before September 28, have halved and are trading at a face value of Rs 5 each now.

Recently, HAL shares turned ex-dividend for a final dividend payout of Rs 15 per share for the financial year 2022-23, amounting to Rs 501.58 crore. For the said fiscal, HAL has paid a first and second interim dividend of Rs 20 per share each, aggregating to Rs 1,337.55 crore. Overall, in FY23, HAL's dividend payout will be to the tune of Rs 1,839.13 crore to shareholders.

Disclaimer:

The recommendations made above are by market analysts and are not advised by either the author nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.