Financial Highlights:

Q4FY24 Result Highlights
Hindustan Aeronautics Ltd (HAL) has achieved exceptional growth through strategic execution and stringent cost control measures, positioning itself as a leader in the aerospace and defence sector. Consolidated Revenue for the quarter surged to Rs 14,769 crores, marking an impressive 18.2% YoY increase and a staggering 143.7% QoQ rise from Rs 12,495 crores in the same period last year. This exceptional growth was driven by the successful execution of major orders, including Dornier aircraft, Twin Seater LCA Tejas, and Tejas Mk-1A. Gross profit soared by 28% YoY, reaching Rs 9,921 crores, thanks to a significant increase in IOC contract value, which contributed an additional Rs 1,500 crores in Q4. This pushed the gross margin up by 524 bps YoY to a remarkable 67.2%. EBITDA skyrocketed by 82% YoY to Rs 5,901 crores, with the EBITDA margin improving by an astounding 1,398 bps YoY to 40%, driven by stringent cost control measures. Profit after tax (PAT) saw a spectacular jump of 51.5% YoY, reaching Rs 4,309 crores, propelled by higher other income and lower interest costs, with PAT margins standing strong at 29.2%, an improvement of 641 bps.

Key Conference Call Takeaways
Order Pipeline

• The order pipeline appears promising with anticipated contracts valued at Rs. 160,000-170,000 crores, expected to materialize within 18 months to 36 months. This includes:
• 97 additional LCA Mk-1A jets
• 156 LCH Prachand helicopters
• 43 advanced light helicopters Dhruv for the Indian Air Force and Indian Army
• 60 utility helicopters for the Indian Navy
• Various upgrades to Dornier aircraft
• These orders will keep the manufacturing lines busy until 2032 and drive HAL's growth. The outlook for FY '24-'25 and beyond is promising, with new platforms being added each year, expanding the product profile.

Growth and Future Projections

• The company has sustained its growth trajectory despite geopolitical challenges and expects to maintain this momentum with a projected growth rate of 12-15% in the upcoming years. It anticipates securing orders valued at Rs 1,60,000-1,70,000 crores over the next three years, reflecting its positive outlook for future growth. The company is optimistic about its long-term prospects and foresees continued and consistent growth in the medium term.

Margins

Q4 and FY24 profitability was aided by ~Rs.1500 cr additional revenue from change order in LCA IOC contract, as well as the absence of impairment loss on Sukhoi and amortization on HTT-40 development. The optimal EBITDA margin is 32-33%, including 18-20% EBIT, 5-7% D&A expenses, and ~6% interest income. The margin should not go below ~29%. Excluding interest income, the operating EBITDA margin should be 26-27%.

Capacity Building and Production Expansion

• The LCA Tejas-Nashik plant is scheduled to commence operations by October 2024, while the helicopter plant in Tumukuri, Bangalore, is investing in capacity to boost the delivery of LCA-Tejas HTT-40 aircraft. Initially, the LCA Tejas Mk-1 production capacity is set at 16 aircraft, which will later increase to 24.
• The company anticipates receiving 93 additional orders for LCA Tejas Mk-1A. Initially, one aircraft will be produced from the Nashik plant in FY25, with the capacity increasing up to 8 aircraft per year from 2026 onwards. The target is to complete the delivery of all aircraft by 2031-32, a year ahead of the contracted timeline.
• In FY25, the company expects to deliver 17 aircraft. ALH naval variant is currently in the developmental stage and is expected to reach production by FY26-27.

Recent Deliveries and Orders

• The company last year (FY24) delivered various aircraft to Guyana, including LUH, AL-31 engines, 15 RD-33 engines, 6 ALH helicopters, and 2 Dornier aircraft, totaling around Rs 200 crores.
• The company's order book is currently at Rs 94,000 crores POST for the delivery of RD-33 engines, Dornier aircraft, and LCA Tejas Mk-1A. It expects this to rise to Rs 1,20,000 crores next year. The Ministry of Defence (MoD) has approved additional orders, including 97 LCA Mk-1A, advanced light helicopters, Dornier aircraft, 150 LCH Prachand, 40 Dhruv helicopters, 60 light utility helicopters for the Indian Navy, and the Sukhoi 30MKI upgrade program.
• The company plans to expand its portfolio to include LUH, HTT-40, and civil ALH, with deliveries anticipated in FY26. It also expects new orders for the naval variant of LCH and the LCA Mk-2 prototype in FY26-27.
• Additionally, the company expects a large order from Su-30MKI engine, with the machinery setup already completed and advanced negotiations expected to be finalized in 2-3 months. The Su-30MKI upgrade program is also in advanced discussions with other stakeholders, with the deal expected to be finalized within six months.

Export Focus and Certification

• The company is seeking global manufacturing certification to facilitate exports.
• It has shifted its focus from the domestic market to exports, anticipating significant export revenue growth over the next 2-3 years.
• The Transfer-of-Technology (ToT) for the GE414 engine is expected to be around 80%, with discussions currently in the advanced stage.

Financial Performance and Cost Control

• The company has implemented cost control measures to reduce employee costs from 23% in FY18-19 to 16% by FY25. Overall expenses are expected to decrease from 8-9% to 4-5% within the next 3-4 years.
• A change in the IOC contract has increased gross profit by Rs 1500 crores. The anticipated EBITDA margin is expected to be between 30-32%, with interest income projected at 26-28%. The new order intake guidance for FY25 is expected to be around Rs. 47,000 crore.

Operational Efficiency

• Inventory has stabilized at an optimal level of 159 days. Debtors' turnover has improved significantly, decreasing from 220 days a few years ago to 55 days, with this trend expected to continue.
• Return on Holdings (ROH) is consistently growing at 8-9% annually. From the manufacturing perspective, the company is confident in achieving double-digit growth smoothly. The company anticipates a ROH-Manufacturing mix of 60-40% in the coming years.

Capital Expenditure and R&D

• The company is prioritizing capital expenditure and R&D to meet future demand, planning to invest Rs 3000 crores in capacity building for various platforms, including GE414-IMRH, Tejas MK-2, and AMCA programs. This includes constructing a 20k-ton isothermal plant for aerostructures and a carbon fiber facility.
• To significantly increase its revenue, the company is investing Rs 4000 crore in IMRH R&D and Rs 2000 crore in Marine Naval Helicopter development. The company has allocated 7-8% of its PAT towards R&D, focusing on the best industry for future growth.

Local Content and MRO Activity

• The company is maximizing local content in its LCA program, with local components and LRU for actuators, and the LCA Mk-1A has over 65% local content.
• Commercial MRO activity for the Airbus 320 has begun at the Nashik plant, with plans to expand these activities in the coming years.

GE-414 Engine
The agreement is for the Transfer of Technology of ~80% to be manufactured in India while 20% is to be sourced from GE. The engine will be used in LCA Mk2. Commercial discussion on the form of compensation to GE has not yet started.

Revenue and Order Projections

• The company's ROH, currently stands at Rs 20,000 crores, is consistently growing at an annual rate of 8-9%. Meanwhile, the manufacturing sector anticipates a growth rate of 15-18%.

Design & Development
FY24 revenue stood at ~Rs.1500 cr, while order book stands at ~Rs.900 cr. Investing Rs.2000 cr from internal funding for the development of UHM for the Navy, which should be on track for flight testing in 2 years and commercial production from FY27 onwards. Also, spending Rs.4000 cr for R&D on IMRH project. The LCA Mk2 prototype should be ready by 2026.

Outlook & valuation

Hindustan Aeronautics Ltd (HAL) delivered impressive Q4 earnings with remarkable improvement across all its key parameters. HAL holds a strong market position with limited competition from the private sector due to high capital requirements and lengthy development timelines in the aerospace industry. HAL is strategically positioned as the sole domestic supplier and has formed valuable collaborations with industry giants like Safran, Airbus, and GE.

HAL is a play on the growing strength & modernization of India’s air defence given 1) its position as the primary supplier of India’s military aircraft, 2) long-term sustainable demand opportunity, owing to the government’s push on procurement of indigenous defence aircraft, 3) The company's strategic diversification into the civilian sector and leap in HAL’s technological capabilities due to development of more advanced platforms (LCA Tejas MK-1A, LCA Tejas Mk-2, LUH, LCH, Su30, HTT-40, and AMCA, etc.), 4) improvement in profitability through scale and operating leverage, 5) Robust order book of Rs.94,000 cr lending strong earnings visibility. At a CMP of Rs. 5110, the stock is trading at 45x FY26E. This valuation reflects the expected influx of new orders, including Tejas Mk-1A, Sukhoi-30MKI upgrades, ALH Dhruv helicopters, and various aerospace structures for PSLV and GSLV, coupled with a strong focus on export opportunities. We recommend a HOLD rating on the stock.