Hindustan Aeronautics (HAL) Poised for Takeoff in 2024 on Robust Defense Spending and Order Pipeline

Ajit Kushwaha

India’s state-owned aerospace and defense company Hindustan Aeronautics Limited (HAL) is set for strong growth in 2024, driven by rising defense spending and a robust order pipeline from the Indian armed forces.

With over Rs. 81,000 crore in orders in hand and the Narendra Modi government continuing to modernize the military, HAL is ramping up production capacity across its factories. Equity research firm Antique believes HAL can deliver 6% earnings CAGR over fiscal years 2023-2026.

Modernization Drive and Increasing Squadrons to Boost Demand

The Indian Air Force (IAF) is working to increase its fighter squadrons from 32 currently to 42 over the next decade. This planned expansion, along with the obsolescence of older aircraft, will drive demand for HAL’s products and services.

HAL is the lead integrator for several projects under the Make in India initiative to build defense systems locally. These include the Light Combat Aircraft (LCA) Tejas fighter jet and the light combat helicopter (LCH).

As indigenous platforms replace ageing foreign fleet, HAL stands to benefit with stable revenues from maintenance, repair and overhaul (MRO) contracts.

Strong Order Book Providing Revenue Visibility

As of May 2023, HAL’s order book stands at over ₹81,700 crore, providing clear visibility for top line growth. Some key orders in hand include:

  • 83 LCA Tejas Mk1A fighter jets worth ₹39,000 crore
  • 15 LCH worth ₹3,300 crore
  • 200 Ka-226T utility helicopters worth ₹20,000 crore
  • 70 Dornier transport aircraft worth ₹11,900 crore

Additionally, HAL is preparing quotations for over ₹1 lakh crore worth of anticipated orders from the armed forces coming up for award over the next 8 years. These include 114 multirole fighter aircraft (MRFA), stealth drones, and indigenous helicopter development programs.

With its healthy order pipeline, HAL is ramping up production across its factories. Equity research firm Antique believes the aerospace major is well positioned to report a 6% EPS CAGR over FY2023-26.

Expanding Production Capacity Across Units

To meet the rising demand for its platforms like LCA Tejas and helicopters, HAL is expanding capacity across its production units:

Bangalore Complex: Additional assembly lines added for LCA Tejas and LCH. Further ramp-up planned.

Nashik: Enhancing annual Sukhoi Su-30MKI output to 24 from existing 14 per year. Tejas capacity to also rise.

Korwa Aero Engine Division: Investing ₹1,500 crore to double output to 250 engines per year over the next 4-5 years. Critical for Tejas production.

These capacity expansions over the medium term will support HAL’s continued dominant position in India’s aerospace industry. With growing indigenization, the majority of future defense aircraft contracts will involve HAL or its partners in some capacity.

Attractive Valuation Provides Upside Potential

HAL continues to remain a financially stable company with a consistent 20%+ return on equity. Despite its exponential rise of over 120% in 2023, equity research firm Antique believes further upside remains.

In their latest update, Antique has maintained a BUY rating on HAL with a revised target price of ₹3,615. This target implies a nearly 29% upside from the 31 Dec 2023 closing price of ₹2,803 per share on the BSE.

Given its growth visibility from assured orders, capacity expansion underway and an improved earnings outlook, HAL remains an attractive bet for 2024 among defense sector stocks.

Investors can consider buying the stock on dips for an expected 30% return over the next 12 months. In the long run, HAL’s dominant position in India’s rapidly growing aerospace sector provides a solid investment case.

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By Ajit Kushwaha Writer
Ajit Kushwaha is a stock market investor and business owner of a chips manufacturing company in Hazaribagh, Jharkhand. He holds a Bsc. from Vinobha Bhave University and leverages over 5 years of share market experience in managing investments and his snack food business.
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