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Slowing revenue growth may disrupt HAL’s flight path


: Investors in Hindustan Aeronautics Ltd (HAL) are delighted, given the government’s sharp focus on defense indigenization. On Monday, HAL stock hit a new 52-week high 2,167. The company is a key supplier of Indian military aircraft.

However, investor optimism comes against the backdrop of muted September quarter (Q2FY24) results. Weak execution and higher costs resulted in lower than expected profit after tax 1,235.3 crore.

Costlier raw material costs and increased expenses pressured operating margins by more than 400 basis points year-on-year (yoy) to 21.7%. Revenue growth of 9.5% yoy at 5,636 crore also lapsed. Manufacturing revenue may have grown faster than the high-margin repair & overhaul (ROH) segment, analysts said.

On the bright side, HAL’s order pipeline is strong, giving visibility to long-term revenue growth. For FY24, HAL has guided for an order inflow of approx 48,000 crore, which is 85% higher than in FY23.

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“The company has a healthy order book of ~82,000 crore (FY23) with more than three years of revenue visibility. Once the execution of large orders like LCA (Mk1A) accelerates, the company could post double-digit revenue growth from FY2025E, and should achieve 14-15% sales growth from FY2026,” Sharekhan told BNP Paribas.

LCA stands for India’s light combat aircraft manufactured by HAL.

HAL expects revenue to grow by 7-8% in FY24, and 10-11% in FY25. “HAL has guided for modest revenue growth for FY24 as manufacturing revenue is expected to see good momentum from FY25 onwards as deliveries of LCA Tejas MK I gain traction. Until then, RoH will dominate the revenue mix, leading to muted revenue growth of 9% for FY24,” Antique Stock Broking Ltd said.

In this calendar year so far, HAL stock has gained 70%. So far, the positives seem to outweigh the negatives. But investors must note that orders that turn into revenue happen gradually.

HAL is seen as a potential beneficiary of the government’s structural reforms in defence, but there are risks such as lower government spending on defence, less allocation to domestic procurement, increased competition from the private sector and a significant rise in commodity prices.

Meanwhile, to diversify its revenue stream and drive long-term growth opportunities, HAL has signed agreements with the largest European aircraft manufacturer Airbus and France-based Safran Aircraft Engines.

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