At a time when companies are demanding high valuations for their initial public offerings (IPOs), Hindustan Aeronautics Ltd’s (HAL’s) valuations come across as rather modest. The company’s IPO is priced at less than 16 times earnings.

But, in fact, even that seems high when you compare valuations with growth.

Revenue and earnings growth have been nothing to write home about. For fiscal year 2017 (FY17), net revenue increased 7% year-on-year whereas pre-tax and exceptional earnings increased 11.7% largely due to a decline in income from other sources.

In the first six months of this fiscal year (FY18), the company’s operating profit margin dropped to 9% from 18% in FY17.

But that shouldn’t worry investors, said an analyst who did not want to be named. “Given the lumpy nature of the business where performance depends to a good extent on the delivery schedule of aircraft, it won’t be fair to evaluate HAL’s financials on a quarterly or half-yearly basis," added the analyst.

In fact, for the half-year ended September, revenue accounted for just 29% of last year’s amount.

Still, investors looking for a listing pop in India’s largest defence public sector unit (PSU) could well be disappointed.

“It’s a nice plane to travel in but I won’t bet my money on it. The company’s capacity expansion and growth plans are hardly exciting," said Arun Kejriwal, director of Kejriwal Research and Information Services Pvt. Ltd.

Another analyst said the PSU tag is a bit of a drag, not only with respect to investor perception, but also in the way the company pursues growth opportunities. “Investors can expect sedate growth with this company," he says.

Further, HAL’s biggest customer—the Indian defence services—contributed a whopping over 90% of its revenue for the half-year ended September and for FY15-FY17. And that’s a key risk.

Simply put, a decline or reprioritization of funding in the defence budget or delays in the budget process could affect the company’s ability to grow or maintain its sales, earnings and cash flow.

On the flip side, investors will be buying into a company with stable financials. On certain parameters, HAL does seem to make a good candidate from a long-term perspective. For instance, it has a robust order book worth Rs68,461 crore (translating into 3.8 times FY17 net revenues) offering decent revenue visibility. The balance sheet is strong with cash and cash equivalents of Rs11,700 crore, nil borrowings and a net worth of Rs12,943 crore as of 30 September. It has a consistent track record of paying dividends. For FY17, its dividend payout stood at Rs1,000 crore, which works out to a dividend payout ratio of 37%.

Some brokerage firms have recommended investors to subscribe with a long-term view, which is a polite way of saying that they can’t expect decent returns anytime in the near future.

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