Defence PSUs: where big is not beautiful
Hindustan Aeronautics Ltd (HAL) may be touted as the largest defence public sector unit (PSU) in terms of production value. But it is the relatively smaller peer Bharat Electronics Ltd (BEL) that is marching ahead on the growth front.
Provisional revenues released by these firms imply that BEL closed the previous fiscal year (FY18) with a revenue growth of 13.3%, way more than the 2.2% rise reported by HAL. Note that both disclosed unaudited turnover figures and final numbers can vary. Even so, the latest figures confirm recent trends.
As the accompanying chart shows, HAL’s revenues have been trudging along in single-digit growth range for some time now. BEL’s revenue growth in FY18 is slower than a year ago, but the company maintained the double-digit growth momentum. The five-year cumulative annual average growth rate works to 10.7% for BEL and 4.7% for HAL.
What explains the difference? Yellapu Santosh, senior research analyst (institutional equities) at IndiaNivesh Securities Ltd, attributes the growth difference to the business mix. For HAL, long-gestation platform projects along with capacity constraints have restricted revenue growth, despite the large order book. Comparatively, BEL, a systems integrator, caters to a wide range of projects as well as customers. BEL’s fortunes are not tied to one platform; hence, it enjoys better visibility on the execution front, backed by a healthy order book, adds Santosh.
That said, both the companies have a positive outlook. HAL expects the emphasis on self-reliance (in defence production), diversification into civil segment and enhancement of capacity to provide steady growth. BEL expects the strong order inflows to sustain its growth momentum.
But the question investors need to ponder over is growth. Indications are the divergence in revenue growth may continue.
Analysts project BEL to continue to post double-digit growth in revenues tracking the project execution. “Expect strong revenue booking in FY20E, as revenue traction from large orders like, Akash, LRSAM and MRSAM projects will start to kick-in,” IndiaNivesh Securities’ Santosh said in a recent note on BEL. LRSAM is long-range surface-to-air missile and MRSAM is medium-range surface-to-air missile.
The outlook for HAL, on the other hand, is not that clear. Business Standard reports that the company faces the risk of a dwindling order book. Also, analysts are yet to obtain a fair view of HAL’s revenue growth trajectory, given the company’s large, complex programmes which are susceptible to delays. While these concerns played a role in HAL’s weak listing, the stocks’ performance may reflect the revenue growth divergence.