Defence modernization, indigenization programme to propel HAL

HAL is set for substantial growth ahead aided by defence modernization, gains from newer markets segment and sustained profit margin. The company designs, develops and manufactures aircraft and helicopters including its engines and electronic systems with Indian Air Force as its major customer.

In FY24, HAL’s revenue grew by nearly 13% and this is projected at 15-18% going forward. Its revenue visibility comes from an orderbook of ₹94,000 crore, more than three times its FY24 revenue. Management expects fresh order of ₹47,000 crore in FY25 with net orderbook projected to cross ₹1.2 trillion by the end of the year.

“We remain positive on HAL given its strong order backlog and robust pipeline. We forecast an earnings CAGR of 27% over FY24-27F," says Nomura in a research report.

Among the important orders being undertaken by HAL is manufacture of 83 indigenously developed Light Combat Aircraft (LCA) MK 1A, to be delivered by 2029.

On top of the strong orderbook and revenue visibility from domestic market, it is also actively trying to enter the huge global market for defence aircraft and helicopters. In terms of market expansion, it is also venturing into segments of commercial aircraft market.

It has entered into an agreement with Airbus to establish a facility for maintenance, repair and overhaul of commercial aircraft to be operational by November.

It has also signed another deal with French engine maker Safran to produce engines for advanced helicopters and certain components of engines for aircraft. HAL is already producing engines for existing helicopters in collaboration with Safran.

Yet, the biggest deal is the MoU signed with GE for the manufacture of engines for fighter jets including technology transfer of up to 80%. The deal required approval from the US Congress because of complex requirements related to the sensitive technology transfer and received the same in June last year.

The technical and other details for the JV is being worked out and is expected to be finalized by the end of the year. To augment its capacity to deliver, company plans to spend ₹3,000 crore during the year. It is also investing ₹6,000 crore for development of newer versions of helicopters including one for Indian Navy.

While the company has established its capability it still faces the near-term challenge of geopolitical uncertainty which affects the supply chain as it is dependent on the global market for several key components. Delays in order from the government side or inability to break into the export markets could be other challenge. For now, the near tripling of stock price in the past year suggests investors have shrugged-off these challenges.