IPO : Hindustan Aeronautics
IPO rating - 46*
About the Issue
This IPO is a part of government's divestment plan of Rs. 80,000 crore set for fiscal year 2018-19. Thus, this IPO is purely offer for sale and HAL will not be getting any funds from this IPO. IPO consist of OFS of 33,438,750 equity shares to general public and 668,775 equity shares to its employees. The IPO price band is Rs. 1,215-1,240 per share. So, at the lower end of the price band selling shareholders will be able to garner Rs. 4,113 crore and at the upped end Rs. 4,198 crore. The employee and retail investors will get discount of Rs. 25 per share. The equity shares will be listed on both exchanges NSE and BSE. Investors need to bid for at least 12 stocks and can bid in multiples of 12.
Purpose of the Issue
The main purpose of this issue is to provide exit route to existing shareholders i.e. mainly government of India. Further, the company also expects to benefits from listing the equity shares on the stock exchanges.
Company Background
Hindustan Aeronautics Limited (HAL) is a government-owned Navratna firm which primarily operates in the design, development, manufacture, repair, overhaul, upgrade and servicing of a wide range of products including, aircraft, helicopters, aero-engines, avionics, accessories and aerospace structures. HAL’s operations are organised into five complexes, namely the Bangalore Complex, MiG Complex, Helicopter Complex, Accessories Complex, and Design Complex, which together include 20 production divisions and 11 research and design R&D centres situated across India. To grow further, the company has entered into 13 commercial joint ventures. According to Flight International, HAL is the 39th largest Aerospace company in the world in terms of revenue.
In FY17, the company derived ~93.3% revenue from Indian defence services and rest state governments, para-military forces and corporates. Further, around 2.6 per cent of revenue was contributed by exports.
Financial Performance
Looking at company’s financial, HAL has stable revenue growth from FY15 to FY17 but in terms of margins and profit, company has outperformed, and its EBITDA margin has surged to 24 per cent from 16.4 per cent in FY15. With margin expansion company’s bottom-line has registered remarkable growth of 62 per cent CAGR over FY15-17. Company’s RoE has witnessed significant jump from mere 7 per cent in FY15 to 21 per cent in FY17. However, recently the company seems to be struggling to maintain the revenue and PAT growth, as for six month ended September 2017, HAL’s revenue was at Rs. 5,277 crore and PAT for the same period was at Rs. 391 crore.
Our view
Company’s order book as on Q3FY18 stands at Rs. 68,461 crore, which includes products and services to be manufactured and delivered and excludes anticipated revenues from their joint ventures and subsidiaries. HAL has a sound track record of profitability and has been consistently paying dividend for the last 40 years. Remarkably, according to the Ministry of Defence Annual Report FY17, HAL is largest Defence PSU (DPSU) in terms of value of production in the Indian defence sector. Besides, in order to reduce dependence of defence products, company plans to increase the revenue share of other business segments such as from the civil aircraft and helicopter segments in the coming fiscals. To fulfill this objective, HAL has started the production of the civil variant of the Dornier Do-228 aircraft and has obtained the production organisation approval from the DGCA. To grow further and sustain the same, HAL aims to increase its presence in the high value services market, as it is not cyclical in nature. With an aim to become self-reliant in the defence sector the Government of India has initiated various programme such as Make in India. This bodes well for the players in this sector as presently 60 per cent of Indian’s defence-related requirements are fulfilled through imports.
In the Union budget of 2017-18 government has allocated around Rs. 2,623,90 crore for defence expenditures excluding pension. However, this allocation represents a decrease to 1.6 per cent in the allocation as a percentage of GDP for 2017-18 from 1.7 per cent for 2016-17. Lower defence spending in proportionate to country’s GDP is likely to have adverse impact on the new acquisition and modernisation plan of the armed forces. This risk overhang on defence manufacturing companies such as HAL.
Post annualising EPS for FY18, the valuation of HAL looks expensive and we believe HAL’s performance in FY18 to be lacklustre. However, HAL boasts of order book of Rs. 68,461 crore which gives us revenue visibility for almost 3-4 years. So, we urge our reader investors to subscribe with limited exposure.
40 or lower – Avoid Investment, 41 to 45 – Risky, 46 to 50 – Invest with limited exposure, 51 to 55 – Investment recommended, 56 & above – Excellent Investment.
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