Article

Hindustan Aeronautics Ltd-IPO Note

15 Mar 2018 Nikita Bhoota

Issue Opens: March 16, 2018
Issue Closes: March20, 2018
Face Value: Rs10
Price Band: Rs1,215-1,240
Issue Size: ~Rs4,198cr
Public Issue: 3.41crore shares
Bid Lot: 12 Equity shares       
Issue Type: 100% Book Building

% shareholding

Pre IPO

Post IPO

Promoter

100.0

89.8

Public

0.0

10.2

Source: RHP

Company Background

Hindustan Aeronautics Ltd. (HAL) is engaged in the design, development, manufacture, and upgrade & servicing of a wide range of products. These products include aircraft, helicopters, aero-engines, avionics, accessories and aerospace structures. The company is the largest DPSU in terms of value of production (source: MoD Annual Report FY17). HAL was also the 39th largest aerospace company in the world in revenue terms in 2016, as per Flight International. The company has 20 production divisions and 11 research and design centres located across India.

Objective of the Offer

The offer consists of offer for sale of up to 3.41 cr shares (Rs4,198cr) by the government of India (GOI). It includes employee reservation of 6.69 lakh shares. There is a discount of Rs25per share to the retail investors and employees. The net offer consists of ~ 3.34cr shares. The object of the offer is to carry out disinvestment plan of GOI.

Financials

Consolidated Rs cr.

FY15

FY16

FY17

**H1FY18

Revenue

15,648

16,759

17,952

5,173

EBITDA Margin %

5.4

14.7

18.1

9.2

Adj. PAT

994

2,004

2,625

391

EPS (`)*

29.7

59.9

78.5

11.7

P/E*

41.7

20.7

15.8

-

P/BV*

2.8

3.8

3.3

-

RONW (%)

6.7

18.2

20.9

Source: Company, 5 Paisa Research; *EPS & Ratios at higher end of the price band and on post IPO shares, **non-annualized numbers

Key Investment Rationale

The company’s order book as on December 31,2017 was strong at Rs68,461cr (3.7xFY17sales), providing good revenue visibility. HAL also has an attractive order pipeline for Light combat aircraft (LCA) Mk1A. In December 2017, the company has received requests for proposal on nomination basis from the Ministry of Defence (MOD) for (1) the procurement of 83 LCA Mk1A aircraft (estimated cost of Rs60,000cr); and (2) the procurement of 15 LCH series production helicopters (estimated cost of Rs4,500cr). We believe materialization of these orders will lead to robust sales growth going forward.

The company is a leader in the Indian aeronautical industry and derives a substantial portion of its revenue from the Indian defence services. Being a GOI promoted entity, it is the preferred supplier for aerospace products and services. It boasts of a diversified product portfolio and indigenously designed and developed products. The company is also developing new products including the Indian Multi Role Helicopter (IMRH). It is also foraying into the civil transport aircraft segment with the civil variant of the Dornier Do-228 aircraft. The company also manufactures industrial marine gas turbines. The company typically spends ~7% of its revenue on research & development (R&D). Its R&D expenses grew at a higher (vs sales) CAGR of 11% CAGR (FY15-17).

Key Risk

HAL’s primary customer is IDS, from which the company derived 91.4%, 93.3%, of total revenue for H1FY18 and FY17 respectively. India’s defence sector still faces challenges in terms of slow decision making process. Therefore, any delay in award of orders could hamper company’s order inflows and revenues.

Conclusion

At the upper price band, the stock is valued at P/E of ~16x FY17. Given its strong growth prospects as the largest DPSU and leadership in the aeronautical industry, we recommend Subscribe from the long-term perspective.

Research Disclaimer

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Hindustan Aeronautics Ltd-IPO Note

15 Mar 2018 Nikita Bhoota

Issue Opens: March 16, 2018
Issue Closes: March20, 2018
Face Value: Rs10
Price Band: Rs1,215-1,240
Issue Size: ~Rs4,198cr
Public Issue: 3.41crore shares
Bid Lot: 12 Equity shares       
Issue Type: 100% Book Building

% shareholding

Pre IPO

Post IPO

Promoter

100.0

89.8

Public

0.0

10.2

Source: RHP

Company Background

Hindustan Aeronautics Ltd. (HAL) is engaged in the design, development, manufacture, and upgrade & servicing of a wide range of products. These products include aircraft, helicopters, aero-engines, avionics, accessories and aerospace structures. The company is the largest DPSU in terms of value of production (source: MoD Annual Report FY17). HAL was also the 39th largest aerospace company in the world in revenue terms in 2016, as per Flight International. The company has 20 production divisions and 11 research and design centres located across India.

Objective of the Offer

The offer consists of offer for sale of up to 3.41 cr shares (Rs4,198cr) by the government of India (GOI). It includes employee reservation of 6.69 lakh shares. There is a discount of Rs25per share to the retail investors and employees. The net offer consists of ~ 3.34cr shares. The object of the offer is to carry out disinvestment plan of GOI.

Financials

Consolidated Rs cr.

FY15

FY16

FY17

**H1FY18

Revenue

15,648

16,759

17,952

5,173

EBITDA Margin %

5.4

14.7

18.1

9.2

Adj. PAT

994

2,004

2,625

391

EPS (`)*

29.7

59.9

78.5

11.7

P/E*

41.7

20.7

15.8

-

P/BV*

2.8

3.8

3.3

-

RONW (%)

6.7

18.2

20.9

Source: Company, 5 Paisa Research; *EPS & Ratios at higher end of the price band and on post IPO shares, **non-annualized numbers

Key Investment Rationale

The company’s order book as on December 31,2017 was strong at Rs68,461cr (3.7xFY17sales), providing good revenue visibility. HAL also has an attractive order pipeline for Light combat aircraft (LCA) Mk1A. In December 2017, the company has received requests for proposal on nomination basis from the Ministry of Defence (MOD) for (1) the procurement of 83 LCA Mk1A aircraft (estimated cost of Rs60,000cr); and (2) the procurement of 15 LCH series production helicopters (estimated cost of Rs4,500cr). We believe materialization of these orders will lead to robust sales growth going forward.

The company is a leader in the Indian aeronautical industry and derives a substantial portion of its revenue from the Indian defence services. Being a GOI promoted entity, it is the preferred supplier for aerospace products and services. It boasts of a diversified product portfolio and indigenously designed and developed products. The company is also developing new products including the Indian Multi Role Helicopter (IMRH). It is also foraying into the civil transport aircraft segment with the civil variant of the Dornier Do-228 aircraft. The company also manufactures industrial marine gas turbines. The company typically spends ~7% of its revenue on research & development (R&D). Its R&D expenses grew at a higher (vs sales) CAGR of 11% CAGR (FY15-17).

Key Risk

HAL’s primary customer is IDS, from which the company derived 91.4%, 93.3%, of total revenue for H1FY18 and FY17 respectively. India’s defence sector still faces challenges in terms of slow decision making process. Therefore, any delay in award of orders could hamper company’s order inflows and revenues.

Conclusion

At the upper price band, the stock is valued at P/E of ~16x FY17. Given its strong growth prospects as the largest DPSU and leadership in the aeronautical industry, we recommend Subscribe from the long-term perspective.

Research Disclaimer