Hindustan Aeronautics Limited IPO (HAL IPO) Review

Hindustan Aeronautics Limited

Hindustan Aeronautics Limited IPO (HAL IPO) constitutes sale of shares by the government of India, which is selling 34.10 million shares or a 10.2% stake in the company.  HAL, is the largest defence public sector undertaking (PSU) in the country, makes fighter planes such as MiG-21, MiG-27, Jaguar, and Su-30 MkI. It is engaged in the design, development, manufacture, repair, overhaul, upgrade and servicing of aircraft, helicopters, aero engines, avionics, accessories and aerospace structures.

Hindustan Aeronautics Limited  IPO (HAL IPO) Details

Issue Period Fri, March 16, 2018- Tue, March 20, 2018
Issue Size ( Shares) Offer for Sale of 34,107,525 Equity Shares
Issue Size (Rs. Cr) Rs. 4,198 Cr
Price Band Rs.1,215 – 1,240
Bid Lot 12 Equity Shares and multiple thereof
Retail & Employee Discount Rs.25/- per Equity Share
Employee Reservation 668,775 Equity Shares  (Rs.80~Cr – 81^Cr)
Issue Structure :  
QIB 50% of the Net offer
NII 15% of the Net offer
Retail 35% of the Net offer-1,17,03,563  Shares– 1,422 Cr
Appls for 1x Subscription 975297
BRLMs Axis Capital, SBI Capital Markets
Registrar Karvy Computershare Pvt. Ltd.
About Hindustan Aeronautics Limited 
  • HAL is ‘Navratna’ company and is the largest Defense PSU in India. It is also the 39th largest aerospace company in the world in terms of revenue.
  • Hindustan Aeronautics Limited operations are organised into 5 complexes, viz. Bangalore Complex, MiG Complex, Helicopter Complex, Accessories Complex, and the Design Complex. It has 20 production divisions and 11 Research and Design centres (“R&D Centres”) located across India.
  • HAL received an “Excellent” rating from the GoI every year from the Financial Years 2002 to 2016. In addition, it was conferred with the Raksha Mantri’s Award for Excellence in Performance” for the “Institutional Category” for the years 2007-2008, 2009-2010, 2010-2011, 2012-2013 and 2015-2016.
  • The current programs under progress at HAL are production of SU-30 MKI, Hawk-AJT, Light Combat Aircraft (LCA), DO-228 Aircraft, Dhruv-ALH and Cheetal Helicopters, Repair Overhaul of Jaguar, Kiran MkI/IA/II, Mirage, HS-748, AN-32, MiG 21, Su-30MKI, DO-228 aircraft and ALH, Cheetah / Chetak helicopters.
  • The Company takes up maintenance and overhaul services to cover the life cycle requirement of all the old and new products. Presently, 13 types of aircraft/ helicopters and 17 types of engines are being overhauled. In addition, facilities exist for repair/ overhaul of various accessories and avionics fitted on aircraft of Russian, Western and Indigenous designs.
  • HAL is currently meeting the requirements of structures for aerospace launch vehicles and satellites of ISRO through its dedicated Aerospace Division. Infrastructure has also been set up to undertake completed assembly of the strap-on L-40 stage booster. HAL has also contributed to Mars mission by supplying riveted structural assemblies and welded propellant tankages for the Polar Satellite Launch Vehicle (PSLV-C25).
Hindustan Aeronautics Limited : Financials: 
Rs. In Crore
  HY18 FY17 FY16 FY15
Revenue from Operations 5,277.00 18,554.90 17,158.60 15,648.00
Revenue Growth (%) 8.14% 9.65%
EBITDA  868.3 4,314.80 4,076.10 2,564.20
EBITDA (%)  16.80% 24.00% 24.30% 16.40%
Profit Before Tax 609.6 3,591.70 3,213.30 1,672.70
PAT 391 2,624.70 2,004.30 994.1
NPM 7.41% 14.15% 11.68% 6.35%
EPS (Rs.) 11 73 42 21
Share Capital 361.5 361.5 361.5 482
Reserves 12,582.10 12,197.60 10,670.90 14,361.90
Net worth 12,943.60 12,559.10 11,032.40 14,843.90
RONW(%) 3% 21% 18% 7%
Net Asset Value (Rs.) 358 347 305    308
IPO Price 1240
Face Value 10
Price/Book Value 3.57
Post Issue Equity 334.39
EPS (Post IPO) Fy17 78.49
PE (post IPO) fy17 15.80
Market Cap 41464.36 crore
Market cap / Sales 2.23
Hindustan Aeronautics Limited : Rationale for Investment
  •  Hindustan Aeronautics Limited is a leader in the Indian defence and aviation markets. There are a  large number of programmes for which HAL is the incumbent nominated production agency. A substantial portion of its  business is awarded through nomination or assignment of contracts by the MoD. 
  • Hindustan Aeronautics Limited products portfolio includes fighter aircraft, trainer aircraft, transport aircraft, military helicopter and civil helicopters and their engines, avionics and accessories (which are both indigenously designed or manufactured under licence.  HAL has indigenously designed and developed a mini UAV of the eight kilogram class  and has  begun the development of other new products including the Indian Multi Role Helicopter (“IMRH”) and commenced new business initiatives including our entry into the civil transport aircraft segment with the civil variant of the Dornier Do-228 aircraft. HAL has also begun manufacturing industrial marine gas turbines in order to further diversify the range of its product offerings.
  • The major on-going indigenous development programs at HAL are the Light Combat Aircraft (LCA), Intermediate Jet Trainer (IJT), Light Combat Helicopter(LCH), Light Utility Helicopter (LUH), Weapon System integration on ALH, Multi-role Transport Aircraft (MTA), Fifth Generation Fighter Aircraft (FGFA), Basic Turboprop Trainer. Design and Development of medium thrust engine has also been taken up. 
  • HAL has a sustained track record of profitability and have paid dividends to  stakeholders every year for over four decades. 
  • As of 31 December, HAL’s order book stood at Rs. 68,461 crore. The order book comprises primarily of orders to manufacture Su-30 MkI and Tejas Light Combat Aircraft (LCA)  fighter aircraft. HAL has order for 40 Tejas planes from the government, of which seven have been delivered. It has a production capacity of eight planes a year, which it is  are looking to enhance to 16 planes a year. It is working with the government to procure another order of another batch of Tejas.
  • There are indications that IAF has “firmly committed” to 123 Tejas jets at present, which will come at a cost of over Rs 75,000 crore if both developmental and production costs are taken into account. But it wants the next 201 Tejas Mark-II jets to be “entirely new fighters” with much better avionics and radars, enhanced fuel and weapons carrying capacity, and more powerful engines.
Risks & Concerns:
  • The GoI has significant influence over our actions which may restrict our ability to manage our business. Any change in GoI policy could have a material adverse effect on our financial condition and results of operations.
  • HAL is in a dispute with the Ministry of Defence of Ecuador relating to their termination of  an agreement relating to the supply of helicopters to the Ecuadorean Air Force. Its revenue and exports may be adversely affected as a result.
  • Hindustan Aeronautics Limited face competition from other international companies, many of which have substantially greater resources.
Hindustan Aeronautics Limited  IPO: Assessment
  • India has the third largest military in the world and is the sixth largest spender in defence. India is also one of the  largest importers of conventional defence equipment and spends approximately 30% of its total defence budget on capital acquisitions. 
  • HAL enjoys Leadership position in the Indian aeronautical industry and strong GoI support.
  • HAL performance may depend considerably on continued induction of ‘Tejas’ jet in the Air Force. There is indication that Govt. may procure more of these aircraft but would also insist on substantial upgrade of these air crafts. 
  • Retail discount of Rs. 25 per share provides some degree of protection to retail.
  • The FY 2017 EPS  on current diluted equity of Rs 334.39 crore ( which has got reduced due to buyback of shares in Nov 2017)  stands at  Rs 78.5 and PE works out to 15.8. 
  • A significant long term risk to HAL is Governments new mode of defence production that permits defence production in private sector with reputed collaborators. 
  • It is felt that HAL IPO (Hindustan Aeronautics Limited  IPO) presents a good opportunity of an investment in a defense sector PSU in aeronautics field  with a reasonable track record. I intend to apply for the IPO as a medium term portfolio stock. However given very lackluster response for Bharat Dynamics IPO, would also keep a watch on subscription numbers as well. 
  • 20/03/18: 1320 Hrs: Response to HAL IPO till now has been poor with not a single bid so far from Mutual Fund and FIIs.  I have not applied so fat as market seems to have no appetite left for Govt Companies even if the valuations are reasonable.  Shall only apply of FIIs & Mutual funds come in.

Standard disclaimer: I am not a SEBI registered analyst and above analysis is for educational purpose only. I may have vested interest in every stock I discuss and my views may be biased. Please do your own due diligence as stock market investments have high degree of inherent risk.

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