IPO UPDATE Hindustan Aeronautics Limited

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1 About the Industry: India has the third largest military in the world, while catering to this important division of defence; India is the sixth largest spender. Moreover, India is also one of the largest importers of conventional defence equipment where approximately 30% of its total defence budget is spent on capital acquisitions. The Government is currently focusing on increasing the indigenously manufactured defence equipments and aiming at becoming self-reliant via the Make in India initiative. Inorder to propel the vision, GOI has opened up the defence sector for private sector participation and allowing foreign OEMs to enter into strategic partnerships with Indian companies. In 2002, the Defence Procurement Procedure (DPP) was introduced; since then the same has been amended a number of times. These amendments have shown some expansion of categories to the latest DPP 2016 which explicitly gives the highest priority to Buy (Indian - IDDM). The Union budget of GOI for has allocated Rs2,623,900mn for defence expenditures (excluding pension), which represents an increase of 5.3% from Rs2,490,990mn for (Budgetary Estimate). Under the Buy and Make (Indian) and Buy Indian categories, the Defence Acquisition Council (under the MoD) has cleared defence sector transactions with a value of more than Rs820bn. The Indian civil aviation sector is one of the fastest growing markets. At present, India is the ninth largest civil aviation market in the world and is anticipated to become the third largest by 2020 and the largest by The defence sector in India consists of DPSUs, OFB, Defence Research and Development Organisation (DRDO) and to a lesser extent some private companies. The Department of Defence production has 10 production organizations i.e. the OFB and nine DPSUs namely Hindustan Aeronautics Limited (HAL), Bharat Electronics Limited (BEL), Bharat Dynamics Limited (BDL), BEML Limited (BEML), Mishra Dhatu Nigam Limited (MIDHANI), Mazagon Dock Shipbuilders Limited (MDL), Garden Reach Shipbuilders & Engineers Limited (GRSE), Goa Shipyard Limited (GSL) and Hindustan Shipyard Limited (HSL). In , HAL was the largest production organization under Department of Defence Production in terms of value of production. SNAPSHOT Issue Opens Friday, March 16, 2018 Issue Closes Tuesday, March 20, 2018 Price Band Bid Lot Face Value Listing Type of Issue Offer Size (Rsmn) Rs1,215 to Rs1, shares and multiples thereafter Rs10 BSE & NSE Offer for Sale Fresh Issue - OFS 42,293 Total 42,293 *Implied Market Cap (Rsmn) 414,641 *PE (Based on FY17 earnings) *Note : Implied Market Cap & PE are calculated at higher price band of Rs1240 Discount of Rs25/- per share for Retail Investors Reservations Issue allocation 16 % of Net Issue QIB 50% NIP 15% Retail 35% Total 100% Object of the offer To carry out the disinvestment of 36.15mn equity shares To achieve the benefit of listing of shares on Stock Exchanges Last 3 year Summarized Financials Source: Red Herring Prospectus About the Company: As per the MoD Annual Report , (HAL) is the largest Defence Public Sector Undertakings (DPSU) (value of production). It is the 39th largest aerospace company in the world in terms of revenue (according to Flight International). The company is essentially engaged in the design, development, manufacture, repair, overhaul, upgrade and servicing of a number of products like aircraft, helicopters, aero-engines, avionics, accessories, aerospace structures etc. HAL has a blend of indigenous research as well as technology transfer tie-ups and license agreements to manufacture their products. The company has entered into 13 commercial joint ventures to grow their operations. The operations of the company are divided into 5 complexes i.e. the Bangalore Complex, MiG Complex, Helicopter Complex, Accessories Complex, and Design Complex, which in turn include 20 production divisions and 11 R&D Centres. Rs(mn) FY15 FY16 FY17 Sales 156, , ,549 EBITDA 8,509 24,680 32,561 EBITDA % 5.4% 14.4% 17.5% Profit After Tax 9,941 20,043 26,247 Profit Margin % 6.4% 11.7% 14.1% Earning Per Share RoNW(%) 7.0% 18.0% 21.0% Details of Selling Shareholder & No of Shares President of India & Employees 3,41,07,525 Total 3,41,07,525

2 About the Company: As of 31st December 2017, HAL owned 2 Trademarks, 7 Patents, 11 Design Registrations and 77 Copyrights. HAL has been conferred with the "Navratna" status by the GOI in June HAL has also received an Excellent rating from the GOI every year from FY2002 to FY2016. In addition to this, they were also conferred with the Raksha Mantri's Award for Excellence in Performance for the Institutional Category for the years , , , and HAL manufactures a wide range of products for military and civil use. These include aircraft, helicopters, engines, avionics, other accessories etc. In addition to this, HAL also provides product servicing, repair, overhaul and upgrade services to its customers. Some of the aircrafts manufactured by the company include the Sukhoi Su-30 MKI, Dornier 228 and LCA Tejas while helicopters like Cheetal and LCH and variants of the Dhruv helicopter are also manufactured by the company. HAL also manufactures engines, avionics and other accessories which are used in the assembly, servicing, repair and overhaul of aircrafts and helicopters. Sukhoi Su-30 MKI Aircraft Hawk Mk 132 Aircraft MiG-21M MiG-21 BIS MiG-27M Dornier 228 Aircraft Light Combat Aircraft Mirage 2000 Upgrade ALH Dhruv ALH Mk IV Rudra Cheetal Cheetah Note: All images are sourced from Red Herring Prospectus of HAL

3 About the Company (contd.) The company also manufactures engines for aircraft and helicopters, and their components, including critical discs, shafts, blades, forgings and castings. the company also manufactures products and spares required for the overhaul of engines and spares required during servicing. HAL manufactures various avionic equipments of indigenous design as well as via technology transfer from various OEMs; these include airborne radar equipment, communication equipment, navigation equipment, on-board computers and display system. Some of the major avionic equipment manufactured include Advanced Communication System (ACS-235), VHF Omni Range and Instrument Landing System (VOR/ILS), Tactical Air Navigation (TACAN), Identification of Friend or Foe (IFF), Radio Altimeter (RAM), Precision Approach Radar (PAR), Mission Computer and Display Processor, Multi-Functional Display (MFD), Inertial Navigation and Global Positioning System (INGPS), Solid State Digital Video Recording System (SSDVRS), Solid State Flight Data Recorder (SSFDR) etc. The company also manufactures other accessories for aircraft, helicopters and aero-engines include Hydraulic Systems and Power Control, Environment Control Systems, Engine Fuel Systems, Instruments like electrical indicators, fuel quantity and flow metering instruments, flight instruments, sensors and switches, temperature indicators automatic starter of engine, automatic temperature controller unit, Electrical Power Generation and Control Systems, Landing Gear Systems etc. Aerospace Structures manufactured.by the company include large size aluminium alloy riveted structures and welded tanks for the Polar Satellite Launch Vehicle (PSLV), Geo-stationary Launch Vehicle (GSLV), Indian Remote Sensing Satellite (IRS) and Indian National Satellite (INSAT), heat shield assembly, nose cone assembly, tank and shrouds used in satellites. There are quite a lot of products under development like HTT-40 basic trainer aircraft, LCA Navy aircraft, LCA MK1A aircraft, fifth generation fighter aircraft, light utility helicopter, Indian Multi Role Helicopter, Hindustan Turbo Fan Engine (HTFE-25), Hindustan Turbo Shaft Engine (HTSE-1200), Engine- 320 dan, Mini UAV, Medium-altitude, long-endurance UAV Rustom-II etc. At the same time upgraded versions of many of the products are in the process of manufacturing. Adour Mk Dornier 228 AircAL-31FP Garrett TPE PTAE-7 Adour Mk 804E/811 Shakti 1H1 Artouste IIIB LM-2500 Maintenance Works RD-33 TM333-2B2 Industrial Avon R-11/R-25 Gnome IT Industrial 501K R-29B Note: All images are sourced from Red Herring Prospectus of HAL

4 Strength of the Company : The company has a plausible history of research, design and development. The company has the necessary infrastructure required for end-to-end business operations for product research, design and development, manufacturing and provision of maintenance, repair and overhaul services to our customers, covering the complete operational life of our products. HAL is capable of providing product life cycle support to its customers helping them to optimise the utilisation of their aircraft and helicopters. The company exhibits strong design and development capabilities via innovative technologies which can also help in expanding the portfolio of offerings. HAL enjoys leadership position in the Indian aeronautical industry and has a strong support from GOI The company has developed a range of product offerings to address the varied requirements of its customers via a very diversified product portfolio Apart from the strong financial track record, the company has an experienced management and operating team Strategies Going Forward: The company intends to expand the operations through partnerships or collaboration with a vision to provide a broad range of products to clients. Diversify through expansion in new growth areas as the company has conducted an analysis of the product portfolio and has identified opportunities to grow in future HAL intends to reduce the dependence on defence products and hence diversify further into the civil aircraft segment for both manufacturing and servicing opportunities Develop in-house capabilities to design and develop specialised products including aero-engines HAL intends to continue its focus on reducing the operating costs to continue to improve the operating margins and leverage the existing cost advantage The company intends to focus on the development of knowledge, skills and capabilities of manpower in order to enhance the human capital. The company intends to enhance the customer satisfaction HAL has revised the existing outsourcing procedures with a view to becoming a lead integrator of aircraft platforms, which is in line with the GOI Make in India initiative and harness the indigenous talent pool available in the aerospace sector. Risk & Concerns: HAL is a GOI enterprise and basically serves the Indian Defence Services; thus the revenues are heavily concentrated with GOI. In the last three year the company derived nearly 93.33% of its total sales from GOI and they will continue to do so in future as well. Contracts by MoD funds are not always fully funded, the funds released upon execution of the contract. These contracts are also subject to termination. If a contract is terminated for delay or default, the Government pays only for the work it has accepted and the company may be subjected to various penalties including liquidated damages. The MoD contracts contain provisions which gives the Indian Defence Services a number of rights and authorities like terminate existing contracts for default or delays, demand encashment of performances, reduce orders, cancel multi-year contracts, claim intellectual property rights in products and systems produced by the company, control or prohibit the export of products etc. There is always an uncertainty of the order book of the company getting translated into future income. HAL faces stiff competition from other international companies and international competitors who have access to substantially greater resources. The company is dependent on key technology licensors, OEMs, suppliers and subcontractors. HAL operates in a market which is subject to constant technological updates, upgrades and changes. Thus, the company has to constantly develop new products. Inability to keep pace with the technological changes can affect the market share, revenues and profits of the company. Thus, also incurring research, design and development costs. Manufacturing processes for some of the products are complex and involves some hazards. Political instability or changes in the economic liberalization, policies by the GOI, changing laws, rules and regulations and legal uncertainties, adverse application of tax laws & regulations could impact the financial results and prospects of HAL. India s trade deficits and rate of price inflation could have a negative impact on the business of the company. The company operates in an industry which demands high working capital and may be adversely affected by changes in terms of credit and payment. The earnings and margins of the company may fluctuate based on the mix of contracts, programs, performance and ability to control costs. The profit earned by the company has dropped for the period 6 months ended Sep This offer is an offer for sale of equity shares by the selling shareholders and the proceeds from this offer will not benefit the company.

5 Financials: HAL does not have any long-term debt. CARE has granted them a credit rating of CARE AAA/A1+ for long term and short term facilities which sums upto Rs25,000mn. HAL has a strong order book which gives a growth visibility of 3-4 years. As of December 31, 2017, the order book was Rs684,610mn, which generally includes products and services to be manufactured and delivered and excludes anticipated revenues from their joint ventures and subsidiaries. Second half of the financial year is generally good for the company in terms of sales and profitability as orders are generally dispatched during this time. During the period of FY13-FY17, the revenue grew from Rs152,303mn to Rs185,549mn representing a CAGR of 5.15% however, the performance has been improving since the last 3 year and the company has shown a CAGR growth of 8.9% from FY15-FY17. HAL generally sells its products and services to Indian state governments, para-military forces and corporates. The same is in the range of 92%-93%. However, in addition to this, during FY17, HAL had exported their products and services (spares) to more than 13 countries. During the period 6 month period ending September 30, 2017, exports were roughly in the range of 2.6%-3.0%. HAL is a cash rich company. As of September 2017, he company had cash equivalents of Rs116,992mn. The company has been a dividend paying company since the last 40 years. Since R&D is the major crux of the company; the Board of the company has mandated that 10% of their operating net profit from the previous year to be used for company funded research, design and development expenditure. Particulars Rs(mn) FY15 FY16 FY17 FY18 Till September Sales 156, , ,549 52,770 EBITDA 8,509 24,680 32,561 4,781 EBITDA % 5.4% 14.4% 17.5% 9.1% Profit After Tax 9,941 20,043 26,247 3,910 Profit Margin % 6.4% 11.7% 14.1% 7.4% Outlook and Recommendations: GOI intends to divest nearly 10.2% and raise Rs42,000mn. The IPO is an offer for sale where the company will not receive any proceeds from the issue. One should bear in mind; the revenues generated by companies in the defence sector are heavily dependent on the orders from MoD or allied sources and allocation of funds (Budget) from the GOI. There could be times when there is an absolute influx of orders which will boost the top line, while there could be times when the order book could remain dry and thus dampen the top line as well as the bottom line. While at the same time MoD and GOI have continued laying more stress on reforms like DPP 2016 as well as indigenously produced products in India (Indigenously Designed, Developed and Manufactured- IDDM), HAL has an order book of Rs6,84,610mn providing a visibility for the next 3-4 years. The company does not have any direct listed peers for comparison. Considering these aspects we recommend subscribing with a vision of long term investment only, however with a limited exposure.

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