Hindustan Aeronautics Ltd.

Transcription

1 Recommendation Subscribe BACKGROUND Price Band Bidding Date Book Running Lead Manager Registrar Sector Rs.1215 Rs March SBI Capital Markets, Axis Capital Ltd Karvy Defense Capital Goods Minimum Retail Application- Detail At Cut off Price Number of Shares 12 Minimum Application Money Rs. 14,580 Discount to retail Payment Mode Rs. 25 per share Consolidated Financials (Rs Cr) FY16 FY17 ASBA Total Income EBITDA PAT Lower Upper Valuations Band Band Market Cap (Rs Cr) EPS* P/E Ratio* EV/ EBITDA* Enterprise Value (Rs Cr) *calculated on FY17 Post Issue Shareholding Pattern Promoters 89.8% Institutions 5.0% Bodies Corporates & Public 5.2% Offer structure for different categories QIB (Including Mutual Fund) 50% Non-Institutional Investors 15% Retail 35% Post Issue Equity (Rs. in cr) Issue Size (Rs in cr) Face Value (Rs) 10 Jehan Bhadha ( ) Research Analyst Hindustan Aeronautics Limited (HAL) is the largest Defence Public Sector Undertakings ( DPSU ) in terms of value of production. HAL is engaged in 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 relies on indigenous R&D as well as on technology transfer and license agreements to manufacture their products. HAL has a sustained track record of profitability and has paid dividends every year for over 4 decades. As of December 31, 2017, the order book stood at Rs.68,461 Cr (3.8x FY17 Sales). Details and Objects of the Issue The entire public issue consists of offer for sale of Rs Cr by the GoI. Investment Rationale: Leadership position in the Indian aeronautical industry Rising mix of fast growing Services business Expansion into engines, UAVs, civil aircrafts and exports Proven design and development capabilities Strong financial track record with robust order book position Valuation and Recommendation HAL is the largest defense PSU and the only one to manufacture defense aircrafts and helicopters. It thus faces no competition domestically and only from international players. HAL has the following positives in its favor - wide portfolio comprising of indigenous and licensed products, rising share of the fast growing services business (40% mix today from 21% in FY15), long credible history of proven design and development capabilities, expansion and diversification into new growth areas of engines, UAVs, civil aircrafts and exports, strong balance sheet and a robust order book to sales of 3.8x. HAL is being offered at a valuation at PE of 15.8x FY17 (vs. domestic peer average of 22.6x) and EV/EBITDA of 7.8x FY17 (vs. domestic peer average of 16.1x). Thus based on the business capabilities, industry growth prospects and valuations, we believe HAL is attractively priced and recommend subscribing to the issue. Financial Snapshot FY15 FY16 FY17 H1FY18 Net Revenues Growth 7% 7% EBIDTA EBITDA Margins 19.5% 21.0% 22.7% 16.1% PAT Growth 102% 31% ROCE 11.0% 27.9% 25.8% Rs Rs Rs Source: Company data, NB Research H1:H2 mix in HAL s case is ~25:75; to that extent, annualizing the numbers shall not give the right perspective. 1

2 Investment Rationale Leadership position in the Indian aeronautical industry with strong GoI support HAL is the largest Defence Public Sector Undertakings ( DPSU ) in terms of value of production in the Indian defence sector according to the MoD. They have their longstanding relationships, particularly with the Indian Defence Services and the DRDO as well as with various academic institutions and regulatory agencies. They have also developed a deep knowledge base and understanding of the aeronautical industry, particularly in India. The GoI is the promoter of the company and HAL derives a substantial portion of their revenue from the Indian Defence Services (93% of sales in FY17). HAL has cultivated a relationship of trust and reliability with their customers, including the GoI and the Indian Defence Services which allows HAL to understand their requirements and generate products and services which are responsive to their demands. Diversified product portfolio HAL s products portfolio includes fighter aircraft, trainer aircraft, transport aircraft, military helicopter and civil helicopters and their engines, avionics and accessories (such as special test equipment and ground handling equipment and ground support equipment), which are both indigenously designed or manufactured under license. INDIGENOUS PRODUCTS (~2/3 rd of product sales) Light Combat Aircraft Tejas Jaguar DARIN-III Upgrade Mirage 2000 Upgrade ALH Dhruv ALH MkIV Rudra Cheetal Light Combat Helicopter LICENSED PRODUCTS (~1/3 rd of product sales) Sukhoi Su-30 MKI Dornier-228 Hawk Mk-132 Aircraft Cheetah Chetak Lancer Source: Company 2

3 Rising share of Services revenues augurs well for future growth visibility due to its counter cyclical nature HAL intends to increase its presence in the high value services market, given its countercyclical nature and opportunities for sustained growth. They intend to leverage the opportunities arising from the rapid expansion of the defense fleet. As a result, HAL has developed a wide range of value added and customised services that customers can select. FY15 FY16 FY17 H1FY18 Product Revenue Growth 6% -4% Mix in total revenue 78% 75% 67% 58% Service Revenue Growth 22% 42% Mix in total revenue 21% 24% 31% 40% Others Total Gross Revenue Growth 10% 8% Source: Company, NB Research Tejas to be an important growth driver for HAL The Light Combat Aircraft ("LCA", also known as Tejas) is a single-engine, light weight and multi-role supersonic fighter. It has a quadruplex digital fly-by-wire flight control system with associated advanced flight control features. The aircraft, with its delta wing, is designed for air combat and offensive air support with reconnaissance. Currently, HAL has capacity to manufacture 8 Tejas LCAs per annum which is slated to increase to 16 shortly, which would propel growth for HAL. (The approximate cost of a Tejas Mark I aircraft is ~Rs. 160 Cr and that of Tejas Mark IA is ~Rs. 240 Cr). Expansion and diversification into new growth areas of engines, UAVs, civil aircrafts and exports In order to meet the demand for aircraft and helicopter engines, HAL has initiated the indigenous design and development of the Hindustan Turbo Fan Engine ( HTFE-25 ), a 25 kn thrust class turbofan engine, and the Hindustan Turbo Shaft Engine ("HTSE-1200"), a 1,200 KW shaft power engine. In addition, they have initiated the indigenous design and development of a mini UAV (Unmanned Aerial Vehicle) of the 8 kilograms class to meet the emerging requirements of military, paramilitary, police and civil sectors, and intend to subsequently enter into the market of larger UAVs with the Rustom-II medium-altitude, long-endurance UAV which they are jointly developing with the Aeronautical Development Establishment (ADE). Moreover, given the growth in civil aviation in India, an opportunity exists for them to position the Dornier Do-228 aircraft for civil application. As the development of their indigenous aircraft and helicopter platforms continue to progress and mature, HAL also intends to expand their export sales of these products as well as aerostructures, avionics, spares and services in international markets. 3

4 Proven design and development capabilities HAL has 11 dedicated R&D Centres and these R&D Centres are capable of developing a wide range of products, upgrading products with combat operational capability and operational performance and maintaining a pipeline of products to meet their future needs. These R&D Centres have facilities for research and prototype activities and are co-located with their production divisions to provide effective concurrent manufacturing, design and development support. Their design capabilities provide them with a significant competitive advantage in the Indian aeronautical industry. The R&D Centres are approved by, among others, the Department of Scientific and Industrial Research and the Centre for Military Airworthiness and Certification (CEMILAC). HAL conducts research, design and development activities under customer funded contracts as well as their own independent funds. For H1FY18 and FY17 and FY16, the research, design and development expenses were Rs. 510 Cr, Rs. 1,284 Cr and Rs. 1,191 Cr, respectively, which accounted for 9.7%, 6.9 % and 6.9%, respectively of their revenue from operations. Strong financial track record with robust order book position HAL has demonstrated a strong financial track record. As of September 30, 2017, HAL had cash and cash equivalents of Rs.11,699 Cr. The company has grown its net sales and operating profits at a CAGR of 7% and 16% respectively over FY15-17 and generated an average ROCE of 27% over the same period. As of December 31, 2017, HAL s order book stood at Rs.68,461 Cr (3.8x FY17 sales) thus providing strong visibility of earnings growth in coming years. Concerns Competitive intensity to rise in the long run GoI is encouraging private companies to enter and participate in defense contracts. In May 2017, the Government has introduced a strategic partnership model under DPP 2016 (the "DPP Strategic Partnership Model") under which the GoI seeks to identify a few Indian private companies as strategic partners who would initially tie up with shortlisted foreign OEMs to manufacture military platforms and equipments. These policies have raised the level of competition and pose a threat to the growth of HAL, although in the long run. Tepid revenue momentum Although HAL has a robust order book of Rs. 68,461 Cr which is 3.8x its FY17 sales; we do not expect a significant acceleration in sales in coming years owing to the slow pace of execution as well as the longer delivery schedule of orders (~4 years). Over FY15-17, HAL s net sales have grown at a meager pace of 7% CAGR. 4

5 Valuation and Recommendation We note that HAL s capabilities in manufacturing and servicing of defense aircrafts and helicopters makes it a direct comparable to established International defense players. HAL is the largest DPSU and the only one to manufacture defense aircrafts and helicopters. It thus faces no competition domestically and only from international players. HAL has the following positives in its favor - wide portfolio comprising of indigenous and licensed products, rising share of the fast growing services business (40% mix today from 21% in FY15), long credible history of proven design and development capabilities, expansion and diversification into new growth areas of engines, UAVs, civil aircrafts and exports, strong balance sheet and a robust order book to sales of 3.8x. HAL is being offered at a valuation at PE of 15.8x FY17 (vs. domestic peer average of 22.6x) and EV/EBITDA of 7.8x FY17 (vs. domestic peer average of 16.1x). Thus based on the business capabilities, industry growth prospects and valuations, we believe HAL is attractively priced and recommend subscribing to the issue. Peer Comparison W.C / Sales Total Asset Turns EBITDA Margins ROE OB / Sales PE EV/EBITDA Sales D/E Domestic - FY17 figures in Rs Cr Bharat Electronics % % 17.6% Cochin Shipyard % % 16.8% Average 0.0-2% % 17.2% Hindustan Aeronautics % % 31.2% International CY17 figures in USD Bn Lockheed Martin 51.1 NA 2% % 16.3% Raytheon % % 20.2% BAE Systems* % % 35.2% Thales* % % 20.4% Kongsberg Gruppen* % % 8.2% SAAB* % % 11.7% Average 4.1-3% % 18.7% Source: Company Data, Morningstar, Nirmal Bang Research *Denotes TTM figures Note: Working Capital excludes cash and cash equivalents 5

6 Financials P&L (Rs. Cr) FY15 FY16 FY17 H1FY18 Balance Sheet (Rs. Cr) FY15 FY16 FY17 H1FY18 Net Revenue Share Capital % Growth 7% 7% Reserve & Surplus 14,362 10,671 12,198 12,582 COGS Networth 14,844 11,032 12,559 12,944 % of Revenues 52.7% 51.4% 51.3% 37.9% Total Loans , Employee Cost Long term provisions 2,573 2,483 2,030 1,921 % of Revenues 21.0% 19.5% 19.9% 34.8% Adv & Milest. Receipts 38,110 35,942 28,909 31,570 Other expenses Trade payable 2,271 2,151 1,797 2,091 % of Revenues 6.8% 8.1% 6.2% 11.3% Deferred Tax Liabilities EBITDA Other Current Liab 1, , EBITDA Margin 19.5% 21.0% 22.7% 16.1% Short term provisions 2,472 2,638 2,878 3,061 Provisions Total Current Liab. 43,891 41,725 34,610 37,606 Depreciation Total Equity & Liab. 62,420 56,532 51,552 53,843 Other Income Fixed Assets & CWIP 7,341 7,951 8,741 8,878 Interest Investments in JVs PBT Other Invests. & L&A Tax Other non Curr. assets 1,730 1,888 1,578 1,871 Tax rate 41% 38% 27% 36% Bank PAT Cash 17,671 13,303 11,153 11,699 Adj. PAT Margin 6.4% 12.0% 14.6% 7.6% Inventories 24,953 23,982 21,321 22,184 % Growth 102% 31% Debtors 6,051 4,837 4,221 4,265 EPS (Post Issue) Short term Advances Performance Ratios FY15 FY16 FY17 H1FY18 Other Current assets 3,681 3,506 3,387 3,763 EBITDA Margin (%) 19.5% 21.0% 22.7% 16.1% Total Assets 62,420 56,532 51,552 53,843 PAT Margin (%) 6.4% 12.0% 14.6% 7.6% Cash Flow (Rs. Cr) FY15 FY16 FY17 H1FY18 ROE (%) 7% 18% 21% EBITDA 3,048 3,519 4, ROCE (%) 11.0% 27.9% 25.8% Provisions & Others (580) Net D/E (x) Op. profit before WC 2,468 4,099 4, Sales Growth (%) 7% 7% Change in WC 1,514 (90) (3,700) 1,441 EBITDA Growth (%) 15% 16% Less: Tax (1,065) (861) (1,037) (384) PAT Growth (%) 102% 31% CF from operations 2,917 3,148 (405) 1,917 Turnover Ratios FY15 FY16 FY17 H1FY18 Addition to assets (917) (1,636) (1,581) (420) Debtors Days (Invest.)/Maturity of Dep (10,183) 2,983 4,596 (116) Inventory Days CF from Investing (11,100) 1,347 3,014 (536) Creditor Days Buyback of shares - (5,266) - - Asset Turnover (x) Loan from banks (679) (950) Valuation Ratio FY15 FY16 FY17 H1FY18 Dividend Paid (576) (614) (1,104) (0) Price/Earnings (x) 15.8 Interest paid (8) - (10) (1) EV/EBITDA (x) 7.8 CF from Financing (1,264) (5,880) (164) (951) Price/BV (x) 3.3 Net Change in cash (9,447) (1,385) 2, Mkt cap/sales (x) 2.3 Cash at beginning 27,118 14,688 8,708 11,270 EV/Sales (x) 1.8 Cash at end 17,671 13,303 11,153 11,699 Source: Company Data, Nirmal Bang Research Note: As H1:H2 mix is ~25:75, we believe annualizing the numbers shall not give the right perspective. 6

7 Disclosure: This Report is published by Nirmal Bang Securities Private Limited (hereinafter referred to as NBSPL ) for private circulation. NBSPL is a registered Research Analyst under SEBI (Research Analyst) Regulations, 2014 having Registration no. INH NBSPL is also a registered Stock Broker with National Stock Exchange of India Limited and BSE Limited in cash and derivatives segments. It is also a registered Portfolio Manager having registration no as INP NBSPL has other business divisions with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. NBSPL or its associates have not been debarred / suspended by SEBI or any other regulatory authority for accessing / dealing in securities Market. NBSPL, its associates or analyst or his relatives do not hold any financial interest in the subject company. NBSPL or its associates or Analyst do not have any conflict or material conflict of interest at the time of publication of the research report with the subject company. NBSPL or its associates or Analyst or his relatives hold / do not hold beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of this research report. NBSPL or its associates / analyst has not received any compensation / managed or co-managed public offering of securities of the company covered by Analyst during the past twelve months. NBSPL or its associates have not received any compensation or other benefits from the company covered by Analyst or third party in connection with the research report. Analyst has not served as an officer, director or employee of Subject Company and NBSPL / analyst has not been engaged in market making activity of the subject company. Analyst Certification: I, Jehan Bhadha, the research analyst and author of this report, hereby certify that the views expressed in this research report accurately reflects my/our personal views about the subject securities, issuers, products, sectors or industries. It is also certified that no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst(s) principally responsible for the preparation of this research report and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. 7

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