IPO Report-Hindustan Aeronautics Ltd 16 th March, 2018 Issue Period 16 Mar 2018-19 Mar, 2018 Security Type Equity Issue Size No. of Shares 3,61,50,000 Price Band 1215-1240 Face Value 10 Market Lot 12 Minimum Bid Quantity 12 (Retail) Maximum Bid Quantity 156 (Retail) SBI Capital Markets Ltd Book Running Lead Managers Axis Capital Ltd Registrar Karvy Computershare Pvt Ltd Listing At BSE & NSE Main Board SME RECOMMENDATION SUBSCRIBE for Long Term Incorporated in 1963, Hindustan Aeronautics Limited (HAL) is Defence Public Sector Undertaking (DPSU) company engaged 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 based in Bengaluru. HAL is 'Navratna' company since June 2007and the largest DPSU. HAL is the 39th largest aerospace company in the world in terms of revenue. Company has 20 production divisions and 11 R&D centres located across India. Indian Defence Services is the main customer of HAL and account for over 93% of sales. HAL also sell its products and provide services to state governments, para-military forces and corporate. Aircraft Helicopters Future Products Power Plant Avionics System and Accessories Aerospace Materials 1
COMPANY S PROMOTERS Mr. T. Suvarna Raju, (Chairman) He holds a bachelor s degree in mechanical engineering from Andhra University, master s degree in business administration from Bangalore University and masters of 197 philosophy in defence and strategic studies from the University of Madras. He has over 37 years of work experience in the aerospace industry and has held various positions in our Company. Mr. V. M. Chamola Director (Human Resources) He holds a bachelor of science degree and a master s degree in economics from Garhwal University, Bachelor of Laws from Avadhesh Pratap Singh University, Rewa, and a master s degree in business administration from the Indira Gandhi National Open University. He has approximately 34 years. The promoter s currently holds 32,53,50,000 equity shares which is 90% of the total share capital post Issue. ISSUE STRUCTURE Offer for sale of Equity shares up to Rs 4483 crores QIB: NIB: Retail: 50% of the issue 15% of the issue 35% of the issue POST ISSUE SHAREHOLDING PATTERN Post Issue Shareholding Pattern 10% Promoters Public 90% 2
OBJECTS OF THE ISSUE Particulars Amount To carry out the disinvestment To achieve the benefits of listing the Equity Shares on the Stock Exchanges. KEY RATIOS VALUATION Particulars Total For the year/period ended March2015 March2016 March2017 Debt-Equity Ratio(x) 0.00 0.00 0.01 Current Ratio(x) 1.00 1.00 1.20 Price/Earnings Ratio(x)* 41.70 20.70 15.80 RoE (%)(Return on Equity) 6.70 18.20 20.90 EPS (Earnings Per Share) 29.70 59.90 78.50 Book Value Per Share 443.90 329.90 375.60 *Upper Price Band Hindustan Aeronautics Ltd is the niche largest defence public sector company of India. The company has a sustained track record of profitability, strong order inflow and best-in-class execution capabilities. On the upper price band of Rs. 1240 Hindustan Aeronautics is available at a P/E ratio of 15.80x of its FY17 earnings. The company does not have any listed peers for comparison. Hence assigning a SUBSCRIBE for long term rating to the issue. OUTLOOK We recommend a SUBSCRIBE for long term rating to the issue as listing gains may be capped considering the current market volatility. 3
OPTIMISING OPERATIONS TOWARDS BECOMING A LEAD INTEGRATOR OF AIRCRAFT PLATFORMS Hindustan Aeronautics has revised their existing outsourcing procedures and also has framed a new outsourcing policy with a view to becoming a leading integrator of aircraft platforms, which they believe will allow the company to align strategies with the Government s Make in India initiative and to harness the indigenous talent pool available in the aerospace sector. The Company s primary objective is to create a strong and vibrant manufacturing ecosystem within the defence and aerospace sector in India by way of vendor development and through building long term partnership and strategic alliance with potential vendors. In order to achieve this goal, the company has devised a tiered outsourcing structure to achieve higher levels of outsourcing, with the aim of developing Tier-II suppliers and, gradually, Tier-I suppliers over a period of time while retaining company s core competency as a lead integrator. Hindustan Aeronautics intends to implement this tiered outsourcing structure by encouraging participation comprising "risk sharing and competent" partners as well as non-risk sharing and dependent partners. ROBUST ORDER BOOK HAL has an order book of Rs. 68,461 crore as on 31st December 2017. It includes products and services to be manufactured and delivered and excludes anticipated revenues from incomplete portions of existing contracts undertaken by its joint ventures. Additionally, HAL has also received requests for proposal (RFP) in December 2017 on a nomination basis from the Ministry of Defence for : 1. Procurement of 83 LCA Mk1A aircraft 2. Procurement of 15 LCG limited series production helicopters ESTABLISHED TRACK RECORD IN OFFERING PRODUCT LIFE CYCLE SUPPORT EXTENDING TO PERIODS BEYOND FOUR DECADES. Hindustan Aeronautics has displayed commitment for providing product life cycle support to their customers to enable them to optimize the utilization of their aircraft and helicopters. In order to provide support for the duration beyond four decades, the Company has worked towards mitigating obsolescence issues by indigenizing equipment or by stockpiling inventories or by finding alternate vendors for equipment for which OEMs have ceased production. Over time, many of the aircraft and helicopters have been upgraded and/or modified to meet the enhanced combat capability and operational performance requirements of our customers and to extend their usable life mitigating to make them a contemporary and effective platform. Company have undertaken upgrade programmes independently as well as in collaboration with OEMs. 4
HAL TO BE LARGEST BENEFICIARY OF SPENDS ON UPGRADATION OF CURRENT FLEET The Indian armed forces aim to upgrade/revamp their fleet in the next 10-20 years. The table below shows a breakdown of India s requirement of upgrades for aircraft and helicopters over the next 10-20 years. Existing platforms to be upgraded over 10-20 years Sr. No. Platforms A Aircraft 1 Light Transport Aircraft 2 transport Aircrafts 3 Fighter Aircrafts 4 Basic trainer aircrafts B Helicopters 1 WIP Helicopters 2 Lift Helicopters 3 Attack Helicopters 4 Utility Helicopters 5 Multi Role Helicopters 6 Combat Helicopters FORAY INTO NEW AREAS AND DIVERSIFIED PRODUCT OFFERING In order to augment and diversify its portfolio of products, HAL has begun development of newer products like the Indian multi-role helicopter (IMRH), aircraft and helicopter aero-engines, unmanned aerial vehicles (UAVs), industrial marine gas turbines, etc. For instance, to meet the demand for aircraft and helicopter engines, HAL has initiated 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. This is likely to help HAL expand its business from existing customers, and address a larger base of new customers. HAL has also started providing comprehensive product servicing, overhaul and upgrade services like life extensions, failure analysis, defect investigations and product improvements, etc. On the UAV side, HAL has indigenously designed and developed a mini UAV of the eight kg class to meet the emerging requirements of its customers, and intends to subsequently enter the market of larger UAVs with the Rustom-II medium-altitude, long-endurance UAV that it is jointly developing with the Aeronautical Development Establishment. EXPERIENCED CORE MANAGEMENT TEAM Hindustan Aeronautics senior management team and key management personnel possess extensive management skills, operating experience and industry knowledge and are able to take advantage of market opportunities to formulate business strategies and to execute them in an effective manner. The Company s senior management personnel are committed to long-term growth and have shown their ability to steer us through different economic cycles as demonstrated by sustained growth in revenue. 5
STRENGTHS Long credible history of research, design and development, manufacturing and maintenance, repair & overhaul services. Established track record in offering product life cycle support extending to periods beyond four decades. Leadership position in the Indian aeronautical industry and strong Government of India support. Strong design and development capabilities. RISKS & CONCERNS Heavy dependence on funding from defence budget. Delays in award of contracts or cancellation of existing contracts. Higher dependency on single customer i.e MoD. The Governments significant influence over the functioning may restrict HAL s ability to manage its business INDUSTRY OUTLOOK 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. 60% of Indian s defence-related requirements are currently met through imports. In addition, the Make in India initiative by the Government is focusing its efforts on increasing indigenous defence manufacturing with the aim of becoming self-reliant. The opening up of the defence sector for private sector participation is helping foreign OEMs to enter into strategic partnerships with Indian companies and leverage opportunities in the domestic market as well as global markets. India s focus on indigenous manufacturing in the defence sector has yielded certain benefits as the MoD over the last two years unveiled several products manufactured in India including the LCA Tejas, the composites sonar dome, a portable telemedicine system for the armed forces, penetration-cum-blast and thermo baric ammunition specifically designed for the Arjun tanks, the Varunastra heavyweight torpedo manufactured with 95% locally sourced parts and medium range surface-to-air missiles. The Defence Acquisition Council under the MoD cleared defence sector transactions with a value of more than Rs. 820 billion under the Buy and Make (Indian) and Buy Indian categories. These transactions include the procurement of Light Combat Aircraft, T-90 tanks, mini UAVs and light combat helicopters. During the Financial Years 2016, 2015 and 2014, ` 20,592 million, ` 16,820 million and ` 11,534 million worth of defence platforms, equipment and spares manufactured in India were exported to more than 28 countries. The major defence equipment exported by the DPSUs and Ordnance Factory Board ( OFB ) are patrol vessels, helicopters including their spares, sonars and radars, avionics, radar warning receivers, small arms, small calibre ammunition, grenades and telecommunication equipment. Items for which there is a capacity constraint, the DPSUs are permitted to export up to 10% of their annual production to explore market opportunities for exports. 6
COMPARISON WITH LISTED INDUSTRY PEERS There are no listed peers in the similar line of business. SUMMARY STATEMENT OF ASSETSANDLIABILITIES Y/E ( `Crore) FY-2015 FY-2016 FY-2017 Share Capital 482.00 361.50 361.50 Reserves & Surplus 14361.90 10670.71 12197.61 Net Worth 14843.90 11032.20 12559.10 Non Current Liabilities 12361.50 12849.20 13401.10 Current Liabilities 35214.90 32650.30 25592.10 Total Liabilities 62420.30 56531.71 51552.31 Non Current Asset Long Term loans & Advances 52.30 52.00 58.90 Other Non current Assets 9851.20 10753.81 11323.21 Current Assets 34845.40 32422.50 29016.90 Cash & Cash Equivalent 17671.40 13303.40 11153.30 Total Assets 62420.30 56531.71 51552.31 SUMMARY STATEMENT OF PROFIT AND LOSS Y/E ( `Crore) FY-2015 FY-2016 FY-2017 Net Sales 16168.07 17320.69 17440.66 Growth (%) - 7% 1% Employee Expenses 3403.25 3274.38 3570.49 Other Expense 10837.64 11572.71 10607.67 Total Expenses 14240.89 14847.09 14178.16 EBITDA 1927.18 2473.60 3262.50 Growth (%) - 28% 32% EBITDA Margin (%) - 14% 19% Depreciation 822.47 862.82 712.92 Interest 14.81 5.93 16.37 Other Income 1714.00 1596.20 1042 PBT 2803.90 3201.05 3575.21 Tax Expense 678.60 1209.00 967.00 Net Profit 2125.30 1992.05 2608.21 Growth (%) - -6% 31% 7
STATEMENT OF CASH FLOWS Particular s( `Crore) FY-2015 FY-2016 FY-2017 Net Cash from Operating Activities (8881.95) 3148.00 (404.50) Net Cash Used in Investing Activities 709.74 1347.22 3014.29 Net Cash Used in Financing Activities (1273.62) (5879.74) (164.28) Offer Opens on 16 March 18 Offer Closes on 20 March18 Finalization of Allotment 27 March 18 Unblocking ASBA 26 March18 Credit to Demat A/c. 27 March 18 Listing on Stock exchange 28 March 18 HAPPY INVESTING!! The TEAM Tel No: +91 22 40628901 Email Id: research@ajmera.co.in AJMERA x-change Disclaimer: The information contained in this report is obtained from reliable company s sources and is directed at market professionals and institutional investors. In no circumstances should it be considered as an offer to sell/buy or, a solicitation of any offers to, buy or sell the securities or commodities mentioned in this report. Ajmera, and/or its affiliates, may or may not have position in securities mentioned in this report. No representation is made that the transactions undertaken based on the information contained in this report will be profitable, or that they will not result in losses. Ajmera Associates Ltd and/or its representatives will not be liable forth recipients disinvestment decision based on this report.for details refer website. 8