Why HAL is a One-of-a-Kind ‘Defense Multibagger’?
There are not many listed companies that are operating in the defense sector in India, all thanks to the government’s strong entry barriers. Investors in the defense sector have some decent choices with Bharat Dynamics (NS: BARA ), Paras Defence and Space Technologies (NS: PRAF ), Data Patterns (NS: DATP ), etc. most of which have done decently well in the last few months.
However, there is one stock that seems to be the favorite among investors in this space and that is Hindustan Aeronautics (NS: HIAE ) Limited, the shares of which have already become a multi-bagger, delivering a return of over 405% since the Covid-19 lows. Here I am talking about what is so special about the company that investors are not willing to make an exit from this stock.
The first and probably the only technical reason for a relentless rally in HAL shares is the company’s low free-float market capitalization. The company’s total market cap is around INR 79,448 crores out of which only INR 19,875 crores worth of shares are publicly traded. That means at any point in time only 25% of the company’s shares are available for supply. This restricted supply is consistently meeting the increasing demand which is resulting in the current non-stop rally. The free-float market capitalization of peers is also low.
On the order book front, the company’s order book stands close to INR 84,800 after the recent receipt of fresh orders of more than INR 6,000 crores. That’s more than the total market capitalization of the company! The company’s collections and budget allocations remain robust during the current year and has a surplus cash balance of almost INR 14,000 crores which is sufficient for its working capital requirements.
FY22 has been a phenomenal year for the company as it clocked a record revenue of INR 25,604.95 crores and consequently, the net income rose over 56.5% on a YoY basis to INR 5,080.04 crores, which is also the highest-ever annual income. The company never fails to impress investors with dividends and is currently trading at a dividend yield of 1.69%, compared to the industry average of 0.58%. But more importantly, it has never skipped paying dividends since its listing. The dividend payout ratio also stands at a decent 0.26 (as of FY22).
Some Recent Developments
Talking about behind the scenes, the company has almost completed the production of the first series of light utility helicopters - Mark 1 which is ready for rollout from the New Greenfield helicopter factory at Tumakuru. Its light transport aircraft - Hindustan 228 Dornier recently attained civil certification from DGCA in May 2022 which is a stepping stone for the company to get the EASA certification for the export of this Dornier. In fact, HAL is increasingly concentrating on International certifications like EASA and FAA to enhance its global appeal.
The company is also running on a schedule to give deliveries of LCA Mark 1A which is one of its flagship orders and would be handing it out by February 2024
The company has also signed an MoU with Safran (EPA: SAF ) to set up a joint venture for the development, production, sales, and support of helicopter engines to meet not only the requirements of the Indian helicopter but also for the global market. Another MoU was signed with IAI, Israel Aerospace Industries in March 2022 to convert their civil passenger aircraft to multi-mission tanker aircraft, which is an important part of HAL’s diversification plan. Some of the opportunities in its diversification plan are in civil MRO, passenger to freight conversion of aircraft, UAV, and simulators, all of these could open up additional revenue streams.
Almost 6% to 7% of the total revenue of the company goes into research and development activities every year. In the last two years, the company has sanctioned projects worth approximately INR 5,000 crores for indigenous design and development. More importantly, a lot of funding is being done in-house without waiting for sanctions from the government.
In fact, last year, the company increased its R&D reserve from 10% to 15% of operating PAT to build a sufficient R&D reserve to take care of all new programs.
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