JM Financial has assigned an 'Add' rating to Hindustan Aeronautics Ltd (HAL) shares, projecting a target price of Rs 5,210. This target suggests a potential 6 percent upside from current levels. While acknowledging HAL's robust order book provides clear revenue visibility in the medium term, the brokerage firm emphasized that execution remains a primary concern for the defence stock.
On Monday, HAL shares experienced a slight dip, falling 0.89 percent to Rs 4,801.85. JM Financial noted that the potential for a significant valuation re-rating for HAL is limited. This is attributed to persistent execution headwinds and a potential slowdown in the growth of new order inflows. The firm also pointed out that many prospective projects are still in various stages of approval or development, and competition from both imports and private sector players is intensifying.
Key Triggers and Execution Challenges
The brokerage firm identifies developments surrounding the deliveries of the Tejas LCA MK1A aircraft as a crucial short-term trigger for HAL's stock. However, it also highlighted ongoing uncertainties in LCA deliveries, primarily due to issues with engine supplies and radar integration. JM Financial anticipates 12 Tejas deliveries in FY27, followed by 20 each in FY28 and FY29. Any delays in the initial acceptance of these aircraft could pose downside risks to these estimates.
Execution is expected to remain a central focus for HAL, given its already strong order book. Further delays in project execution could lead to earnings downgrades, potentially keeping valuation multiples suppressed.
Financial Outlook and Project Timelines
JM Financial projects a decline in HAL's gross margin to 51.5 percent by FY29, down from 55.5 percent in FY27, as manufacturing revenue scales up. The firm forecasts a 25 percent Compound Annual Growth Rate (CAGR) in revenue from FY26 to FY29, translating into 17 percent growth in Ebitda and 15 percent growth in earnings per share (EPS) over the same period.
Regarding the Rs 13,500 crore order for 12 Su-30MKI aircraft, HAL plans to deliver one aircraft by FY28 and the remaining 11 by FY29. To meet this target, HAL is reactivating its production line in Nashik and has already secured necessary material kits from Russia. While execution for the Su-30MKI order is expected to align with management guidance, risks of delays could arise from integrating indigenous equipment, particularly as the Virupaksha radar is still under development and testing. For the LCH Prachand, JM Financial anticipates no major execution risks from FY29 onwards, maintaining a base case revenue CAGR of 25 percent over FY26–29.