Hindustan Aeronautics Limited — Q1 FY23 earnings call

Call held 29 Aug 2022

Management summary

HAL posted robust Q1 FY23 results reflecting operational normalcy post-COVID. The company highlighted a strong order pipeline of Rs 45,000 crores in platform orders expected to materialize in FY23, which could take the order book beyond Rs 1 lakh crores. Management was bullish on indigenization with 30 out of 34 platforms delivered being indigenously designed. Export initiatives gained traction with enquiries from Malaysia, Philippines, Argentina, Egypt and other countries.

Highlights

  • Order book strengthened to ~Rs 84,800 crores with fresh orders of Rs 6,000+ crores

  • Surplus cash balance of ~Rs 14,000 crores from customer advance payments

  • First series production LUH Mark 1 took to skies in July 2022; Tumakuru helicopter factory near complete

  • LCA Mark 1A first flight commenced; deliveries scheduled from February 2024

  • MoU signed with Safran for 50-50 JV for helicopter engine development with IPR in India

  • Order pipeline of ~Rs 45,000 crores for platforms expected to materialize in FY23 (70 HTT-40, 25 ALH, 12 LUH, 12 Su-30, 240 AL-31FP engines)

  • Export target of Rs 2,500 crores annually by 2025 (10% of revenue)

  • Market capitalization reached ~Rs 74,000 crores

Key financials

  1. Order Book ₹84,800 Cr
  2. Cash Balance ₹14,000 Cr
  3. Market Capitalization ₹74,000 Cr
  4. ROH Revenue Target FY23 ₹13,000 Cr
  5. R&D as % of Revenue 7%

What they filed

Q1 FY27: revenue up 14.4%, net profit up 14.9% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue5,976 6,957 13,700 4,819 6,629 +11%7,699 +11%13,942 +2%5,515 +14%
EBITDA1,640 1,683 5,295 1,282 1,558 −5%1,871 +11%5,059 −4%1,527 +19%
Net profit1,510 1,440 3,977 1,384 1,669 +11%1,867 +30%4,196 +6%1,590 +15%
How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Guidance & targets

Order Book

  • Order Book Target Order Book · FY23 · High confidence Beyond Rs 1 lakh crores

    From Rs 84,800 crores today

    The aggregate value of all the above orders would be around 45,000 crores and would take our order book position beyond 1 lakh crores in the current financial year if all of these materializes.

    — C.B. Ananthakrishnan

Exports

  • Export Revenue Target Exports · By 2025 · Medium confidence Rs 2,500 crores annually
    Broadly, we expect around 2,500 crores of exports we should be able to achieve by 2025 on a consistent basis year-on-year.

    — C.B. Ananthakrishnan

Margins

  • EBITDA Margin Margins · FY23 · High confidence 24-25%
    the margins we will still be able to maintain at 24%, 25%

    — C.B. Ananthakrishnan

Provisions

  • Provisions as % of Revenue Provisions · FY23 · High confidence 6-7%

    From 10% today

    all of this we should be able to continue to maintain at 6% to 7% of our total revenue as our provisions in the current year

    — C.B. Ananthakrishnan

Order Pipeline

  • 3-5 Year Order Pipeline Order Pipeline · 3-5 years · Medium confidence Rs 60,000 crores
    the platforms which we are expecting in the next 3 to 5 years horizon...should be in the order of around 60,000 crores

    — C.B. Ananthakrishnan

Deliveries

  • Dornier Civil Price Deliveries · Current · High confidence Rs 60 crores per unit
    for the civil aircraft, our price is expected to be around 60 crores

    — C.B. Ananthakrishnan

Risks & concerns

  • Russian supply chain disruption due to Ukraine conflict

    medium

    Management claims supplies continuing and sufficient inventory available, but payments through Sberbank had initial hiccups

    Both downplayed

  • LCA Mark II program uncertainty amid reports of IAF preferring foreign jets

    medium

    Management insists project is on track with IAF participating in critical design review

    Analyst downplayed

  • Export orders yet to materialize despite aggressive targets

    medium

    Rs 2,500 crore export target by 2025 but no breakthrough order yet

    Management acknowledged

  • Provisions running high at 10% vs normal 6-7%

    low

    Rs 160 crore Sukhoi accident, Rs 270 crore loaned items, Rs 190 crore warranty increase - expected to normalize

    Analyst acknowledged

  • Indigenous engine development 6-7 years away

    low

    25 kN engine still in integration phase, GE-404 manufacturing not established at HAL

    Management acknowledged

Areas of evasion (1)

  • Specific margin impact of manufacturing vs ROH mix

Q&A highlights

4 direct
LCA Mark II Status Direct
IAF has participated in the critical design review...the project is still on

Clarifies that LCA Mark II program continues despite media reports of IAF preferring foreign aircraft

Asked by Aditya (Securities Investment Management)

Export Opportunities Beyond LCA Direct
We are promoting ALH and LCH...Philippines, Nepal, Bangladesh, Namibia, Mauritius, Vietnam, Seychelles, Thailand, Nigeria

Shows breadth of export push across multiple platforms and geographies

Asked by Aditya

Engine Development Timeline Direct
it may take another six to seven years to certify this engine

25 kN indigenous engine still 6-7 years from certification, showing long development timelines

Asked by Vishal Biraia (Max Life Insurance)

Russian Supply Chain Direct
supplies from Russia, we are managing without much of concern...sufficient inventory at our disposal

Critical concern given geopolitical situation; management confident about continuity

Asked by Abhijit Mitra (ICICI Securities)

Navy Aircraft Carrier Programs Partial
we do not foresee any competition or any sort of setback because this when foreign OEMs are trying to pitch in their products

TEDBF program for carrier-based operations is 5-6 years away from development

Asked by Abhijit Mitra

1 min read 5 chapters

Detailed narrative

Order Pipeline and Book Trajectory

HAL's order pipeline of Rs 45,000 crores includes 70 HTT-40, 25 ALH (Army), 6 Dornier, 12 LUH, 12 additional Sukhoi-30, and 240 AL-31FP engines. If materialized, this would push the order book beyond Rs 1 lakh crores. Further pipeline of Rs 60,000 crores over 3-5 years includes 145 LCH, 175 LUH, 60 UHM, and balance HTT-40.

Indigenization and Atmanirbhar Push

30 out of 34 new platforms delivered were indigenously designed. Third Positive Indigenization List approved with 780 items, of which 360 are from HAL platforms. R&D reserve increased from 10% to 15% of operating PAT. R&D investment at 6-7% of revenue with Rs 5,000 crores of projects sanctioned.

Export Strategy and International Business

HAL targeting 10% of revenue from exports by 2025 (~Rs 2,500 crores). Active enquiries from Malaysia (LCA tender for 18 Tejas in advanced stage), Philippines, Argentina, Egypt. Opening offices in Malaysia and planning offices in Egypt, Middle East, North America. Pursuing EASA/FAA certifications for global appeal.

ROH Business Robustness

ROH revenue target of Rs 13,000 crores for FY23 (platforms + engines Rs 6,900 crores, accessories/avionics Rs 7,000 crores). Major platforms: 20 Sukhoi, 13 Jaguar, 9 Mirage, 21 Kiran, 9 Hawk, 41 ALH, ~40 Cheetah/Chetak overhauls planned.

Greenfield Expansion and Capacity

Tumakuru helicopter factory nearly complete, ready for operations shortly. First series production LUH took to skies in July 2022. HEMRO JV with Safran for helicopter engine MRO at Goa expected operational by end 2023. Cryogenic engine facility for ISRO programs being established.

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