Hindustan Aeronautics Limited — Q2 FY23 earnings call

Call held 15 Nov 2022

Management summary

HAL delivered strong H1 FY23 results with 22% revenue growth driven by ROH activity compensating for depleting manufacturing contracts. ROH contributed ~75% of H1 revenue, boosting margins to 33%. Management reiterated that manufacturing proportion would improve from H2 FY23 onward with LCA Mark 1A deliveries starting FY24. The Rs 50,000 crore order pipeline (excluding ROH) provides strong visibility for future growth.

Highlights

  • H1 FY23 revenue grew 22% YoY; ROH segment drove growth while manufacturing remained flat

  • EBITDA margin improved to 33% in H1 vs 25% historical average due to higher ROH mix and interest income

  • Order book maintained at ~Rs 84,000 crores with Rs 10,000 crore fresh accretion in H1

  • PSLV contract of Rs 860 crores won in consortium with L&T from NSIL - first foray into space

  • HTT-40 contract for 70 numbers concluded at ~Rs 6,500-7,000 crores at Def Expo

  • Rs 50,000 crore order pipeline expected to materialize in 6-12 months (excl ROH)

  • Cash balance at Rs 16,000 crores; interest income doubled to Rs 160-170 crores

  • Full year EBITDA margin guidance maintained at 26-27%; revenue growth guidance 7-8%

Key financials

2 periods

Headline

  • Order Book
    ₹84,000 Cr
  • Cash Balance
    ₹16,000 Cr

H1

  • Revenue Growth
    22%
    YoY +22%
  • EBITDA Margin
    33%
  • ROH Revenue
    ₹4,800 Cr
    YoY +29%
  • Manufacturing Revenue
    ₹1,600 Cr
    YoY 0%

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

Revenue

  • Full Year Revenue Growth Revenue · FY23 · High confidence 7-8%
    we have given a target revenue guidance of almost 7% to 8% growth in the full financial year

    — C.B. Ananthakrishnan

Margins

  • Full Year EBITDA Margin Margins · FY23 · High confidence 26-27%
    on average for the full financial year, it will be maintained at 26% to 27% as we have been maintaining in the past

    — C.B. Ananthakrishnan

Revenue Mix

  • Manufacturing vs ROH Ratio Revenue Mix · FY23-FY24 · High confidence 40:60
    manufacturing should be 40% and ROH should be 60%

    — C.B. Ananthakrishnan

Order Book

  • Order Pipeline (Manufacturing) Order Book · 6-12 months · High confidence Rs 50,000 crores
    The aggregate value of all these contracts is expected to be around Rs. 50,000 crore, which should all materialize

    — C.B. Ananthakrishnan

ROH

  • ROH Revenue Growth ROH · Annual · High confidence 10-12%

    Previously 5-6% → 10-12%

    10% to 12% in ROH growth

    — C.B. Ananthakrishnan

Profitability

  • PAT Growth Profitability · FY23 · Medium confidence 4-5%
    we'll be able to maintain the profitability of last year and also show some growth...not less than 4% to 5%

    — C.B. Ananthakrishnan

Deliveries

  • Platform Deliveries FY23 Deliveries · FY23 · High confidence 24-25 numbers
    6 LCA, 9 ALH, 9 LCH...24-25 numbers, yes

    — C.B. Ananthakrishnan

  • HTT-40 Delivery Start Deliveries · FY26 · High confidence October 2025
    it should be somewhere in October 2025, the delivery should start commencing from

    — C.B. Ananthakrishnan

Capacity

  • Helicopter Production Capacity Capacity · Current · High confidence 60 helicopters per annum
    almost 60 helicopters we will be in a position to deliver

    — C.B. Ananthakrishnan

Engines

  • AL-31FP Delivery Schedule Engines · FY24 onwards · High confidence 30 per annum peak, 8-year liquidation
    we should be able to reach a peak load of around 30 numbers on an average. So, with 30 numbers per annum, we should be able to liquidate in 8 years

    — C.B. Ananthakrishnan

Risks & concerns

  • Manufacturing revenue stagnation - flat YoY in H1

    medium

    Manufacturing contracts depleting; gap being filled by ROH. New manufacturing revenue dependent on LCA Mark 1A starting FY24

    Both acknowledged

  • Export order breakthrough remains elusive

    medium

    Malaysian deal facing political uncertainty; no firm export orders despite active discussions

    Both acknowledged

  • Dependency on Russian supply chain for Su-30/MiG programs

    medium

    Payment issues through Sberbank being worked out; supplies continuing but uncertainty persists

    Analyst downplayed

  • Elevated margins unsustainable as manufacturing picks up

    low

    H1 margin of 33% will normalize to 26-27% for full year as manufacturing revenue (lower margin) increases in H2

    Management acknowledged

  • Double-digit revenue growth delayed to FY25

    low

    FY23-24 guided at single-digit 7-8% growth; double-digit from FY25 once LCA Mark 1A ramps up

    Management acknowledged

Areas of evasion (3)

  • Manufacturing vs ROH margin breakup
  • Specific export deal timelines
  • Detailed product-wise revenue

Q&A highlights

3 direct, 1 evasive
ROH Growth Sustainability Direct
10% to 12% in ROH growth...the Rs 50,000 order pipeline is exclusive of the repair and overhaul activity, which we expect on an average around Rs 15,000 crore minimum accretion year-on-year

ROH growth guidance upgraded from 5-6% to 10-12%; pipeline excludes ROH orders

Asked by Kiran Sebastian (Franklin Templeton)

ROH vs Manufacturing Margins Evasive
we may not be exactly be able to differentiate between manufacturing contracts and ROH contracts

Management refuses to break out segment margins despite clear margin benefit from ROH mix shift

Asked by Amit Dixit (ICICI Securities)

LCA Mark 1A Delivery Timeline Direct
3 numbers as per the schedule...from next year also we should be in a position to deliver all these platforms

Confirms LCA Mark 1A deliveries starting FY24 with 3 aircraft

Asked by Jonas Bhutta (Birla MF)

AL-31FP Engine Opportunity Direct
first year will be 12-13 numbers...peak load of around 30 numbers...liquidate in 8 years

240 engine order worth Rs 26,000 crores with clear execution timeline

Asked by Harshit Patel (Equirus)

Export Challenges Partial
there are certain difficulties and challenges which we are facing...the change in political landscape

Malaysian Tejas deal facing headwinds from elections; export breakthrough still elusive

Asked by Bharat Sheth (Quest Investment)

1 min read 5 chapters

Detailed narrative

Revenue Mix Shift Toward ROH

H1 FY23 saw ROH contributing ~75% of revenue (Rs 4,800 crores, up 29% YoY) while manufacturing remained flat at Rs 1,600 crores. This shift to higher-margin ROH business temporarily boosted EBITDA to 33%. Management expects 40:60 manufacturing-to-ROH ratio for FY23-24, improving to 50:50 from FY25 as LCA Mark 1A deliveries commence.

Order Book and Pipeline Strength

Order book steady at Rs 84,000 crores with Rs 10,000 crore H1 accretion including PSLV (Rs 860 crores) and HTT-40 (Rs 6,500 crores). Manufacturing pipeline of Rs 50,000 crores excludes annual ROH accretion of Rs 15,000+ crores. Further Rs 70,000 crores of LCH (140), LUH (170), and NUH (60) orders expected in 2-5 years.

LCA Mark 1A Production Ramp-Up

Delivery schedule: 3 aircraft in FY24, then 16 per annum peak. Second production line established in Bangalore; capacity being scaled to 20-24 with 4 private sector partners for structures. Third line planned for Nashik using freed-up Sukhoi facilities. Capacity will never be a constraint.

Engine Programs Creating New Revenue Streams

AL-31FP 240 engines: contract expected by March 2023, 12-13 deliveries in first year, peak 30/year, 8-year execution. RD-33 80 engines: 20/year, 4-5 year timeline. Both orders together worth ~Rs 30,000 crores. Only 6 AL-31FP engines left in current contract (~Rs 300-400 crores).

Cash Position and Dividend Policy

Cash balance at Rs 16,000 crores expected to end FY23 at Rs 14,000-15,000 crores. Interest income doubled in H1 due to higher rates and surplus cash. Interim dividend of Rs 20/share declared (200% of face value). Company rewarding shareholders while maintaining healthy working capital from customer advances.

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