How did Hindustan Aeronautics report such a sharp growth in profits in the Sep-20 quarter?

Despite the worries over COVID, Hindustan Aeronautics reported operating profit spurt of 51% at Rs.810 crore for the Sep-20 quarter. The overall sales revenues of HAL grew by 40.73% at Rs.4,854 crore. This comes on the back of a weak Jun-20 quarter when defence orders were coming at a slow pace.

On the one hand, operating profits were up 51.16% at Rs.810cr due to the cost of inputs growing much slower than revenues. As a result, the OPM of the company expanded from 15.53% in the Sep-19 quarter to 16.68% in Sep-20 quarter.

However, the Profit after tax or PAT for the Sep-20 quarter was 1.04% lower at Rs.615 crore which was largely because HAL had a tax outflow of Rs.211 crore in Sep-20 quarter but it had a net deferred tax credit of Rs.140 crore in Sep-19 quarter. Hence, PAT margins fell lower from 18.02% to 12.67% in the Sep-20 quarter.

In this case, the operating profit is more illustrative than the net profit, as the tax differential is not sustainable. These are one-time tax deferred credits in the Sep-19 quarter in the light of the shift in tax formula. If you ignore that effect, the profit would be higher by 50%. What really matters for HAL is the top line is back to pre-COVID normal.