Why is Hindustan Aeronautics scaling new highs on a regular basis? What is the positive new flow for the company?
Answer
Answer
Even as the stock market has gyrated between optimism and pessimism, one stock that has sequentially hit new highs is Hindustan Aeronautics Ltd (HAL). The stock recently touched a record high of Rs.1,592 on the BSE. The rerating of the stock started after it recently announced that its sales revenues for FY22 would be at an all-time record high of Rs.24,000 crores. This represents a 6% growth yoy on the back of robust orders from armed forces.
One of the fears that analysts had expressed in the aftermath of the Russia-Ukraine war was the disruption in supplies and spares to HAL, which depends substantially on Russia. However, these fears have been largely belied as the company runs with inventories of 8-9 months and supplies are hardly an issue. It is hoped that by then the fears of war would be history and hence such supply chain flows should normalize by that time.
Apart from the top line, the big orders under the Make in India scheme also helped the stock. This was led by the production of 44 new helicopters, 84 new engines, and the overhauling of 203 helicopters and 478 engines. There is more to the story. HAL bagged a contract to produce 15 Light Combat Helicopters (LCH) with order value at Rs.3,887 crore. Of these 15 LCHs, 10 will be for the IAF while the other 5 will be for the Indian Army.
The second trigger has been the rating upgrade for HAL by two rating agencies. During the year, CARE Ratings and ICRA upgraded the credit rating of the bonds and debt facilities of HAL from AA+ Stable to AAA/Stable. What triggered this upgrade? The decision by the CRAs was backed by better than expected financial performance and better cash flow position. The rating upgrade will rationalize the cost of funds for future borrowings.
Finally, a quick look at the price related dynamics of HAL. The stock of HAL trades at a price Rs.1,562. In the last 1 year, it touched a 52-week high of Rs.1,592 and a 52-week low of Rs.925, so it is much closer to the high. The HAL stock currently trades at a P/E ratio of 14.5 times rolling four quarter earnings, which can be justified with the ROE at 21.9%. HAL enjoys market cap of Rs.52,220 crore and a free float market cap of Rs.13,058 crore.