Hindustan Aeronatics Limited IPO: Subscribe or Not?

Hindustan Aeronautics Financial Performance (in Rs crore)

HAL Important Dates

HAL IPO Opening Date: 16 March 2018

HAL IPO Closing Date: 20 March 2018

Finalisation of Basis of Allotment: 26 March 2018

Initiation of refunds: 27 March 2018

Transfer of shares to accounts: 27 March 2018

Listing Date: 28 March 2018

Strengths of the Company: HAL

1. Experience of more than 5 decades in research, design and development, production and maintenance, repair and overhaul services.
2. Set track record in offering giving life cycle support.
3. 11 dedicated Research & Development Centres. Aeronautics owns 1 trademark, 7 patents, 6 design registrations and 44 copyrights.
4. Largest DPSU in terms of value of manufacturing.
5. Diversified product portfolio which consists of fighter aircraft, trainer aircraft, transport aircraft, military helicopter and civil helicopters and their engines, avionics, and accessories

Company Promoters of HAL 

The President of India, acting through the Department of Defence Production, Ministry of Defence is the promoter of Hindustan Aeronautics Limited.

The promoter presently holds, 100% of the pre Offer paid up Equity Share capital of the company. Assuming the sale of all Offered Shares, the Promoter shall have stake of approx. 90% of the post Offer paid up Equity Share capital of the Company.

Hindustan Aeronautics Limited IPO Market Lot

• Shares: Apply for 12 Shares (Minimum Lot Size)
• Amount: Rs.14,580 (For Retail & Employee)
• Amount: Rs.14,880 (For QIB & HNI)

HAL’s Primary Customers

• Indian Defence Forces.
• Indian Air Force.
• Indian Army.
• Indian Navy
• Indian Coast Guard.
• State governments.
• Para-military forces.
• Corporates.

Order Book Position: HAL 

As of December 31, 2017, Hindustan Aeronautics’s order book was Rs.68,461 crores which generally consists of products and services to be produced and delivered and excludes expected revenues from their joint ventures and subsidiaries.

Competitors of the Company: HAL

Hindustan Aeronautic Limited’s main competitors in the aircraft and helicopter production segment operations are companies such as Lockheed Martin, Saab, Airbus Helicopters, Bell Helicopters, Leonardo, Boeing, BAE Systems and UGMK (LET Kunovice Aircraft Industries).

Management Team: HAL

1. Mr. T. Suvarna Raju (Designation: Chairman and Managing Director)
2. Mr. V. M. Chamola (Designation: Director (Human Resources)
3. Mr. C. V. Ramana Rao (Designation: Director (Finance) and Chief Financial Officer)

Objectives of the Issue:

• To carry out the disinvestment of 36,150,000 equity shares by the selling shareholder forming 10 % of the company’s pre-offer paid up equity share capital of the company.
• To get the gains of listing the equity shares on the stock exchanges.

Peer Group Comparison

Since there is no listed companies in India that are directly comparable to the business carried on by Hindustan Aeronautics Ltd. Hence, we cannot make any comparison.

Positives for the Company

• Long history of research, design, repair, overhaul and production and maintenance services.
• Strong design & development potential.
• Leadership Position in the Indian Aeronautical industry and strong Government of India support.
• Strong financial track record.

HAL: Risks & Concerns

• The Government of India has a notable impact on the company’s actions which may restrict management’s ability to manage the business. Any change in the government’s policy could have a material adverse impact on the company’s financial condition and results of operations.
• The company is in a disagreement with the Ministry of Defence of Ecuador relating to their termination of an agreement relating to the supply of helicopters to the Ecuadorean Air Force. Its revenue and exports may be badly impacted as a result.
• The company faces competition from other international companies, many of which have considerably more resources.

 IPO Assessment: HAL

• India has the third largest military in the world and is the sixth largest spender in defense. I is also one of the biggest importers of conventional defense and incurs about 30% of its total defence budget on capital acquisitions.
• Hindustan Aeronautics has Leadership position in the Indian aeronautical industry and strong government support.
• The company’s performance may depend significantly on continued induction of Tejas jet in the Air Force. There is sign that the Government may obtain more of these aircraft but would also contend on considerable upgrade of these aircrafts.
• Retail discount of Rs. 25 per share gives some degree of protection to retail.
• The Financial Year 2017 EPS on present diluted equity of Rs 334.39 crore (which has decreased because of buyback of shares in Nov last year)  stands at  Rs 78.5 and PE works out to 15.8.
• A considerable long term risk to Hindustan Aeronautics is governments new mode of defence manufacturing that allows defence manufacturing in private sector with reputed collaborators.
• It is felt that the company’s public issue gives a good chance of an investment in a defense sector Public Sector Unit in aeronautics field with a good track record. However, given very uninspired response for Bharat Dynamics IPO, would also keep a watch on subscription numbers as well.

Modest Valuation and Growth Prospects

At a time when companies are asking for high valuations for their public issues, this company’s valuations look modest. Hindustan Aeronautics Limited’s IPO is priced at less than 16 times earnings.

But, in fact, even that seems high when we compare valuations with growth.

Revenue and earnings growth have been not much to write about. For the financial year 2017 (FY17), net revenue rose 7 % year on year whereas pre tax and exceptional earnings rose 11.7 % mainly due to a fall in income from other sources.

In the first 6 months of this financial year FY18, the Hindustan Aeronautics operating profit margin decreased to 9% from 18% in FY17.

An analyst said that it that should not concern investors. Given the uneven nature of the business where performance relies to a good extent on the delivery schedule of aircraft, it would not be fair to evaluate the company’s financials on a quarterly or half yearly basis.

In fact, for the half year ended September, revenue accounted for only 29% of previous year’s amount.

Still, investors looking for a listing pop in India’s largest defence Public Sector Unit (PSU) could well be upset.

Arun Kejriwal, director of Kejriwal Research and Information Services Pvt. Ltd said that it is a nice plane to travel in but I would not bet my money on it. The company’s capacity expansion and growth plans are not that exciting.

Another analyst said the Public Sector Unit tag is a bit of a drag, not only in consideration to investor perception, but also in the way the company chases growth opportunities. Investors can anticipate steady growth with this company.

Further, the company’s biggest client is the Indian defence services contributing a high revenue of over 90 % for the half year ended September and for FY15-FY17. And that’s a key risk.

A fall or reprioritization of funding in the defense budget or postponing in the budget process could impact the company’s ability to grow or maintain its sales, earnings, and cash flow.

On the other side, investors will be purchasing into a company with steady financials. On certain criteria, the company does seem to make a good candidate from a long-term perspective. For instance, it has a strong order book worth Rs 68,461 crore offering modest revenue visibility.

The balance sheet is strong with cash and cash equivalents of Rs. 11,700 crore, no borrowings and a net worth of Rs 12,943 crore as of 30 September. It has a steady track record of paying dividends. For FY 17, its dividend payout was at Rs 1,000 crore, which works out to a dividend payout ratio of 37%.

Some brokerage firms have recommended investors to subscribe with a long-term view, which is a respectful way of saying that they cannot anticipate decent returns anytime in the near future.

IPO vs Mutual Funds

If you have no knowledge of the equity markets but are looking to gain from the equity markets, mutual funds are ideal. Investments can be made in Mutual Funds since they provide a wide variety and also the amount of investment can vary as per investor’s preference.

Many mutual funds invest in IPOs – many times at discounted rates that are not available to retail investors.

It is necessary to not get carried away by the hype surrounding IPOs. Don’t jump into IPO if you do not have the necessary skills.

In a mutual fund, a skilled and trained professional handles all investments for you and therefore, you can benefit from the equity markets without spending too much time gaining the skills needed to understand the markets.

Different Funds:

• Large Cap Funds– Here the investment is made in large cap companies. These companies offer 12-18% return. Moderate risk is involved and it is suggested to invest here for 4 years or more.
• Mid Cap Funds– Here the investment is made in mid cap companies. These companies are offer 15-20% return. Moderately high risk is involved and it is suggested to invest here for 5 years or more.
• Small Cap Funds– Here the investment is made in small cap companies. These companies offer 15-20% return. High risk is involved and it is suggested to invest here for 6 years or more.
• Balanced Fund– This fund is a combination of equity and debt in its portfolio. Depending on the proportion of investment made in Equity and Debt, the risk and returns are accordingly determined. It is suggested to invest here for 2 to 3 years. Returns in this fund range from 11-14%.

Investment can be made via lump sum investment or through SIP (Systematic Investment Plan) mode in any of these funds.

Moreover return is something that cannot be promised but these return estimates have been given on the basis of past performance.

Mutual Funds for 2018

Large Cap Fund:

These funds invest in large companies that have a history of good performance and stable balances.

• SBI Bluechip Fund

Mid Cap Fund:

These are funds that are high risk – high return. They’re a bit riskier than large cap funds.

• Aditya Birla Small & Midcap Fund

Small Cap Fund:

These are the funds that you can invest in if you want very high growth. They are a very high risk too.

• HDFC Small Cap Fund

Happy investing!

Disclaimer: the views expressed here are of the author and do not reflect those of Groww.