Hindustan Aeronautics -...

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Hindustan Aeronautics

March 15, 2018

IPO Note

Board the Indian Aerospace leader

Kunal Sheth [email protected] +91‐22‐66322257

Shreyans Jain [email protected] +91‐22‐66322256

Rating Subscribe

Price Band Rs1215‐Rs1240

IPO Fact Sheet

Opening Date March 16, 2018

Closing Date March 20, 2018

BRLMs SBI Capital Markets, Axis Capital

Issue Size Rs 41440mn – Rs42293mn

Issue Details Pre‐issue equity (m shares) 334.38

Post‐issue equity (m shares)* 334.38

Post‐issue Market Cap (Rs bn)* 414.6bn

* Calculation on higher price‐band

Hindustan Aeronautics (HAL) is engaged in the design, development, manufacture,

repair, overhaul, upgrade and servicing of a wide range of products including,

aircraft, helicopters, aero‐engines, avionics, accessories and aerospace structures.

HAL is the largest DPSU in terms of production value and is the 39th largest

aerospace company in the world in terms of revenue (in USDmn) in 2016 according

to Flight International. Their primary customer is the Indian Defence Forces.

The Defence Acquisition Council under the MoD cleared defence sector transactions

with a value of more than Rs820bn under the ‘Buy and Make (Indian)’ and ‘Buy

Indian’ categories. These transactions include the procurement of Light Combat

Aircraft, T‐90 tanks, Mini UAVs and Light combat helicopters. The Indian Armed

Forces aim to procure newer and more advanced aircrafts and to revamp its fleet in

the next 10 to 20 years. In addition, it plans to procure more than 1,000 rotary wing

aircrafts, including attack, utility, multirole and lift platforms (Exhibit 16). We

believe, with the upgrade of major fleets of the Indian Defence forces on the anvil,

this segment would continue to witness robust growth, going forward. Growth

would also be led by the execution of LCA (Tejas), Sukhoi, LCH, UAV and

development of indigenous spares and engines. In addition to this, the company is

also nominated by the Ministry of Defence for procurement of 83 LCA and 15 LCH

(Rs645bn opportunity). HAL is doubling its LCA capacity to 16 via some de‐

bottlenecking and by outsourcing production of few spares.

HAL has managed to register revenue CAGR of 5.5% over FY14‐17 on the back of strong

growth in its services business. During this period, services revenues witnessed

revenue CAGR of 13% and accounted for 32% of revenues in FY17 from 23% in FY14.

Order book of Rs684bn provides strong revenue visibility for the company over the

next five years. At the upper end of the price band, the issue is valued 15.8x FY17 P/E.

While the opportunity is massive in the domestic Aeronautical defence space, order

inflow/execution could be bumpy, given the nature of the defence industry. We

recommend investors to subscribe with a long term view.

Key financials (Y/e March) FY14 FY15 FY16 FY17

Revenues (Rs m) 152,902 156,475 167,585 179,515

Growth 0.4% 2.3% 7.1% 7.1%

EBITDA (Rs m) 22,396 8,509 24,680 32,561

PAT (Rs m) 25,402 9,948 19,924 26,080

APAT 25,411 9,941 20,043 26,247

EPS (Rs) 53.0 21.0 42.0 73.0

Profitability & Valuation FY14 FY15 FY16 FY17

EBITDA margin (%) 14.6 5.4 14.7 18.1

RoE (%) 17.5 6.7 18.2 20.9

RoCE (%) 7.4 ‐0.1 9.1 13.7

EV/EBITDA (x) 11.3 28.0 11.4 9.6

P/E (x) 16.3 41.7 20.7 15.8

Source: Company Data; PL Research * All ratios have been calculated at the higher price band

March 15, 2018 2


Exhibit 1: Issue Details

Company Hindustan Aeronautics Limited

Profile

HAL is engaged in the design, development, manufacture, repair, overhaul, upgrade and servicing of a wide range of products including, aircraft, helicopters, aero‐engines, avionics, accessories and aerospace structures. The company has been conferred with the “Navratna” status by the GoI in June 2007 and are the largest DPSU in terms of value of production according to the MoD Annual Report 2016‐2017. It was the 39th largest aerospace company in the world in terms of revenue (in USD mn) in 2016 according to Flight International.

Offer Period Opens On : Friday, March 16, 2018

Closes On : Tuesday, March 20, 2018

Price Band Rs1215 to Rs1240

Retail & Employee Discount

Rs25 per Equity Share

Bid Lot 12 Equity Shares & in multiple of thereafter

Offer Size Offer for sale of 34,107,525 Equity Shares

Issue Size (In Rs.) Rs41440mn ‐ 42293mn

QIB : 50% of the Issue

NIB : 15% of the Issue

RETAIL : 35% of the Issue

Mode of Payment ASBA Mandatory (No Cheques will be accepted)

Lead Manager SBI Capital Markets and Axis Capital Ltd

Registrar Karvy Computershare Private Ltd

Listing NSE and BSE

Source: Company Data, PL Research

March 15, 2018 3


Business Summary

HAL is engaged in the design, development, manufacture, repair, overhaul, upgrade

and servicing of a wide range of products including, aircraft, helicopters, aero‐

engines, avionics, accessories and aerospace structures.

HAL is the largest DPSU in terms of value of production and is the 39th largest

aerospace company in the world in terms of revenue (in USDmn) in 2016 according

to Flight International.

HAL’s operations are organized into five complexes, namely the Bangalore Complex,

MiG Complex, Helicopter Complex, Accessories Complex, and Design Complex, which

together include 20 production divisions and 11 R&D Centres located across India.

In addition to sales to the Indian Defence Services, HAL sells its products and

provides services to State Governments, para‐military forces and corporates. A

significant component of their business outlook in this environment is to focus on

execution, improving standards and quality and predictability of the delivery of the

products to the Indian Army.

Exhibit 2: Key Management Personnel

Name Age Designation

T. Suvarna Raju 59 Chairman and Managing Director

C.V Ramana Rao 59 Director (Finance) and Chief Financial Officer

Damal Venkatesh 59 Director (Engineering and Research & Development)

V. M Chamola 57 Director (Human Resources)

Source: RHP, PL Research

Conferred with the "Navratna" status by

the GoI in June 2007

HAL has also received an "Excellent" rating

from the GoI every year from the Financial

Years 2002 to 2016

March 15, 2018 4


Overview

HAL manufactures a wide range of products for military and civil use, including

aircrafts, helicopters, engines, avionics and other accessories. They also provide

product servicing, repair, overhaul and upgrade services.

Aircrafts that they presently manufacture include ‐

Sukhoi Su‐30 MKI,

Dornier 228 and

LCA Tejas

They also manufacture the Cheetal and LCH helicopters as well as variants of the

Dhruv helicopter.

In addition, they manufacture engines, avionics and other accessories which are

used in the assembly, servicing, repair and overhaul of aircrafts and helicopters.

Their primary customers are the Indian Defence Forces, namely, the Indian Air Force,

Indian Army, Indian Navy and Indian Coast Guard.

In India, they sell their products and provide services to Central and State

governments, para‐military forces and corporates. They also export their products

and services, primarily spares.

Over the years, HAL has showcased their Research, Design and Development

capabilities with the successful development of military aircraft and helicopters such

as the Ajeet, Marut, HPT‐32, Kiran and Advanced Light Helicopter. These indigenous

aircraft and helicopters were manufactured by them along with aircraft

manufactured under license such as the MiG 21FL/M/BIS, MiG‐27, Avro, Jaguar,

Dornier 228, Su‐30 MkI, Hawk Mk 132 aircraft and license manufactured helicopters

such as the Cheetah and Chetak helicopters, along with the associated engines,

accessories and avionics to meet the demand of the Indian Defence customers.

They have also upgraded several aircrafts including the MiG‐21 BIS, MiG‐27 Upgrade

and Jaguar in order to enhance their combat capabilities and performance. They also

provide support for maintenance, repair and overhaul for these indigenous and

license manufactured aircraft and helicopters, as well as for aircraft and helicopters

procured directly by the Indian Defence Services, Mirage 2000 and An‐32 aircraft

along with the associated engines, accessories and avionics. They also provide

maintenance, repair and overhaul services for engines of the MiG‐29 aircrafts that

the Indian Air Force procured from third parties.

March 15, 2018 5


Exhibit 3: Manufacturing locations and R&D centres across India


March 15, 2018 6


Product Portfolio

Aircrafts

Presently, manufacturing aircrafts using indigenous technologies, Russian and

Western origin technologies

Sukhoi Su‐30 MKI Aircraft

MiG‐21M

MiG‐21BIS

MiG‐27M

Hawk Mk 132 Aircraft

Dornier 228 Aircraft

Light Combat Aircraft

Pilotless Target Aircraft Lakshya

Helicopters

They manufacture indigenously designed and developed helicopters as well as under

licenses or transfer of technology from the OEM plus provide repairs, overhaul and

maintenance services

ALH Dhruv

ALH Mk IV Rudra

Light Combat Helicopter

Cheetal

Cheetah

Chetak

Lancer

Engines

HAL manufactures engines for aircraft and helicopters and their components,

including critical discs, shafts, blades, forgings and castings. They also manufacture

products and spares required for the overhaul of engines and spares required during

servicing. In addition, they also carry out maintenance work for certain engines

which are not manufactured by them.

March 15, 2018 7


Examples are Adour Mk 871‐07, Adour Mk 804E/811, AL‐31FP, Shakti 1H1, Garrett

TPE‐331‐5 etc.

Accessories

Avionic equipments

HAL manufactures various avionic equipments of indigenous design as well as under

technology transfer from various OEMs, such as airborne radar equipments,

communication equipments, navigation equipments, on‐board computers and

display systems. Details of major avionic equipments manufactured are as follows:

Advanced Communication System (ACS‐235) – radio set with anti‐jam and

voice/data secure transmission features which facilitates communication in

different radio frequencies

VHF Omni Range and Instrument Landing System (VOR/ILS) – provides route

navigation, instrument landing and runway approach assistance

Tactical Air Navigation (TACAN) – provides air navigation with magnetic

beaming, slant distance information, beacon identification tone and runway

approach

Identification of Friend or Foe (IFF) – identifies the identity of an aircraft. It

provides automatic replies to ground or airborne interrogators and is of modular

construction

Radio Altimeter (RAM) – provides height of an aircraft measured from the

terrain below and is of modular construction

Precision Approach Radar (PAR) – an X‐band radar that provides Azimuth,

elevation, bearing information to the Aircraft etc.

Aerospace Structures

Engaged in the manufacture and supply of structures for satellite launch vehicles for

India's space programme. They manufacture

Large size aluminium alloy riveted structures

Welded tanks for the Polar Satellite Launch Vehicle (PSLV)

Geo‐stationary Launch Vehicle (GSLV)

Indian Remote Sensing Satellite (IRS) and

Indian National Satellite (INSAT)

Heat shield and Nose cone assembly

Tank and shrouds used in satellites

March 15, 2018 8


Exhibit 4: Sukhoi Su‐30 MKI Aircraft


Exhibit 5: Hawk Mk 132 Aircraft


Exhibit 6: Light Combat Aircraft


Exhibit 7: MiG‐21M


Exhibit 8: Dornier 228 Aircraft


Exhibit 9: ALH Dhruv


March 15, 2018 9


Exhibit 10: ALH Mk IV Rudra


Exhibit 11: Light Combat Helicopter


Exhibit 12: Chetak


Exhibit 13: Lancer


Exhibit 14: Adour Mk 871‐07


Exhibit 15: Adour Mk 804E/811


March 15, 2018 10


Indian Competitive Landscape

India has the third largest military in the world and is the sixth largest spender in

defence. India is also one of the largest importers of conventional defence

equipment and spends approximately 30% of its total defence budget on capital

acquisitions. 60% of Indian’s defence‐related requirements are currently met

through imports. In addition, the ‘Make in India’ initiative by the Government is

focusing its efforts on increasing indigenous defence manufacturing with the aim of

becoming self‐reliant. The opening up of the defence sector for private sector

participation is helping foreign OEMs to enter into strategic partnerships with Indian

companies and leverage opportunities in the domestic market as well as global

markets.

India’s focus on indigenous manufacturing in the defence sector has yielded certain

benefits as the MoD over the last two years unveiled several products manufactured

in India including

LCA Tejas

Composites sonar dome

Portable telemedicine system for the armed forces

Penetration‐cum‐blast

Thermobaric ammunition specifically designed for the Arjun tanks

Varunastra heavyweight torpedo manufactured with 95% locally sourced parts

and

Medium range surface‐to‐air missiles

The Defence Acquisition Council under the MoD cleared defence sector transactions

with a value of more than Rs820bn under the ‘Buy and Make (Indian)’ and ‘Buy

Indian’ categories. These transactions include the procurement of Light Combat

Aircraft, T‐90 tanks, mini UAVs and light combat helicopters.

Market Drivers and Future Trends

Equipment Replacement and Procurement

As the Indian government targets further indigenisation of its defence sector,

domestic demand is expected to drive the market and defence spending. As existing

equipment is rendered obsolete by technological advances, new equipment

procurement will be necessary, the geopolitical climate will also affect demand for

defence equipment and the inventory levels required for combat readiness.

March 15, 2018 11


Export Market Opportunities

As the domestic defence sector grows, it is expected that India will have

opportunities to develop its export market for defence engineering services and

components. Foreign vendors may seek to satisfy their offset obligations under the

DPP by sourcing military components from India, particularly with the latest

introduction of the 'Buy (Indian‐IDDM)' category under DPP 2016. With the

advantage of a lower manufacturing costs and skilled engineers, India may be able to

provide foreign markets with a cost‐effective solution to defence budget cuts.

Upgrading Existing Fleet

The Indian Armed Forces aim to procure newer and more advanced aircrafts and to

revamp its fleet in the next 10 to 20 years. In addition, it plans to procure more than

1,000 rotary wing aircrafts, including attack, utility, multirole and lift platforms.

Breakdown of India's requirement for aircrafts and helicopters over approximately the next 10 to 20 years

Exhibit 16: Requirements

Sl. No. Platform

A Aircraft

1 Light Transport Aircraft (AVRO replacement)

2 Transport Aircraft (An‐32 replacement)

3 LCA Tejas

4 AMCA

5 FGFA

6 Single Engine Fighter Aircraft

7 Basic trainer aircraft

B Helicopters

7 VVIP Helicopter

8 Heavy Lift Helicopter

9 Attack Helicopter

10 Naval Utility Helicopter (NUH)

11 Multi Role Helicopter (MRH)

12 Light Combat Helicopter (LCH)

13 ALH Dhruv

14 Cheetal

15 LUH/Ka‐226t

16 MALE UAV

17 Mini UAV

C Upgrade

18 Hawk Upgrade

19 Su‐30 MkI Upgrade


March 15, 2018 12


Products under Development

A number of products are currently under development using indigenous or co‐

developed technology.

The major Products under development are as follows:

Aircraft

Exhibit 17: HTT‐40 basic trainer aircraft


Exhibit 18: LCA Navy


Exhibit 19: Intermediate Jet Trainer


Exhibit 20: Fifth Generation Fighter Aircraft


March 15, 2018 13


Helicopters

Exhibit 21: Light Utility Helicopter


Exhibit 22: Indian Multi Role Helicopter


Engines

Exhibit 23: Hindustan Turbo Fan Engine (HTFE‐25)


Exhibit 24: Hindustan Turbo Shaft Engine (HTSE‐1200)


Unmanned Aerial Vehicles (UAVs)

The indigenous design and development of mini UAV of the eight kilograms class is

to meet the emerging requirements of military, para‐military, police and civil sectors.

It consists of fully composite structure, robust, rugged and man‐portable system. It

can be used for surveillance, reconnaissance and target tracking mission.

March 15, 2018 14


Exhibit 25: Mini UAV


Exhibit 26: Medium‐altitude, long‐endurance UAV – Rustom‐II


Upgrade

Hawk Upgrade – Hawk Mk 132

This upgraded aircraft is equipped with indigenous mission computer in dual

redundant configuration, embedded virtual training system (EVTS), softnet radio and

cockpit human machine interface (HMI).

Exhibit 27: Hawk Upgrade


Su‐30 MkI Upgrade

Plan to upgrade Su‐30 MkI to integrate contemporary systems both in terms of

hardware and software with indigenous equipment and integration of new weapons

for enhancement of operational capabilities.

March 15, 2018 15


New Business Initiatives

Dornier 228 Civil Variant

HAL believes an opportunity exists for them to position the Dornier 228 aircraft for

regional applications within the 18‐20 seater aircraft segment, given the growth in

civil aviation in India.

Currently, there is no other aircraft of this category being manufactured in India. In

an effort to tap this segment, we intend to market the civil variant of the Dornier 228

aircraft with new upgraded engine, composite propellers, a suitable avionics suite

and glass cockpit.

HAL believes that the civil variant of the Dornier 228 aircraft will provide a significant

support to the Government’s Regional Connectivity Scheme (Ude Desh ka Aam

Nagrik) initiative which was introduced under the National Civil Aviation Policy 2016

to provide Tier II cities in India with access to aviation transport services, thereby,

putting them onto the aviation map of the country.

New Helicopter Manufacturing Facility, Tumakuru

Planned production of the three‐ton class Light Utility Helicopter (LUH) at Tumakuru,

located approximately 100 km from Bengaluru.

March 15, 2018 16


Company at a Glance

Exhibit 28: Revenue grew at a CAGR of 5.5% from FY14‐17

152,902 156,475

167,585

179,515

135,000

140,000

145,000

150,000

155,000

160,000

165,000

170,000

175,000

180,000

185,000

FY14 FY15 FY16 FY17

(Rs m)


Exhibit 29: EBITDA and EBITDA Margins

22,396

8,509

24,680

32,561

14.6%

5.4%

14.7%

18.1%

0.0%

5.0%

10.0%

15.0%

20.0%

‐

5,000

10,000

15,000

20,000

25,000

30,000

35,000

FY14 FY15 FY16 FY17

(Rs m)


Exhibit 30: Profit after Tax

25,411

9,941

20,043

26,247

‐

5,000

10,000

15,000

20,000

25,000

30,000

FY14 FY15 FY16 FY17

(Rs m)


Exhibit 31: Return on Equity

17.5%

6.7%

18.2%

20.9%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

FY14 FY15 FY16 FY17


Exhibit 32: Return on Capital Employed

7.4%

‐0.1%

9.1%

13.7%

‐2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

FY14 FY15 FY16 FY17


Exhibit 33: Gross Block Movement over the years

87,391 92,916

102,889 111,656

‐

20,000

40,000

60,000

80,000

100,000

120,000

FY14 FY15 FY16 FY17


March 15, 2018 17


Financial

Exhibit 34: Income Statement (Rs m)

Particulars (Rs in millions) FY13 FY14 FY15 FY16 FY17

Revenue from operations 152,276 152,902 156,475 167,585 179,515

YoY gr. 0.4% 2.3% 7.1% 7.1%

Expenses:

Cost of materials consumed 69,470 84,578 78,671 88,119 84,042

Purchase of Stock‐in‐Trade 11,303 7,892 10,165 3,637 2,907

Changes in Inventories of Finished Goods, Work‐in‐Progress and Stock‐in‐Trade

(327) (7,907) (6,346) (5,624) 5,111

Employee benefits expense 24,475 26,890 32,805 32,743 35,704

Other expenses 10,176 10,563 11,124 11,759 12,494

Direct Input to WIP / Expenses Capitalised 11,504 2,017 (425) 1,759 (1,423)

Provisions 1,979 6,473 21,972 10,512 8,119

Total Expenditure 128,580 130,506 147,966 142,905 146,954

EBITDA 23,696 22,396 8,509 24,680 32,561

EBITDA Margin 15.6% 14.6% 5.4% 14.7% 18.1%

Other income 19,938 20,374 17,140 15,962 10,420

Depreciation and amortisation expense 6,010 6,198 8,832 8,628 7,129

EBIT 37,624 36,572 16,817 32,014 35,852

Finance costs 119 65 83 ‐ 102

PBT 37,505 36,507 16,734 32,014 35,750

Total Tax 5,333 11,105 6,786 12,090 9,670

Tax Rate 14.2% 30.4% 40.6% 37.8% 27.0%

Profit after Tax 32,172 25,402 9,948 19,924 26,080

Extraordinary item(net of tax expense ) ‐ 9 (7) 119 167

Profit for the year 32,172 25,411 9,941 20,043 26,247


Exhibit 35: Cash Flow (Rs m)

Particulars (Rs in millions) FY13 FY14 FY15 FY16 FY17

Net Cash Flow from Operating activities 449 104 445 423 546

Net Cash Flow Used In Investing activities (86) 12 (223) (216) (432)

Net Cash Flow From Financing activities (367) (128) (223) (201) (104)

Net Cash Generated (4) (11) (0) 6 10

Capex (87) (85) (221) (270) (391)

FCF 362 19 224 152 155


March 15, 2018 18


Exhibit 36: Balance Sheet (Rs m)

FY13 FY14 FY15 FY16 FY17

EQUITY AND LIABILITIES

Shareholders’ funds

Share capital 1,205 4,820 4,820 3,615 3,615

Reserves and Surplus 128,209 140,036 143,619 106,709 121,976

Total 129,414 144,856 148,439 110,324 125,591

Minority Interest ‐ ‐ ‐ ‐ ‐

Non‐current liabilities

Long term borrowings 1,251 1,350 ‐ ‐ ‐

Trade payables ‐ ‐ 34 ‐ 1,926

Other financial liabilities ‐ ‐ 3,732 3,973 3,716

Deferred tax liabilities (Net) 15,648 16,765 5,604 9,120 8,450

Other long term liabilities 65,362 62,217 87,513 91,546 98,472

Long term provisions 5,037 4,878 25,728 24,825 20,298

Total 87,298 85,210 122,611 129,464 132,862

Current liabilities

Short term borrowings 156 7,061 ‐ ‐ 9,500

Trade payables 20,873 21,371 22,676 21,512 16,047

Other financial liabilities ‐ ‐ 11,170 9,769 10,976

Other current liabilities 312,184 349,887 293,585 267,874 190,614

Short‐term provisions 27,506 31,639 24,718 26,376 28,784

Total 360,719 409,958 352,149 325,531 255,921

Total 577,431 640,024 623,199 565,319 514,374

ASSETS

Non‐current assets

Fixed assets

(i)Tangible assets 49,235 52,202 50,359 54,444 58,398

(ii) Intangible assets 21,280 22,098 20,781 21,308 22,799

(iii) Capital work in progress 1,218 2,016 2,270 3,754 6,211

Investments ‐ JV/Subsidiaries ‐ ‐ 1,949 1,901 2,046

Financial Assets

i) Investments ‐ Others 5,174 5,322 5,699 7,257 7,894

ii) Trade Receivables ‐ ‐ 155 ‐ 102

iii) Long‐term loans and advances 1,610 1,601 523 520 589

iv) Others ‐ 3,733 4,014 3,675

Deferred Tax Assets ‐ ‐ ‐ ‐ ‐

Other non‐current assets 71,041 10,497 13,566 14,862 12,107

Total 149,558 93,736 99,035 108,060 113,821

Current assets

Inventories 178,348 223,733 249,528 239,817 213,213

Trade receivables 55,159 69,232 60,354 48,369 42,103

Cash and bank balances 134,773 170,356 176,714 133,034 111,533

Short‐term loans and advances 46,335 49,964 1,760 981 987

Other current assets 13,258 33,003 35,808 35,058 32,717

Total 427,873 546,288 524,164 457,259 400,553

Total 577,431 640,024 623,199 565,319 514,374


March 15, 2018 19


Prabhudas Lilladher Pvt. Ltd.

3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai‐400 018, India

Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209

Rating Distribution of Research Coverage PL’s Recommendation Nomenclature

43.8% 44.5%

11.7%

0.0%0%

10%

20%

30%

40%

50%

BUY Accumulate Reduce Sell

% of Total Coverage

BUY : Over 15% Outperformance to Sensex over 12‐months

Accumulate : Outperformance to Sensex over 12‐months

Reduce : Underperformance to Sensex over 12‐months

Sell : Over 15% underperformance to Sensex over 12‐months

Trading Buy : Over 10% absolute upside in 1‐month

Trading Sell : Over 10% absolute decline in 1‐month

Not Rated (NR) : No specific call on the stock

Under Review (UR) : Rating likely to change shortly

DISCLAIMER/DISCLOSURES

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