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Review By Rudra Shares & Stock Brokers Ltd on Mar 17, 2018

HAL, the 'Navratna' company is a leader in the Indian defence and aviation markets, currently owned 2 trademarks, 7 patents, 11 design registrations and 77 copyrights as of December 31, 2017, plans to double manufacturing line for LCA to 16 per year from the current eight.

Further, company have a strong balance sheet, nil borrowings which will help to make investments required for growth plan, including investments in R & D going forward. In addition, strong financial ratios and credit ratings currently enable to have ready access to domestic and international credit markets.

Orders to manufacture 40LCA & the completion of Sukhoi orders will bring in revenue going ahead. The government's decision to go ahead with LCA for single engine fighter jets requirement will also help the company.

Moreover, taking into consideration, the current market opportunities in defence and Government of India's initiative, 'Make in India' aims to boost the nation's manufacturing sector as well as to create market globally.

We recommend to SUBSCRIBE the IPO for long term listing benefits.

THE OFFER

• Issue Open: 16 Mar 2018 to 20 Mar 2018
• Issue Type: Book Built Issue IPO
• Issue Size: 34,107,525 Equity Shares of Rs 10 aggregating up to Rs 4,229.33 Cr

Offer for Sale 34,107,525 Equity Shares @ Rs 10 aggregating up to Rs 4,229.33 Cr

• Face Value: Rs 10 per Equity Share
• Issue Price: Rs 1215 - Rs 1240 per Equity Share
• Market Lot: 12Shares
• Minimum Order Quantity: 12 Shares
• Listing At: NSE, BSE

CAPITAL STRUCTURE

The share capital of Company, is set forth below (Amount in Rs except share data)

Authorized Share Capital

600,000,000 Equity Shares @10 Aggregate values 6,000,000,000

Issued, subscribed and paid up capital before the Issue:-

334,387,500 Equity Shares @10 Aggregate values 3,343,875,000

Present Issue

Offer for Sale 34,107,525 Equity Shares @ Rs 10 aggregating up to Rs 4,229.33 Cr

OBJECT OF THE OFFER

The objects of the Offer are

• To carry out the disinvestment of 34,107,525 Equity Shares by the Selling Shareholder (President of India) constituting 10% of the Company's pre-Offer paid up Equity Share capital the Company; and
• To achieve the benefits of listing the Equity Shares on the Stock Exchanges.

COMPANY OVERVIEW

Incorporated in 1963, Hindustan Aeronautics Limited (HAL) is Bangalore based Defence Public Sector Undertakings (DPSU) company, (aspiring to raise Rs 4,200 crore through IPO) that manufacture a wide range of products for military and civil use, including aircraft, helicopters, engines, avionics and other accessories, also provide product servicing, repair, overhaul and upgrade services.

Aircrafts that the company presently manufacture include the Sukhoi Su-30 MKI, Dornier 228 and LCA Tejas, also manufactures the Cheetal and LCH helicopters as well as variants of the Dhruv helicopter. In addition, HAL manufactures engines, avionics and other accessories which are used in the assembly, servicing, repair and overhaul of aircraft and helicopters.

Company's primary customers are the Indian Defence Forces, namely, the Indian Air Force, Indian Army, Indian Navy and Indian Coast Guard. Further, in India, it sells products and provides services to central and state 133 governments, para-military forces and corporate.

Company was conferred with the 'Navratna' status by the GOI in June 2007, was the 39th largest aerospace company in the world in terms of revenue (in USD million) in 2016 according to Flight International.

As of December 31, 2017, HAL owned two trademarks, seven patents, 11 design registrations and 77 copyrights. In addition, have entered into 13 commercial joint ventures to improve access to modern technology and grow operations in new areas.

HIGHLIGHTS

• The company had orders to manufacture 222 Sukhoi 30 MKIs, of which only25 are pending and will be completed over the next three years.
• Currently has orders to manufacture 40 Light Combat Aircraft and 73 Advanced Light Helicopter aside of Dornier-228 aircraft for Indian Navy and civilian purposes. Besides, it is in talks with the government for additional 80 LCAs.
• Have a production capacity of eight planes a year, which the company is looking to enhance to 16 planes a year.

ROAD MAP AHEAD

Company intend to pursue the following principal strategies to exploit competitive strengths and grow business

• Expand operations through partnerships or collaboration
• Diversify through expansion in new growth areas
• Diversify further into the civil aircraft segment for both manufacturing and servicing opportunities
• Develop in-house capabilities to design and develop specialised products including aero-engines
• Leverage Existing Cost Advantage

STRENGTHS

• Established track record in offering product life cycle support extending to periods beyond four decades
• Long credible history of research, design and development, manufacturing and maintenance, repair and overhaul ('MRO') services.
• Strong design and development capabilities.
• Diversified product portfolio with Strong financial track record
• Leadership position in the Indian aeronautical industry and strong GOI support.

INDUSTRY OVERVIEW

Current outlook on the Indian Aerospace & Defence Market

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.

During the Financial Years 2016, 2015 and 2014, Rs 20,592 million, Rs 16,820 million and Rs 11,534 million worth of defence platforms, equipment and spares manufactured in India were exported to more than 28 countries. The Union budget of the Government of India for 2017-18 allocates Rs 2,623,900 million for defence expenditures excluding pension, which represents an increase of 5.3% from Rs 2,490,990 million for 2016-2017 (Budgetary Estimate).

The Indian civil aviation sector is amongst the fastest growing market and is expected to become the third largest by 2020 and the largest by 2030. Presently, India is the world's ninth largest civil aviation market. The total passenger traffic registered in India in 2016-17 is approximately 264.97 million which grew by 18.5% from 223.6 million in 2015-16. Passenger traffic in India has expanded at a CAGR of 12.39% during 2006-17 to 2016-17. Total freight traffic in India grew by a CAGR of 7.95% from 2006-07 to 2016-17. In addition, freight traffic in India is expected to be 11.4 million ton by year 2032. Growth in Indian imports and exports will be the key driver for growth in freight traffic as 30% of total trade is undertaken by airways.

FINANCIAL PERFORMANCE

The company reported a revenue of Rs 17,951 crore in FY17, as against a revenue of Rs 16,758.5 crore in the previous year.

Company derived 91.4%, 93.3%, 94.2% and 92.6% of total sales from sales to the Indian Defence Services in the six months period ended September 30, 2017 and in the Financial Years 2017, 2016 and 2015, respectively.

In the six months period ended September 30, 2017 and in the Financial Years 2017, 2016 and 2015, R&D expenses were Rs 509.7 crores, Rs 1,283.7 cr, Rs 1191.2 cr and Rs 1042.4 cr, respectively, accounting for 9.7%, 6.9%, 6.9% and 6.7%, of revenue.

Exports for the six month period ended September 30, 2017, FY's 2017, 2016 and 2015, were Rs 154.2 cr, Rs 465 cr, Rs 446.1 cr and Rs 494.1 cr, respectively.

Order book stands at Rs 68,461 cr as of December 31, 2017 which generally includes products and services to be manufactured and delivered (primarily of orders to manufacture Su-30 MkI and Tejas Light Combat Aircraft (LCA)) and excludes anticipated revenues from joint ventures and subsidiaries. Sale of the Sukhoi currently accounts for 31.1 percent of HAL's revenue.

As of September 30, 2017 HAL had cash and cash equivalents of Rs 11,699.2 cr being reduced by Rs 1,127.9 cr as a result of the buyback of Equity Shares in December 2017.

As of September 30, 2017 Company's net worth stood at Rs 12943.6 cr.

For FY17, dividend payout stood at Rs 1,000 crore, which works out to a dividend payout ratio of 37%.

RISK FOR THE BUSINESS

• Company is highly dependent the Ministry of Defence, Government of India ('MoD') contracts. A decline of the Indian defence budget or termination of contracts will have a material adverse impact on business
• Company faces competition from other international companies, many of which have substantially greater resources.
• Unforeseen environmental costs could affect future earnings.
• Business could be materially adversely affected if any default causes an aircraft or helicopter accident.
• The GOI has significant influence over actions which may restrict ability to manage business. Any change in GOI policy could have a material adverse effect on financial condition and results of operations
• HAL is dependent on key technology licensors, OEMs, suppliers and subcontractors. Any failure on the performance of any of them could have a material impact on operations.
• Company have experienced negative cash flows in past. Any negative cash flows in the future could adversely affect the results of operations and financial condition.