1:2 Split, 440% Dividend: Defence PSU Stock Advised To BUY For Robust Gains; 12-Months Target Price At Rs 5700

Navratna Defence PSU, Hindustan Aeronautics (HAL) is among the hot bets for robust gains in the sector due to its strong order book and execution in the pipeline ahead. The largest defence stock stood at Rs 5160.90 apiece last week on BSE with a market cap of Rs 3,45,148.09 crore. YTD, the stock is up by 83% on the exchange. In a year, the stock emerges as a multibagger with the upside of 243%.

In Q4FY24, HAL reported consolidated revenue from operations of Rs 14,768.75 crore, rising from Rs 12,494.67 crore in Q4FY23, and more than doubling from Rs 6,061.28 crore in Q3FY24. Meanwhile, PAT stood at Rs 4,308.68 crore, robust growth from a profit of Rs 2,831.19 crore in Q4FY23, and Rs 1,261.51 crore in Q3FY24.

Earlier, in February this year, HAL turned ex-dividend for its first interim dividend of Rs 22 per share having a face value of Rs 5 each for FY24. Its dividend payout was 440% in percentage terms. This was also its first dividend payout since HAL shares turned ex-split in the ratio of 1:2.

HAL shares turned ex-split on September 28, 2023, for the ratio of 1:2. That meant HAL's share price face value was reduced to Rs 5 per share compared to earlier Rs 10 per share.

The latest to recommend buy on HAL shares is ICICI Direct.

Talking about the last quarterly earnings of FY24, ICICI Direct in its report said, "Revenue increased by 18.2% YoY (+143.7% QoQ) to ₹ 14768.8 crore in Q4FY24. During the quarter, the company has recognized additional revenue of ~₹ 549 crore pertaining to the change of value of an old contract. EBITDA margin was at 40% (vs 26% in Q4FY24). However, the company has reversed the provision of ₹ 1034 crore made in earlier years."

Nonetheless, ICICI Direct believes that HAL is strongly placed to benefit from a pick-up in the execution of the existing strong order backlog and robust pipeline. We estimate revenue, EBITDA and PAT to grow at ~14%, ~17% and ~13% CAGR respectively over FY23-26E.

On its valuation, the brokerage's note added, "Valuation at 37.9x P/E on FY26E basis looks attractive given strong growth ahead led by multiple sectoral tailwinds. We recommend BUY on HAL with a target price of ₹ 5700 per share (based on 45x FY26E EPS)."

On its buy rating, ICICI Direct gave two rationales. These are:

1. Strong order-book:

HAL's order backlog stands at ₹ 94,000 crore (3x FY24 revenue). The company's revenue growth is expected to pick up substantially over the next few years, led by a pick-up in the execution of major contracts like Tejas MK1A aircraft (which remains the largest manufacturing contract at ~35% of current order book) and other manufacturing contracts (like LCH, LUH, ALH, aero-engines etc).

Execution of MRO contracts is expected to remain strong with continuous order inflows and shorter execution duration.

2. Commissioning of new capacities:

As per the company, ₹ 1.6-1.7 lakh crore worth of contracts are expected to be placed with HAL in the coming 1.5-3 years. Additionally, there are a number of large-scale contracts (like AMCA, deck-based fighters for the Navy, multi-role helicopters etc) which will be placed with HAL in the next 3-5 years.

This pipeline of projects gives longer-term visibility on the company in terms of manufacturing order inflows and thus revenue growth in the coming years.

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author or Greynium Information Technologies. The author, the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns. in advises users to consult with certified experts before making any investment decision.