Buy This Navratna PSU Stock For Over 22% Gains In 12-18 Months: ICICI Direct

Indices are trading weak in trade today (June 29, 2022) and as we are close to usher in the second half of the CY beginning July, headline indices have so far in the year corrected by 9%. The various factors leading to the fall on the indexes are the US Fed's aggressive rate hike call to combat inflation, Ukraine-Russia crisis, continued FPI outflow and pricey crude.

Meanwhile, brokerage firm ICICI Direct has recommended to buy the stock of Hindustan Aeronautics (HAL) for a target price of 2200 seen to be attained in 12-18 months. At the current price of Rs. 1796, the stock offers a potential upside of over 22%.

The brokerage is bullish on the counter for the following reasons:

Given the armed forces requirement of faster procurement of advanced equipment, the government is increasing its thrust in expanding the capex in the defence space. Also at the same time, indeginisation remains at the core of the process.

The company offers its services to a wide spectrum of aerospace business including design, development, manufacturing and maintenance, repair & overhaul
(MRO) of different types of aircraft/helicopters and engines.

Robust order book of Rs. 82,153 crore i.e. around 3.3 times Fy22 revenues. Also there is a robust pipeline of orders worth Rs. 1.24 lakh crore in the manufacturing segment for the coming next 3-4 years said the report led by LUH, LCH and engines for Su-30 & MiG-29.

The delivery of LCA Tejas MK1 A to IAF is to start in Fy25E. "Execution of large order backlog of manufacturing and sustained growth in MRO will drive
revenue growth in double digits", notes the brokerage house.

 

Company's financials over a period as highlighted by the brokerages

The aerospace and defense entity has over the period from Fy18-22 reported revenue, EBITDA and PAT CAGR of 7.4%, 12% and 26.5%, respectively. Talking specifically of the Fy22 (the last fiscal year), the firm's repair and overhaul division accounted for about 64% of the total revenues, while manufacturing accounted for some 30%.

 

Estimations on the financials and the company valuation

"Expect HAL to deliver revenue and EBITDA CAGR
of 6.8% and 11.8%, respectively, in FY22-24E. PBT is likely to grow at 7.7% CAGRduring FY22-24E. Increase in profitability with strong asset turnover is expected to result in healthy return ratios over FY23-24E", notes the brokerage.

The brokerage further adds that it values the company HAL at Rs 2200 per share on 16x P/E on FY24E EPS basis.

 

Alternate Stock Idea:

Apart from HAL, the brokerage bets on Bharat Electronics (BEL) in the defence space. The target price suggested for BEL is Rs. 290 per share. And the reasons for a 'Buy' as given out by the brokerage are "Strong growth in profitability led by well executed healthy order backlog and sustained margins. Strong balance sheet, double digit returns ratios".

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