Defence Stock HAL: From Soaring Heights to Ground Realities – Is Valuation a Big Concern?

Shares of Hindustan Aeronautics Ltd. (HAL) fell over 4% on Thursday, continuing their downward trend from Tuesday, when the stock declined by 3.3%.

Valuation Comparison: HAL vs. Dassault Aviation

A recent report draws an intriguing comparison between HAL and its global peer Dassault Aviation. Dassault achieved a revenue of $5.19 billion and a profit of $974 million in the last financial year, whereas HAL recorded a revenue of $3.67 billion and a profit of $921 million during the same timeframe.

Despite these financial figures, HAL is trading at an enterprise value of $41 billion, significantly higher than Dassault Aviation’s $6.7 billion. Furthermore, Dassault concluded the calendar year 2023 with an order backlog of $41 billion, compared to HAL’s $11 billion. This stark difference raises concerns over HAL’s valuation.

Impact of Key Resignation on the Tejas Program

Adding to these valuation concerns, prominent defense journalist Anantha Krishnan M reported a critical development affecting HAL’s Light Combat Aircraft (LCA) Tejas program. Mr. Anantha Krishnan M reported, Shri Sanjay Sharma, a pivotal member of the Integrated Flight Control Systems (IFCS) testing facility (Iron Bird) at the Aeronautical Development Establishment, has resigned from his position. The IFCS is essential for controlling the flight dynamics and stability of modern fighter aircraft. The Iron Bird facility simulates flight conditions for ground testing of the IFCS, playing a crucial role in the development of the Tejas program.

Market Reaction and Share Performance

Following these developments, HAL shares are trading 4.6% lower at Rs 5,085, recovering slightly from the day’s low of Rs 4,975. The stock had reached a record high of Rs 5,675 on July 14 but has since corrected.

Changes in Shareholding Patterns

The June quarter shareholding data reveals a significant increase in the number of small shareholders in HAL. Shareholders with an authorized share capital of less than Rs 2 lakh surged by 60%, from 6.9 lakh at the end of March to 10.8 lakh.

Conversely, India’s domestic mutual funds reduced their stake in HAL from 6.75% in March to 5.8%. Foreign Portfolio Investors (FPIs) also trimmed their holdings, from 12.42% to 11.68%.

Despite the Drop, Year-to-Date Gains Remain Strong

Despite the recent drop, HAL’s stock has still seen gains of 80% so far in 2024. The company’s stock performance continues to be a topic of keen interest among investors and analysts, especially in light of the valuation concerns and the recent key resignation affecting the Tejas program.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.