Shares of Hindustan Aeronautics Limited (HAL) rose nearly 3% in early trade on Monday, paring previous session losses, after the public company bagged a contract worth ₹2,890 crore from the Ministry of Defence. The state-owned aerospace and defence company has signed a deal with the defence ministry for mid life upgrade (MLU) of the Indian Navy’s 25 Domier aircraft along with associated equipment, as per the exchange filing.

In an exchange filing on March 15, HAL said that the MLU of 25 Domier aircraft is likely to generate 1.8 lakh man-days of employment during its execution span of 6.5 years. The indigenous upgrade entails the supply of major systems and equipments from indigenous sources, which would enhance the operational capability of the Domier aircraft of the Indian Navy to perform primary roles of maritime surveillance, coastal surveillance, electronic intelligence and development of maritime domain awareness. In addition, this upgrade will also enable Indian Navy Domiers to carry out secondary roles of search and rescue, medical/casualty evacuation and communication link.

Boosted by the development, HAL shares opened 1% higher at ₹3,130 against the previous closing price of ₹3,098.85 on the BSE. On Friday, the PSU stock ended 2.08% lower.

During the session so far today, the defence stock gained as much as 2.8% to ₹3,183.80, while the market capitalisation rose to ₹2.09 lakh crore.

Earlier this month, HAL shares touched its all-time high of ₹3,428.75 on March 11, rebounding 180% from its 52-week low of ₹1,237.50 hit on March 23, 2023. The stock has witnessed a strong rally in the last one year amid a robust order book, its dominance in the Indian defence market, as well as healthy operating performance of the company.

As of December 31, 2023, HAL’s order book stood at ₹84,814 crore, majorly contributed by manufacturing of various models of helicopters and aircraft of around ₹56,569 crore to be executed over the next five to six years. Major orders in the manufacturing segment include supply of 83 Light Combat Aircraft-Mk1A version (LCA), 70 HTT-40, 6 LCA IOC/FOC, 4 Dornier apart from various aerospace structures for PSLV and GSLV.

On the financial front, HAL reported total operating income (TOI), a difference of total operating revenue and total operating cost, at ₹15,612 crore and profit after tax (PAT) of ₹3,303 crore as against TOI of ₹14,433 crore and PAT of ₹2,970 crore in the same period last year.

CARE Ratings on March 5, 2024, reaffirmed ‘CARE AAA’ rating to HAL’s long-term bank facilities and ‘CARE A1+’ to its short-term bank facilities, factoring in its strategic importance to the government of India as its core defence aviation equipment supplier for the Indian defence forces.  The central government owns majority ownership (71.64%) in the company despite divestment of part of its stake over the past two years.

The ratings also derived comfort from a strong order book, healthy operating performance, and the high-entry barrier in the business considering the capital intensity and long gestation period required for developing the manufacturing and servicing facilities.

The agency believes that HAL will continue to benefit from its strategic importance to the Indian defence forces resulting in maintaining its leadership position in the Indian aerospace and defence industry. Adding to it, the company’s long track record of operations and high entry barriers along with its highly comfortable financial risk profile also augur well for the PSU company.

HAL’s liquidity stood strong marked by free cash and cash equivalents of around ₹20,300 crore as on December 31, 2023. There has been negligible utilisation of its sanctioned fund-based working capital limits of ₹4,000 crore over the past 12 months ended December 31, 2023, as the working capital requirement is met out of internal accruals and advances from its customers, CARE said in its report.

The company reported cash flow from operations of ₹9,406 crore in FY23, while its cash accruals also remain healthy and are expected to comfortably meet its working capital and the routine capex requirements of ₹1,800-2,000 crore per annum, it added.

HAL does not have any term debt repayment obligations and has completed Phase-1 of capex at Tumakuru with a capacity of 30 helicopter units, while the second phase for increasing its capacity to 60 helicopters annually will be contingent upon order inflow. 

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