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Guidance, stock rally may keep Hindustan Aeronautics under pressure

Hindustan Aeronautics' (HAL) performance for FY25 was driven by improved margins and lower provisions. The order book as of March '25 was of Rs 1.8 trillion, with inflows of Rs 1 trillion during FY25. Given more assured engine supply from GE, HAL is optimistic about delivering 12 Tejas Mk1A aircraft during the year. The guidance was for a conservative 8-10 per cent revenue growth. HAL reported a decent set of numbers in Q4FY25, with revenue at Rs 13,700 crore (down 7 per cent Y-o-Y). The operating profit dipped 10 per cent Y-o-Y to Rs 5,290 crore, while margins at the operating level dipped 140 basis points Y-o-Y to 38.6 per cent. The net profit margin stood at 29 per cent. Net profit was down 8 per cent Y-o-Y due to reversals of some provisions received during FY24, resulting in higher net profit base in Q4FY24. For FY25, revenue was up 2 per cent to Rs 30,980 crore while operating profit increased 18 per cent to Rs 9,610 crore while margin expanded 370 basis points Y-o-Y, led by lower provisions. Due to lower depreciation and a spike in other income, reported net profit grew 10 per cent Y-o-Y to Rs 8,360 crore. Adjusted net profit grew 38 per cent Y-o-Y. The LCA Mk1A programme saw the resolution of engine supply issues from GE. The first F404 engine was delivered in April this year, and successfully integrated. GE committed to delivering 12 engines in CY25, enabling HAL to target 12 LCA deliveries. In FY25, revenue consisted of 23 per cent manufacturing with repair/overhaul or ROH being 70 per cent and rest 7 per cent being exports and design and development (D&D). Given the order book and opportunities, there could be sustained long-term growth. The order book included 156 light combat helicopter (Prachand) (Rs 62,800 crore), 240 AL-31FP engines (Rs 25,500 crore), and 12 Su-30 MKIs (Rs 13,500 crore), alongside ROH (Rs 19,270 crore), D&D (Rs 3,180 crore), and exports (Rs 490 crore) orders. HAL expects annual ROH orders of around Rs 20,000 crore, driven by in-service fleets like the ALH (340+), Su-30s (250+), Jaguars, and Dorniers. Going ahead, the LCA MK1 would be entering the overhaul phase and there are sustained platform additions. HAL will deliver 12 Su-30s under a new contract starting FY27. The Rs 60,000 crore Su-30 avionics upgrade project is in the approval phase, with D&D in FY26 and aircraft orders by FY31. The 156-unit LCH Prachand order will begin delivery in FY28, with execution over 5.5 to 6 years. ALH deliveries are expected to accelerate in FY26. In FY25, HAL reported total provisions of about Rs 2,500 crore. There was an exceptional Rs 804 crore provision allocated for an engine damaged during repairs, classified as a precautionary provision. This was not a write-off but a provisioning with prudent accounting practices. The management said future provisioning is expected to remain stable, with deviations limited to 3-5 per cent. There were no write-backs or reversals of earlier provisions. Key risks include slower-than-expected finalization of large orders, delays in deliveries of key components such as engines, delays in payments and possible competition for the private sector. The execution of Tejas Mk1 delivery will be major monitorable. Given everything, revenue may record a annual growth of 21 per cent over FY25-27, due to manufacturing scale-up. Operating profit margin should remain at 28-30 per cent. Given annual capex of Rs 4,000-5,000 crore and good working capital management, net profit should have mid-teens growth over FY25-27. Return on equity and capital employed should be over 20 per cent.