Slowing revenue growth may disrupt HAL’s flight path

However, the investor optimism comes in the backdrop of muted September quarter (Q2FY24) results. Weak execution and higher costs led to lower-than-expected profit after tax of ₹1,235.3 crore.

Costlier raw material costs and increased expenses squeezed operating margins by over 400 basis points year-on-year (y-o-y) to 21.7%. Revenue growth of 9.5% y-o-y at ₹5,636 crore lagged expectations as well. Manufacturing revenue may have grown faster than high-margin repair & overhaul (ROH) segment, said analysts.

On the bright side, HAL’s order pipeline is strong, bringing visibility on long-term revenue growth. For FY24, HAL has guided for an order inflow of almost ₹48,000 crore, which is 85% higher than in FY23.

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“The company has a healthy order book of ~82,000 crore (FY23) with more than three years of revenue visibility. Once the execution of large orders like LCA (Mk1A) picks up pace, the company could post double-digit revenue growth from FY2025E, and it should stabilize at 14-15% sales growth from FY2026,” said Sharekhan by BNP Paribas.

LCA stands for India’s light combat aircraft that HAL is manufacturing.

HAL expects revenue to grow by 7-8% in FY24, and 10-11% in FY25. “HAL has guided for moderate revenue growth for FY24 given manufacturing revenue is expected to witness good momentum from FY25 onwards as delivery for LCA Tejas MK I gains traction. Till then, RoH will dominate the revenue mix, leading to muted revenue growth of 9% for FY24,” said Antique Stock Broking Ltd.

In this calendar year so far, the HAL stock has rallied by 70%. For now, positives seem to outweigh the negatives. But investors need to note that orders translating into revenue happens gradually.

HAL is seen as a potential beneficiary of the government’s structural reforms in defence, but there are risks such as lower government spending on defence, less allocation toward domestic procurement, increased competition from the private sector and a significant rise in commodity prices.

Meanwhile, to diversify its revenue stream and drive long-term growth opportunities, HAL has signed pacts with the largest European aircraft manufacturer Airbus and France-based Safran Aircraft Engines.