The initial public offering (IPO) of India’s largest defence public sector undertaking Hindustan Aeronautics Ltd (HAL) which opens on Friday is attractively valued, analysts said.
The company has set a price band of Rs1,215 to Rs1,240 per share for the IPO, which closes on 20 March. The government aims to raise Rs4,000 crore by selling 10.2% stake in HAL.
Reliance Securities Ltd said HAL can potentially grow in the low-teens range in next 2-3 years given its current order book. As of 31 December, HAL’s order book, executable over 48 months, stood at Rs68,400 crore, which generally includes products and services to be manufactured and delivered and excludes anticipated revenues from its joint ventures and subsidiaries. While manufacturing accounts for 90% of its order book, maintenance, repair and overhaul (MRO) segment accounts for the rest.
“At the upper price band, the stock is available at 15.8 times FY17 earnings per share (EPS) and 9.6 times of FY17 Ebitda, which appears to be reasonable considering its strong order book, healthy financials and return ratios. Further, considering the absence of any peer, we do not expect it to trade at a wider discount,” Reliance Securities said in a 15 March report.
According to the Department of Investment and Public Asset Management, total disinvestment proceeds during the current fiscal is at Rs92,744.61 crore as on 8 March 2018. On Thursday, the government has closed stake sale in missile maker Bharat Dynamics Ltd, which was oversubscribed 1.28 times. Another state-owned company Mishra Dhatu Nigam will open its IPO on 21 March.
According to analysts, HAL is on a firm footing to exploit upcoming opportunities in defence in India led by the Make in India initiative, higher defence expenditures and a robust order book.
In the six-month period ended 30 September 2017 and in fiscal 2017, revenues from sales to the Indian defence services continued to represent a significant portion of total sales, comprising 91.4% and 93.3%, of total sales, respectively.
In order to reduce dependence on defence products, HAL aims to increase the contribution of other business segments in future years, such as from the civil aircraft and helicopter segments, said Sanjeev Zarbade, vice president of PCG Research at Kotak Securities Ltd.
“On an EV/EBITDA basis, the stock is trading at 9.3 times FY17 EBITDA. The stock is trading at a discount to listed peers like Bharat Electronics Ltd (BEL). However, BEL scores over HAL in terms of higher revenue visibility provided by its order book,” Zarbade said in a report on 15 March.
Others concur. According to IIFL Wealth Management Ltd, the stock is attractively priced given strong earnings potential and large opportunities in domestic aero defence.
The company provides end-to-end business operations comprising product research, design and development, manufacturing and provision of maintenance, repair and overhaul services, covering the complete operational life of its products. Over the years, it has successfully showcased research and development (R&D) capabilities in developing military aircraft and helicopters.