News reports that GE Aerospace has delivered the first of 99 F404-IN20 engines ordered by Hindustan Aeronautics (HAL) for the Tejas Mk-1A has revived interest in the HAL stock.
This addresses serious concerns about a supply bottleneck. HAL has said it will receive 12 engines this year.
While HAL could make 24 aircraft, given the engine supply, it is more likely to be a gradual ramp up from 10 aircraft deliveries to the Indian Air Force (IAF) in the financial year 2026 (FY26), to 24 aircraft per annum by FY30.
Consistent supply of F-404 engines for Tejas Mk-1A is a big relief.
The Tejas Mk-1A is an Rs 48,000 crore order accounting for 37 per cent of HAL's order book of Rs 1.3 trillion.
Given lumpy delivery schedules, revenue growth should be 25-28 per cent year-on-year (YoY) in FY26 and FY27, with an implied EPS CAGR of 39 per cent during FY25-FY27.
This is also a positive for Bharat Electronics (BEL) and Astra Microwave, which are contracted for the Uttam AESA radar and EW system and for Dynamatic Technologies (front fuselage supplier).
HAL also targets assembly of the first Tejas Mk-II aircraft by Oct '25 which could take its first flight by Mar 26.
The order pipeline from a medium to long term perspective is strong. HAL received an order for 83 Tejas Mk-1A in FY21, with delivery to start in FY24.
However, non-availability of engines impacted the timeline.
GE is required to deliver two engines per month as per the contract and consistent supply may lead to IAF placing an incremental order for 97 Tejas Mk-1A aircraft.
IAF needs to scale up fighter aircraft inventory to a targeted 42 squadrons, from a currently depleted 32 squadrons.
If HAL can push up delivery to 24 aircraft per annum there will be an upside to the revenue booking but 10-11 LCA Tejas aircraft may conservatively be delivered in FY26 (revenue of Rs 3,000- Rs 3,500 crore).
HAL s order book provides revenue visibility of at least 3.2x of its FY24 revenue.
Management set a FY26 order book target of Rs 2.5 trillion -Rs 2.6 trillion, led by two large orders of 97 Tejas Mk-1A in addition to 83 already in place and 156 Prachand helicopters.
The order book also includes 12 Su-30 MKI aircrafts worth Rs 13,500 crore and Rs 26,000 crore order for 240 aero engines of the Su-30 MKI aircraft, leading to an order book of Rs 1.35 trillion (4.2x of the trailing 12-month revenue).
Orders for Advanced Light Helicopter (25), Light Utility Helicopter (12), and RD-33 engines (80) are expected in near to medium term and an order of Rs 18,000 crore is expected on Repair & Overhaul.
If all these fructify, HAL would have a business opportunity of Rs 4.5 trillion over the next decade.
HAL has an MoU with GE to produce GE-F414 fighter jet engines for the LCA Tejas MK II aircraft.
Post signing, HAL will receive 80 per cent transfer of technology (ToT) for the F414 engine with the potential to reach 100 per cent over the next decade.
Additionally, HAL is also working on a joint venture with Safran to co-develop and produce turboshaft engines in India for Multi Role Helicopters (IMRH) and Deck-Based Multi-Role Helicopters (DBMRH) for the navy.
Valuations for a defence contractor is tricky due to lumpy revenue dependent on delivery schedules.
Most analysts seem to value HAL at around 40X PE of FY26 estimated earnings but target prices will differ on the basis of anticipated deliveries which will affect revenue for FY26 and beyond.
According to Bloomberg, all six analysts polled in March are bullish on HAL, with an average one-year target price of Rs 5,002.
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