HAL shares: 3 reasons why UBS cut stock rating but raised target price

Hindustan Aeronautics Ltd (HAL) saw foreign brokerage UBS reducing its rating on the stock to 'Neutral' from 'Buy' but upped target price to Rs 5,600 from Rs 5,400 earlier, citing fair risk-reward. 

UBS gave three key reasons for its neutral view on the stock. First, it believes the near-term drivers such as resolution of the GE F404 engine delay, the Light Combat Helicopter (LCH) order and the LCA MK1A fighter aircraft order overhang are now in the price.

Second, it has cut its order book CAGR of 21 per cent for FY26-28E to 14 per cent post the recent management guidance on longer timelines for the Su-30 MKI fighter aircraft upgrade and LCA Mark 2 order.

That said, UBS said the FY26 topline guidance based on bottom-up platform contractual deliveries at 7-8 per cent has upside, with a potential for more LCA MK1A deliveries. The consensus and UBS estimates for revenue growth stands at 24 per cent and 22 per cent, respectively. 

"We think the manufacturing ramp-up with strong guidance on margins should support the P&L and provide downside risk support," UBS said.

The foreign brokerage believes the recent events have improved growth visibility for defence companies, especially SOEs. It values HAL at 35 times 12-month forward PE with a new price target of Rs 5,600 from 
Rs 5,440, led by roll-forward of UBS earnings. 

"Our P&L assumptions are based on higher margins and a lower topline, in line with bottom-up guidance. A slower ramp in the manufacturing topline is the major downside risk to our Neutral rating, while upside
could come from faster awards of large platform orders," UBS said. 

Meanwhile, another foreign brokerage Nomura India expects HAL to report a PAT CAGR of 20 per cent over FY25-28F. It retained its 'Buy' call on HAL with a fresh target price of Rs 6,100 against Rs 4,700 earlier. This brokerage also values the stock at 35 times one-year-forward earnings.
HAL shares settled at Rs 5,016.40 on Monday. Nomura India's target price suggests a 21 per cent potential upside over this price.