HAL shares at Rs 5,400 or Rs 6,145? Tejas LCA Mk 1A delivery concerns unlikely to hit defence stock

Hindustan Aeronautics Ltd (HAL) reported a healthy set of June quarter results, with net profit rising 77 per cent year-on-year (YoY) on 11 per cent rise in sales. Analysts were a bit concerned over delays in the delivery of LCA Tejas Mk1A aircraft due to supply chain issues at GE Aerospace. They, however, remained upbeat on the HAL stock's prospects. The HAL management expects FY25 revenue to grow at 13 per cent YoY on a rise in manufacturing sales, as it sees delivery of Tejas Mk 1A from September quarter onwards.

Nomura India said while the June quarter execution came in ahead of its estimates by 5 per cent, it does not see upward revision in FY25 revenue because of concerns revolving around the supply chain for the largest contract in the backlog.

"As far as delivery of the LCA Tejas Mk1A aircraft is concerned, supply chain issues at GE Aerospace have led to delays in delivery of the F404 engine. Initially, GE had planned to deliver 16 engines annually beginning in FY23, but GE is yet to supply any as of August 2024. This has in turn postponed the delivery of LCA Mk1A by HAL, which had originally planned to deliver three aircraft starting 4Q24," it noted.

Given the delays, this brokerage had earlier cut its LCA delivery estimates from 14 to 10 aircraft in FY25. It maintained 'Buy' rating and target price of Rs 5,400, valuing the stock at 38 times September 2026 EPS.

The management of Astra Microwave Products, in its Q1FY25 conference call, highlighted that there may be no major delay in the delivery of 83 units of LCA Tejas Mk 1A by HAL despite delayed supply of GE F404 engines. Astra mentioned that HAL has an alternate replacement for the engines, and as a result, would be able to supply the units within the contractual timeline, with minor delays in supply of some aircraft in FY25.

"Thus, we marginally lower the number of Tejas Mk 1A to be delivered to 11nos in FY25E (from 14nos earlier), in our assumptions," Elara Securities said.

Despite paring the number of Tejas Mk 1A to be delivered in FY25 in its assumptions, Elara Securities raised FY25 EPS by 1 per cent given the rise in repair and overhaul (ROH) revenue, which may prop margin. "So, we raise target price to Rs 5,730 from Rs 5,590, on 45 times June 2026E EPS as we roll forward. We lower FY26E EPS by 1 per cent and introduce FY27 estimates," it said.

Antique Stock Broking remained confident of HAL’s business prospects as India is in the midst of modernising its armed forces due to (1) Obsolescence and (2) The prevailing adverse geopolitical situation, leading to strong ordering for fighter aircrafts and helicopters, along with developing their respective engines and accessories.

"HAL is expected to deliver strong operational performance over FY24–27 coupled with a strong order backlog, given its prevailing strong order pipeline which is expected to be finalised over FY25–27E. Success in procuring orders from friendly countries can also significantly boost its growth outlook," it said.

This brokerage retained 'Buy' rating and target price of Rs 6,145 on HAL.