Hindustan Aeronautics IPO review (May apply)

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Review By Dilip Davda on March 13, 2018

Hindustan Aeronautics Ltd. (HAL) is one of the 'Navratna' and the largest DPSU in terms of value of production as per MoD report. It is the 39th largest aerospace company in the world. It is engaged in design, development, manufacture, repair, overhaul, upgrade and servicing of a wide range of products including aircraft, helicopters, aero-engines, avionics, accessories and aerospace structures. It has 20 production divisions and 11 research and design centres ('R&D Centres') located across India. It relies on indigenous research as well as enters into technology transfer and licence agreements to manufacture products. In addition, HAL has entered into 13 commercial joint ventures to grow operations. The company has a sustained track record of profitability and paid dividends every year for over four decades. As of December 31, 2017, HAL's order book was Rs. 68461 crore which generally includes products and services to be manufactured and delivered and excludes anticipated revenues from joint ventures and subsidiaries.

Under divestment program and for listing gains, HAL is coming out with a maiden IPO of 34107525 equity shares of Rs. 10 each via book building route with a price band of Rs. 1215 – Rs. 1240 per share to mobilize Rs. 4144.06 cr. to Rs. 4229.33 cr. based on lower and upper price bands. Issue opens for subscription on 16.03.2018 and will close on 20.03.18. It has reserved 668775 equity shares for eligible employees thus the net offer size is 33438750 equity shares. HAL is offering a discount of Rs. 25 per share to retail investors and eligible employees. The overall issue consists 10.20% of the post issue paid up equity capital of the company. Minimum application is to be made for 12 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. BRLMs to this issue are SBI Capital Markets Ltd. and Axis Capital Ltd. Karvy Computershare Pvt. Ltd. is the registrar to the issue. The average cost of acquisition of shares by the promoters (GoI) is Rs. 152 per share. Its entire equity is issued at par. In February 2014 it issued bonus shares in the ratio of 3 for 1. It also bought back few shares in the price range of Rs. 339.88 and Rs. 355.55 per share in March 2016 and November 2017. Post Issue Company's paid up equity capital remains same at Rs. 334.39 cr. 

On performance front, HAL has (on a consolidated basis) posted turnover/net profits of Rs. 17362.00 cr. / Rs. 994.10 cr. (FY15), Rs. 18754.80 cr. / Rs. 2004.30 cr. (FY16) and Rs. 19596.90 cr. / RS. 2624.70 cr. (FY17). For first half of the current fiscal, it has earned net profit of Rs. 391 cr. on a turnover of Rs. 5665.90 cr. For last three fiscals, it has posted an average EPS of Rs. 54 and an average RoNW of 17.67%. HAL's last three fiscal's EPS stands at Rs. 73 (FY17), Rs. 42 (FY16) and Rs. 21 (FY15). PAT margins for these fiscals were 14%, 12% and 6% respectively. It has posted CAGR of 9% for revenues, 62% CAGR in PAT for last three fiscals. Issue is priced at a P/BV of 3.46 on the basis of its NAV of Rs. 358 as on 30.09.17. It has no listed peers to compare with. HAL's sale to Indian Defense Services accounts for nearly 92% (on an average) of its revenues. According to management, first half results cannot be annualized to compare as it always does better in the second half due to billings only on delivery of products. However, if we annualize latest earnings and attribute it on its paid up equity then asking price is at a P/E of 53, but if we consider FY 17earnings then P/E comes to 17.

On BRLM's front, two merchant bankers associated with this issue have handled 44 public issues in the past 3 years, out of which 14 issues closed below the issue price on listing date.

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