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Shares of Hindustan Aeronautics Limited (HAL) have experienced a significant decline, dropping nearly 10% in two trading sessions. This downturn can be attributed to concerns regarding the valuation of the company, particularly in comparison to its global peers in the defense sector.
Incred, a prominent brokerage firm, has cited valuation concerns as the primary driver behind the recent drop in HAL shares. The brokerage firm conducted a comparative analysis of HAL with Dassault Aviation, a leading global aerospace company. Despite HAL's substantial revenue of $3.67 billion and a profit of $921 million in the previous fiscal year, its enterprise value stands at a hefty $41 billion. In contrast, Dassault Aviation, boasting a revenue of $5.19 billion and a profit of $974 million in the same period, has an enterprise value of only $6.7 billion.
Incred's sales note further highlights the projected growth trajectory of both companies. While Dassault Aviation's revenue and earnings are expected to increase at a Compounded Annual Growth Rate (CAGR) of around 24% and 12%, respectively, over the next two years, HAL's projected growth is comparatively modest at 13% and 8%. Additionally, Dassault Aviation ended 2023 with a substantial order backlog of $41 billion, significantly exceeding HAL's order backlog of $11 billion.
Despite the recent decline, HAL shares are currently trading at a price-to-earnings (P/E) multiple of 38.26 times for the fiscal year 2026. This multiple surpasses its five-year average P/E of 23.6 times, indicating a potentially inflated valuation. Furthermore, a recent analysis of shareholding data reveals a decline in the stake held by Foreign Portfolio Investors (FPIs) and domestic mutual funds.
The number of small shareholders in HAL, holding shares with an authorized capital of less than ₹2 lakh, has witnessed a substantial increase of 60% from the March quarter to 10.8 lakh. Conversely, India's domestic mutual funds have reduced their stake in the PSU stock to 5.8%, down from 6.75% in March. Notably, the FPI stake in HAL has also decreased to 11.68%, compared to 12.42% in the previous quarter.
The recent decline in HAL shares comes despite the stock's impressive performance in 2024, registering an 80% gain year-to-date. The downward trend suggests that investor sentiment towards the company has shifted, driven by concerns over valuation, growth prospects, and changing investor dynamics. However, it's worth noting that 14 out of 16 analysts covering Hindustan Aeronautics currently maintain a "buy" rating, with only one analyst holding a "hold" rating and another a "sell" rating. Despite the recent drop, the consensus price target projects a potential upside of 4% in HAL shares.
The future trajectory of HAL shares will depend on several factors, including the company's ability to deliver on its growth targets, maintain its profitability, and attract investors. The recent decline serves as a reminder of the volatility inherent in the stock market and the importance of thorough due diligence before making any investment decisions.
Source: Why Hindustan Aeronautics shares are down nearly 10% in two sessions — Explained