In his Union budget speech on 1st February 2018, India’s Finance Minister Arun Jaitley said that the government is set to overshoot its Rs 72,500 crore disinvestment target for 2017-18 but it is aiming to disinvest Rs 1 trillion during the year ending 31st March 2018. The Indian Government has set a disinvestment target of Rs 80,000 crore for 2018-19. They are looking to achieve by coming out with an IPO of Hindustan Aeronautics and Bharat dynamics this week despite the fact that the market isn’t performing well.


Issue Period – 16-20 March 2018
Issue Type – Book Built Issue IPO
Issue Size – 100% of offer of Sale of 3.62 crore Equity Shares of Rs 10 aggregating up to Rs 4,482.60 crore
Employee reservation portion – 668,775 Equity Shares

QIB portion – 1.67 crore Equity Shares (Rs 2073.2 crore)

Non-institutional buyer – Not less than 0.5 crore Equity Shares

Retail portion – not less than 1.17 crore Equity Shares

Retail discount – Rs. 25 per share
Face Value – Rs 10 Per Equity Share
Issue Price – Rs 1,215 – Rs 1,240 Per Equity Share
Market Lot – 12 Shares
Minimum Order Quantity – 12 Shares
Listing on – BSE, NSE


  • SBI Capital
  • Axis capital





  • To carry out the disinvestment of 3.4 crore Equity Shares by the Selling Shareholder constituting 10% of our Company’s Pre-Offer paid up Equity Share capital our Company; and
  • To achieve the benefits of listing the Equity Shares on the Stock Exchanges.


India has the third largest military in the world and is the sixth largest spender in defense. It is also one of the largest importers of conventional defense equipment and spends approximately 30% of its total defense budget on capital acquisitions.

60% of Indian’s defense-related requirements are currently met through imports. In addition, the ‘Make in India’ initiative by the Government is focusing its efforts on increasing indigenous defense manufacturing with the aim of becoming self-reliant.

The opening up of the defense sector for private sector participation is helping foreign OEMs to enter into strategic partnerships with Indian companies and leverage opportunities in the domestic market as well as global markets.

Defense platforms, equipment and spares manufactured in India were exported to more than 28 countries by worth of Rs 2,059.2 crore, Rs 1,682 crore and Rs 1,153 crore respectively in FY16, FY15 and FY14. The major defense equipment exported by the DPSUs and Ordnance Factory Board (“OFB”) are patrol vessels, helicopters including their spares, sonars and radars, avionics, radar warning receivers, small arms, small caliber ammunition, grenades and telecommunication equipment.

Items for which there is a capacity constraint, the DPSUs are permitted to export up to 10% of their annual production to explore market opportunities for exports

The Indian civil aviation sector is amongst the fastest growing market and is expected to become the third largest by 2020 and the largest by 2030.

Presently, India is the world’s ninth largest civil aviation market. The total passenger traffic registered in India in 2016-17 is approximately 26.5 crore which grew by 18.5% from 22.4 crore in 2015-16.

Passenger traffic in India has expanded at a CAGR of 12.4% during 2006-17 to 2016-17. Total freight traffic in India grew by a CAGR of 7.95% from 2006-07 to 2016-17.

In addition, freight traffic in India is expected to be 1.14 crore ton by the year 2032. Growth in Indian imports and exports will be the key driver for growth in freight traffic as 30% of total trade is undertaken by airways.

Private Players in the Defense Sector

Since private companies have entered into the Indian defense sector, not only have foreign manufacturers formed joint ventures with private Indian companies, several private Indian companies have also acquired interests in foreign defense companies to further develop defense products and technologies. However, private companies have only begun winning major domestic and international contracts recently, since 2011.

After opening up of the defense sector for Indian private sector participation, 36 FDI proposals and joint ventures have been approved for the manufacture of various types of equipment, both in public and private sector. FDI amounting to Rs 25.8 crore (US$5.1 million) has been received in the defense sector from April 2000 to September 2016.

Industry Participants in Defence Sector

The defense sector in India primarily consists of DPSUs, the OFB, Defense Research, and Development Organisation (“DRDO”) and to a lesser extent private companies. DPSUs and the OFB are state-owned defense enterprises of the Department of Defense Production, MoD.

In 2016-2017, HAL was the largest production organization under Department of Defense Production in terms of the value of production.

The graph below shows the value of production of the nine DPSUs and the OFB from 2013 to 2016:   (in Rs.crore)

As we can see HINDUSTAN AERONAUTICS is the highest producer among all other company in the defense sector.

Expenditure in Defense Sector by Government

The Government every year allocates fund to defense sector as capital and revenue expenditure to boost the manufacturing of defense in India.



Defense procurement procedure (DPP)

In 2002, the Indian Government introduced the Defence Procurement Procedure (“DPP”). DPP was aimed to ensure expeditious procurement of approved requirements of Armed Forces in terms of capabilities sought and time-frame prescribed, by optimally utilizing allocated budgetary resources.

The scope of these procedures has been revised and enlarged through periodical reviews resulting in the promulgation of the DPP 2003, 2005, 2006, 2008, 2011, 2013 and 2016. These amendments have seen the expansion of the categorisation process from only the ‘Buy’ cases to ‘Buy (Indian)’, ‘Buy and Make (Indian)’, ‘Make’, ‘Buy and Make through Transfer of Technology’, ‘Buy (Global)’ and most recently, ‘Buy-(Indian IDDM)’ categories. The latest DPP 2016 explicitly states the order of priority when procuring the defense equipment. The highest priority is ‘Buy (Indian – IDDM)’, followed by ‘Buy (Indian)’, Buy and Make (Indian)’, ‘Buy and Make’ and finally, ‘Buy (Global)’.

Note: IDDM stands for Indigenously Designed Developed and Manufactured


In May 2017, the Government of India has introduced the DPP Strategic Partnership Model to establish a transparent, objective and functional mechanism to encourage broader participation of the private sector, in addition to the capacities of DPSUs and the OFB, in the manufacturing of major defense platforms.

Partnerships under the DPP Strategic Partnership Model will be established between the MoD and the selected Indian private entity. The overall aim will be to progressively build indigenous capabilities in the private sector to design, develop and manufacture complex weapon systems for the future needs of the armed forces.

The DPP Strategic Partnership Model seeks to identify a few Indian private companies as strategic partners who would initially tie up with a few shortlisted foreign OEMs to manufacture military platforms and equipment. In the initial phase, the selection of strategic partners would be confined to four segments, namely: (i) fighter aircraft, (ii) helicopters, (iii) submarines and (iv) armored fighting vehicles and main battle tanks. In each segment, only one strategic partner would generally be selected.

Market drivers for the Defense Sector

  • Export Controls – For security reasons, governments may employ export controls on defense equipment
  • Equipment replacement & procurement
  • Export market opportunities
  • Upgrading existing fleet


Company Overview

HAL has been conferred with the “Navratna” status by the GoI in June 2007 and is the largest DPSU in terms of the value of production according to the MoD Annual Report 2016-2017. They were the 39th largest aerospace company in the world in terms of revenue (in USD million) in 2016 according to Flight International. They are engaged in the design, development, manufacture, repair, overhaul, upgrade and servicing of a wide range of products including, aircraft, helicopters, aero-engines, avionics, accessories and aerospace structures.

HAL operations are organized into five complexes, namely the Bangalore Complex, MiG Complex, Helicopter Complex, Accessories Complex, and Design Complex, which together include 20 production divisions and 11 research and design centers (R&D Centres) located across India.

They rely on indigenous research as well as enter into technology transfer and license agreements to manufacture our products. In addition, they have entered into 13 commercial joint ventures to grow our operations.

As of December 31, 2017, their order book was Rs 68,461 crore, which generally includes products and services to be manufactured and delivered and excludes anticipated revenues from our joint ventures and subsidiaries.

Key strength

  • Long credible history of research, design, and development, manufacturing, and maintenance, repair and overhaul (“MRO”) services
  • The diversified portfolio of product and strong financial
  • Leadership position in the Indian aeronautical industry and strong GOI support.
  • Established track record in offering product lifecycle support extending to periods beyond four decades


  • Expand our operations through partnerships or collaboration
  • Optimising operations towards becoming a lead integrator of aircraft platforms
  • Develop in-house capabilities to design and develop specialized products including aero-engines
  • Leverage existing cost advantage
  • Developing human capital

Risk factor

  • HAL depend heavily on MoD contracts. A decline or reprioritisation of funding in the Indian defence budget, that of customers including the Indian Army, Indian Air Force and Indian Navy (the “Indian Defence Services”), Indian Coast Guard, Border Security Force, Central Reserve Police Force and Paramilitary forces or delays in the budget process could adversely affect their ability to grow or maintain their sales, earnings, and cash flow
  • The MoD contracts are not always fully funded at inception and are subject to termination. Their inability to fund such contracts at the time of inception or any termination could have a material adverse effect on their financial condition and results of operations.
  • Ongoing disclosure of information in relation to HAL after the listing of the Equity Shares on the Stock Exchanges may be limited and may not be in compliance with the SEBI Listing Regulations and other applicable laws.
  • The GoI has significant influence over HAL actions which may restrict their ability to manage their business. Any change in GoI policy could have a material adverse effect on their financial condition and results of operations.

 Finding New Business Opportunities

In addition to their products that are currently under development, they have initiated several new business initiatives which comprise their plans to introduce new products and services as well as their entry into new market segments within the Aviation Industry.

Dornier Do – 228 Civil Variant: Given the growth in civil aviation in India, HAL believes an opportunity exists for them to position the Dornier 228 aircraft for regional applications within the 18-20 seater aircraft segment. Currently, there is no other aircraft of this category being manufactured in India.

HAL received a Certificate of Airworthiness from the DGCA for their first Dornier Do-228 civil variant aircraft on December 21, 2017, to enable its use as a passenger transport aircraft.


HAL believe that the civil variant of the Dornier Do – 228 aircraft will provide a significant support to the Government’s Regional Connectivity Scheme (UDAN) initiative which was introduced under the National Civil Aviation Policy 2016 to provide Tier II cities in India with access to aviation transport services, thereby putting them onto the aviation map of the country.

Manufacturing and R&D across India:

Over the years, it has successfully showcased research and development (R&D) capabilities in developing military aircraft and helicopters. It consistently around 7% R&D cost as percent of total revenue.

Joint ventures & subsidiaries

HAL has 13 joint ventures and 1 subsidiary out of 13 joint ventures and 1 subsidiary but out of which 4 JV has net asset around Rs 30 crore and subsidiary has Rs 100 crore. And most of them are minor loss-making. As we saw the major company among all the joint venture and subsidiary is HAL itself. HAL net asset is 98% among all the consolidate asset whereas around 3 joint ventures and 1 subsidiary is giving a negative return.

Financial Performance:

The company has significantly grown after the NDA government’s initiative in the manufacturing sector where they are more focused on defense sector for the safety of our Nation.

HAL’s sales and PAT have grown at CAGR of 7.1% and 62.5% respectively (FY15-17).

The growth in the revenue was led by around 33% CAGR (FY15-17) in the services business, which contributed around 32% to revenue in FY17 as against 21% in FY15.

Going forward, services segment is expected to perform well on account of an upgrade of major fleets of the Indian defense forces.

We can’t directly use the FY15 financial performance due to the adherence of new accounting standard where they have to make extra provision for their products; otherwise the FY15 PAT would have been Rs 2382 crore and EPS of around Rs. 50.

For the first half of the current fiscal, it has earned a net profit of Rs. 391 crore on a turnover of Rs. 5665.90 crore.

As on 31st Dec 2017, HAL’s order book stood at Rs 68,461 crore. The order book comprises primarily of orders to manufacture Su-30 MkI and Tejas Light Combat Aircraft (LCA), the company said.

Tejas is an indigenously designed and developed fighter aircraft. They have an order for 40 Tejas planes from the government, of which seven have been delivered.

They have a production capacity of eight planes a year, which they are looking to enhance to 16 planes a year. They are working with the government to procure an order of another batch of Tejas.


The financials of HAL are strong but they get most of the orders from Indian defense service which is around 91% of their revenue so they are solely dependent on one customer. All the decisions taken by  the Government can change the outlook and profit of the company, which in turn can hurt the return of investors.

However, in order to reduce dependency on defense products, HAL aims to increase the contribution of other business segments in future years, such as from the civil aircraft and helicopter segments.

HAL is debt free with surplus cash of Rs. 10,571 crore as against Rs 12,022 crore of net worth, after accounting for share buy-back. Per-share it’s cash component is translating to Rs 318 per share as against of book value of Rs 360 per share. It has been paying dividend consistently for the last four decades.

The company doesn’t have any listed peer and all the private peers are very small compared to HAL. According to the management, first-half results cannot be annualized for comparison as it always does better in the second half. HAL’s business is cyclical in nature as its revenue recognition depends on a certification process (acceptance and delivery of products by customers) which generally takes place in the second half due to favorable conditions for flight testing.

However, if we annualize the 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.

Given the growth prospects, investors can go for the issue for a long-term perspective. However it must be noted that, owing to the current market volatility listing gains may be capped.

-Report by Rahul Goyal under the guidance of Mr. Chirag Gothi