Fundamental Analysis And Intrinsic Value of Hindustan Aeronautics Ltd.
Dated: 28 Jun 23
Company: Hindustan Aeronautics Ltd.
CMP: Rs. 3661.25
Market Capitalisation: Rs. 1,22,427.62 Cr.
Intrinsic Value of Hindustan Aeronautics Ltd.
In this article we will try to analyze Hindustan Aeronautics Ltd. based on previous six years of financial statements viz Balance sheet, Profit and Loss statement and Cash flow statement. With this fundamental analysis we will try to gain insight into the financial health, operating efficiency and profitability of the company and finally try to derive the intrinsic value of the stock using Discounted Cash Flow method and the price at which the stock becomes attractive for long term investment.
Hindustan Aeronautics Ltd. is a leading aerospace and defense company in India with facilities in Bangalore, Kanpur, Nasik, Lucknow, Koraput and Korwa. Its product line includes both fixed and rotary wing aircraft, engines, avionics and related systems. Apart from this the company is also involved in licensed production of aircraft such as Su-30MKI and Hawk Advanced Jet Trainer etc. It also provides after sales support and maintenance services for its products.
Note: Here we are carrying out only the quantitative fundamental analysis of the company as the qualitative analysis is more subjective and individual views may vary vastly.
Before we enter into the calculation of Intrinsic value of Hindustan Aeronautics Ltd. we have to make some logical assumptions based on the previous six years financial statements and ongoing yield for 10y Government Of India bonds.
Assumptions:
- Terminal growth rate is assumed to be 0%.
- Discount rate is assumed to be 12%.
- The increase in Free Cash Flow is assumed to be Rs. 166392.87 lakhs per year for the first five years and then Rs 83196.44 lakhs from sixth to tenth year. The growth rate is projected based on the past growth of Free Cash Flow (refer to figure below). In the past Free Cash Flow has increased at the rate of Rs. 332785.74 lakhs per year, however, with a conservative outlook we have taken 50% of that figure for the first five years and 25% of that for the next five years.
- Increase in Revenue is assumed to be Rs. 81433.93 lakhs per year for the first five years and then Rs 40716.96 lakhs per year for the next five years. This growth rate is based on analysis of previous year’s revenues (refer to figure below). In the past revenue has decreased at the rate of Rs. 162867.86 lakhs per year, however, with a conservative outlook we have taken 50% of that figure for the first five years and 25% of that for the next five years.
- Free cash flow will be 14% of revenues in future. The FCF/Revenue ratio for the period under consideration has an average of 0.14. We assume that this ratio will hold good for future.
Based on the above assumptions we have arrived at two levels as intrinsic value of the firm. One is based on extrapolation of Free Cash Flow and the other is based on Free cash flows derived from extrapolated values of revenues. Both the methods only differ in how the input values are derived; in both the cases the present value is arrived at using Discounted Cash Flow Method.
Free Cash Flow Growth Model
Intrinsic Value: Rs. 3395.21
Stock Entry price with 25% margin of safety: Rs. 2564.41
Revenue Growth Model
Intrinsic Value: Rs. 1070.06
Stock Entry price with 25% margin of safety: Rs. 802.54
The average of the above two stock entry prices works out to be Rs. 1674.48. When the stock starts trading below this price it becomes attractive for long term investment.
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Fundamental Analysis Of Hindustan Aeronautics Ltd.
Leverage Ratios
Observations:
- The company is operating with almost no debt.
Operating Ratios
Observations:
- Fixed asset turnover ratio has improved indicating that the company is efficiently utilizing its fixed assets viz property, plant and machinery.
- Receivable turnover ratio has improved indicating that the company is promptly collecting payments from customers.
Profitability Ratios
Observations:
- PAT and EBITDA have shown improvement as have their margins which is a good sign.
- ROE, ROCE and ROA have shown improvement during the period under observation.
Author
Jibu Dharmapalan
Fundamental Analyst
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Disclaimer: This is not a stock advise. Investors must use their due diligence before buy/selling any stocks.
References:
https://hal-india.co.in/Annual-Reports/M__369
https://hal-india.co.in/Financial%20Results/M__368
More about the Company:
Board Of Directors
|
Shri CB Ananthakrishnan |
Director (Finance) & CFO with addl Charge of Chairman and Managing Director |
|
Shri Jayadev EP |
Director (Operations) |
|
Dr. DK Sunil |
Director (Engg and R&D) |
|
Shri T Natarajan |
Non-Executive Director |
|
Dr. Divya Gupta |
Non-Official Independent Director |
|
Shri Deepak Abasaheb Shinde |
Non-Official Independent Director |
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