Understanding the 10% Drop in Hindustan Aeronautics Shares: A Detailed Analysis

Shares of Hindustan Aeronautics Ltd. (HAL) witnessed a significant decline, falling by 6% on Thursday, which added to the over 3% drop seen during Tuesday’s trading session. This has raised concerns among investors and analysts alike.

Valuation Concerns Highlighted by InCred

InCred, a brokerage firm, has raised concerns regarding the valuation of defence stocks, particularly Hindustan Aeronautics. Their sales note, dated July 7, points out the valuation discrepancies between HAL and its global counterpart, Dassault Aviation. While Dassault reported a revenue of $5.19 billion and a profit of $974 million in the last fiscal year, HAL posted revenue of $3.67 billion and a profit of $921 million for the same period. Despite these figures, HAL is trading at an enterprise value of $41 billion compared to Dassault’s $6.7 billion.

Growth Projections and Order Backlog

The sales note further highlights future growth projections, stating that Dassault Aviation’s revenue and earnings are expected to grow at a Compounded Annual Growth Rate (CAGR) of approximately 24% and 12% respectively over the next two years. In contrast, HAL’s revenue and earnings are expected to grow at around 13% and 8% respectively. Additionally, Dassault exited the calendar year 2023 with an order backlog of $41 billion, significantly higher than HAL’s $11 billion.

Analyst Ratings and Stock Performance

Despite the recent downturn, Hindustan Aeronautics still has strong support from analysts. Out of 16 analysts covering the stock, 14 have a “buy” rating, with one “hold” and one “sell” rating. Following the two-day drop, the consensus price target suggests a potential upside of 4% for the defence PSU.

As of the latest trading session, HAL shares are down 4.6% at ₹5,085, having hit an intraday low of ₹4,975 on Wednesday. This is a significant drop from the record high of ₹5,675 reached on July 14. Currently, HAL shares are trading at a financial year 2026 price-to-earnings (P/E) ratio of 38.26, which is considerably higher than its five-year average P/E ratio of 23.6.

Shareholder Data and Stake Adjustments

The June quarter shareholding data reveals a 60% increase in the number of small shareholders (those with an authorized share capital of less than ₹2 lakh), rising from 6.9 lakh at the end of March to 10.8 lakh. However, India’s domestic mutual funds have reduced their stake in HAL from 6.75% in March to 5.8%. Similarly, Foreign Portfolio Investors (FPIs) have also trimmed their holdings from 12.42% to 11.68%.

In Conclusion, Despite the recent volatility and the concerns raised about its valuation, HAL has still experienced an impressive 80% gain in 2024. This highlights the complex nature of stock performance, influenced by a mix of financial metrics, market sentiment, and investor behavior.