The stock of Defence aircraft maker Hindustan Aeronautics (HAL) shed almost 5 per cent in trade on Thursday. In the past week, the stock has lost over 10 per cent. The recent fall in the stock price came on the back of an announcement on Wednesday by the government of India, to divest up to 58.51 lakh shares amounting to 1.75 per cent of the company, with an option to sell an additional 58.51 lakh shares (an additional 1.75 per cent) in the event of oversubscription (oversubscription option). The offer for sale (OFS) price of ₹2,450 a share was nearly 7 per cent lower than Wednesday’s close price. As with every secondary issue, the stock price tends to gravitate towards the OFS price, and this explains the fall in stock price.

HAL, a pioneer in defence aircraft manufacturing and maintenance, has been among the investors’ favourites for the last two years. The company’s stock has gained 86 per cent in the past 12 months. We believe the strong interest in HAL stock is based on three counts.

Three reasons

First, with the ongoing geopolitical crisis not just between Russia and Ukraine, but several countries across the world, countries globally, including India, are stepping up their defence spend, and this is a positive for HAL.

Second, India’s thrust on indigenisation in manufacturing post Covid, through schemes such as production-linked incentives to spur local manufacturing will augur well for defence-focussed companies in India. And Indian companies including HAL are not just eyeing Indian market, but have also over the years acquired capabilities which can catapult them into a global player in defence products.   

Third, HAL boasts of the largest order-book among defence-focussed companies in the country, totalling ₹80,000 crore. Last week, Defence Minister Rajnath Singh and the Defence Acquisition Council announced proposals worth ₹70,000 crore for purchase of defence equipment. This includes 60 UH Marine choppers from HAL worth ₹32,000 crore. With revenue of ₹24,620 crore in FY22, the current order-book is over 4.5 times its FY22 sales. Thus, the growth visibility for the company remains strong over the next two-three years.

The stock at ₹2,497, trades at an attractive 13.7 times its trailing 12-month earnings.

While these fundamental factors are in favour of HAL, the narrowing differential between the OFS price and market price, with a possibility of further correction in the stock price on Friday, may offer retail investors an opportunity to also buy in the secondary market, even if they do not manage to get an allotment in the OFS.

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