Though the company had revenues of Rs 185 billion in FY17, given the order flow and revenue recognition happening towards the end of the project, sales can be lumpy. The first half of FY18, for example, has sales of only Rs 52.7 billion, though the company indicated the second half typically was better than the first and so sales should look up.
However, this lumpy nature of revenues makes valuing the company on the basis of the latest numbers difficult. While the company is valued at 16 times its diluted FY17 earnings at the upper end of the pricing band, it is 53 times the annualised FY18 revenues. With Bharat Electronics, another defence public-sector player, valued at 23 times its trailing earnings per share estimates, the issue price of HAL is reasonable, with retail customers getting a Rs 25 discount.
While the defence services are its key customers and account for over 90 per cent for revenues, the company is diversifying into the civilian segment could open up new revenue opportunities. HAL has started the production of the civilian variant Dornier Do-228 aircraft, and given a thrust on connecting the regional routes through the Udaan scheme, there could be good demand for these aircraft, believes the company’s management. Beyond this, the company is diversifying into new areas such as the indigenous design and development of aircraft and helicopter engines, as well as unmanned aerial vehicles. The development of indigenous aircraft and helicopter platforms also opens up the export market of not just the core products but also spares and services. This should improve the proportion of export revenues, currently at under 3 per cent, and diversify its risk.
In addition to indigenous production, the company also gets revenue from manufacture and maintenance of products under licence from defence companies in Russia and Western countries.