Hindustan Aeronautics Ltd:Annual Report 2023-24 Analysis

Hindustan Aeronautics Ltd. (HAL): A Comprehensive Overview #

About the Company #

Year of Establishment and Founding History #

Hindustan Aeronautics Limited (HAL) was established on December 23, 1940, as Hindustan Aircraft Limited by Walchand Hirachand in Bangalore. It was later taken over by the Government of India in 1941.

Headquarters Location and Global Presence #

HAL’s headquarters are located in Bangalore, India. While primarily focused on the Indian market, HAL has established international collaborations and partnerships.

Company Vision and Mission #

• Vision: To be a leading aerospace and defence company with global presence.
• Mission: To design, develop, manufacture, repair, overhaul and upgrade aircraft, helicopters, engines, systems and accessories to meet the needs of Defence Services and other customers.

Key Milestones in Their Growth Journey #

• 1940s: Establishment and initial focus on license production.
• 1960s-70s: Development of indigenous aircraft like HF-24 Marut.
• 1980s-90s: Production of MiG-21 variants and other licensed aircraft.
• 2000s: Development of Advanced Light Helicopter (ALH) Dhruv and Light Combat Aircraft (LCA) Tejas.
• Present: Focus on indigenous design, development, and production of advanced aerospace and defence platforms.

Stock Exchange Listing Details and Market Capitalization #

HAL is listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Market capitalization fluctuates based on market conditions.

Recent Financial Performance Highlights #

Recent financial highlights (actual values will vary depending on the reporting period):

• Consistent revenue growth.
• Strong order book reflecting future business prospects.
• Profitability maintained despite economic challenges.

Management Team and Leadership Structure #

HAL is led by a Chairman and Managing Director (CMD) and a board of directors comprising functional directors.

Notable Awards or Recognitions #

• “Raksha Mantri’s Awards for Excellence in Defence and Aerospace Sector”
• Various industry awards for technological innovation and export performance.

Their Products #

Complete Product Portfolio with Categories #

• Aircraft: Fighter aircraft (Tejas), Trainer aircraft (HJT-36), Transport aircraft (Dornier 228).
• Helicopters: Advanced Light Helicopter (ALH) Dhruv, Light Combat Helicopter (LCH), Light Utility Helicopter (LUH).
• Engines: Manufacturing and overhauling of various aircraft engines.
• Aerospace Structures: Manufacturing of aircraft structures and components.
• Avionics: Development and integration of avionics systems.

Flagship or Signature Product Lines #

• Tejas Light Combat Aircraft (LCA): A 4.5 generation, multi-role light combat aircraft designed for air superiority and ground attack.
• Advanced Light Helicopter (ALH) Dhruv: A multi-role, multi-mission helicopter used by the Indian armed forces and civilian operators.

Key Technological Innovations or Patents #

• Development of composite structures for aircraft.
• Indigenous avionics and mission systems.
• Advanced helicopter technologies.

Manufacturing Facilities and Production Capacity #

HAL has multiple manufacturing facilities across India. These facilities are equipped for production, assembly, testing, and overhauling of aircraft, helicopters, engines, and avionics.

Quality Certifications and Standards #

HAL maintains quality certifications and standards such as ISO 9001 and AS9100.

Unique Selling Propositions or Technological Advantages #

• Indigenous design and development capabilities.
• Expertise in integrating advanced technologies.
• Comprehensive lifecycle support for its products.

Recent Product Launches or R&D Initiatives #

• Development of the Light Utility Helicopter (LUH).
• Upgrades to the LCA Tejas.
• Research and development in advanced materials and technologies.

Primary Customers #

Target Industries and Sectors #

• Defence (Indian Armed Forces)
• Civil Aviation
• Space (ISRO)
• Export Markets

Geographic Markets (Domestic vs. International) #

Predominantly domestic (India), but with increasing focus on export markets.

Major Client Segments #

• Indian Air Force
• Indian Army
• Indian Navy
• Indian Coast Guard
• Civil Aviation Operators

Notable Government Contracts or Institutional Clients #

HAL has long-term contracts with the Indian Ministry of Defence for supplying aircraft, helicopters, and related services.

Major Competitors #

Direct Competitors in India and Globally #

• India: Private sector players like Tata Advanced Systems, Mahindra Defence Systems.
• Globally: Lockheed Martin, Boeing, Airbus, Rosoboronexport.

Comparative Market Share Analysis #

Market share data is often proprietary and dependent on specific product categories. HAL holds a significant market share in the Indian defence aerospace sector.

Competitive Advantages and Disadvantages #

• Advantages: Strong government support, established infrastructure, experienced workforce, indigenous design capabilities.
• Disadvantages: Bureaucratic processes, dependence on government orders, competition from international players with advanced technologies and established global supply chains.

How They Differentiate from Competitors #

HAL differentiates itself through:

• Focus on indigenous design and development tailored to Indian requirements.
• Comprehensive lifecycle support and maintenance services.
• Competitive pricing due to local manufacturing.

Industry Challenges and Opportunities #

• Challenges: Technological advancements, increasing competition, evolving geopolitical landscape.
• Opportunities: Growth in the Indian defence sector, expanding export markets, indigenization drive of the Indian government.

Market Positioning Strategy #

HAL positions itself as a leading aerospace and defence company committed to indigenous design, development, and manufacturing of high-quality products for the Indian armed forces and export markets.

Future Outlook #

Expansion Plans or Growth Strategy #

• Increasing focus on exports.
• Expanding its product portfolio through indigenous development and technology partnerships.
• Strengthening its supply chain and manufacturing capabilities.

Upcoming Products or Innovations #

• Advanced Medium Combat Aircraft (AMCA).
• Further upgrades to the LCA Tejas.
• Development of next-generation helicopters.

Sustainability Initiatives or ESG Commitments #

• Environmental conservation initiatives at its facilities.
• Focus on sustainable manufacturing practices.

Industry Trends Affecting Their Business #

• Increasing demand for indigenous defence equipment.
• Growing adoption of advanced technologies like artificial intelligence and robotics in aerospace.
• Evolving geopolitical landscape and increasing security threats.

Long-Term Vision and Strategic Goals #

HAL’s long-term vision is to be a globally recognized aerospace and defence company, contributing to India’s self-reliance in defence. Its strategic goals include achieving technological leadership, expanding its market presence, and delivering sustainable growth.

3-Year Trend Analysis of Key Financial Metrics #

• Revenue from Operations: Increased consistently, with a 12.82% growth from FY 2022-23 (’ 26,92,785 Lakh) to FY 2023-24 (’ 30,38,084 Lakh).
• Turnover: Grew by 7% from FY 2022-23 (’ 26,36,056 Lakh) to FY 2023-24 (’ 28,16,185 Lakh).
• Profit Before Tax (PBT): Increased significantly by 57% from FY 2022-23 (’ 6,49,294 Lakh) to FY 2023-24 (’ 10,19,897 Lakh), indicates improved operational efficiency and potentially higher margins.
• Profit After Tax (PAT): Increased by 31% from FY 2022-23 (’ 5,81,117 Lakh) to FY 2023-24 (’ 7,59,504 Lakh).
• R&D Expenditure: Increased from ’ 2,49,433 Lakh in FY 2022-23 to ’ 2,82,624 Lakh in FY 2023-24, remaining a consistent proportion of turnover (around 10%).
• Earnings Per Share (EPS): Increased from ’ 86.89 in FY 2022-23 to ’ 113.57 in FY 2023-24 (Face value of ‘5).
• Book Value Per Share: Increased from ’ 351.48 in FY 2022-23 to ’ 434.32 in FY 2023-24.
• Cash and Bank Balance: Increased from ’ 20,30,615 Lakh in FY 2022-23 to ’ 26,42,224 Lakh in FY 2023-24.
• Order Book Position: increased from 81784 Cr in 2022-23 to 94129 Cr. in 2023-24.
• Operating Profit Margin (%) on Turnover: Increased from 18% in FY 2022-23 to 36% in FY 2023-24.
• Net Profit Margin (%) on Turnover: Increased from 22% in FY 2022-23 to 36% in FY 2023-24.
• Return on net worth %: Increased from 25% in FY 2022-23 to 26% in FY 2023-24.
• Total Dividend: increased from 22 per equity in 2022-23 to 35 in 2023-24.

Major Strategic Initiatives and Their Progress #

• Indigenization (Atmanirbhar Bharat): HAL has indigenized 2,046 items with anticipated annual foreign exchange savings of ’ 385 Crore. A dedicated indigenization fund has been created. 430 imported items have been included in the Positive Indigenisation Lists (PILs) and 59 PIL items (cumulatively 71) have been indigenized during the year.
• Outsourcing: The Company has been actively involved in updating the Outsourcing Manual (Rev 05-2024 was issued in March, 2024).
• Exports: The Company is expanding it’s global presence by exporting two Hindustan-228 aircraft to Guyana Defence Force and establishing a regional office in Kuala Lumpur.
• New Initiatives: MoU was signed with General Electric, USA on June 6, 2023 for ToT and Manufacturing of GE-414 aero-engine. A Joint Venture Company with Safran Helicopter Engines. Successful flight with 10% blended bio-fuel was carried out on Do-228 aircraft.

Risk Landscape Changes #

• The document highlights increased competition from domestic and foreign players.
• Geopolitical instability and supply chain disruptions are also identified as significant risks.
• Dependence on foreign Original Equipment Manufacturers (OEMs) for critical components.
• HAL noted that Strategic Partnership (SP) Model may deprive HAL from some high value Defence orders.

ESG Initiatives and Metrics #

• CSR Spending: Exceeded the obligation, spending ’ 11,998 Lakh against an obligation of ’ 10,931 Lakh in FY 2023-24. Focus areas include healthcare, skill development, education, and environmental sustainability.
• Environmental Protection & Conservation: Multiple measures are in place, including waste management (hazardous and non-hazardous), rainwater harvesting, and investments in renewable energy (7.57 MW rooftop solar, 26.50 MW ground-mounted solar, and 14.7 MW wind power). These captive sources helped avoid more than 66000 Tons of CO2e emission.
• Business Responsibility and Sustainability Report (BRSR): HAL prepared a BRSR report and received an independent assurance report.
• Women Empowerment: HAL is a Corporate Life Member of Women in Public Sector (WIPS) Forum. The 34th Annual Conclave (National Meet) of WIPS was held in HAL, Bengaluru on 12th & 13th February, 2024. Women’s Day is celebrated on 8th March every year.

Management Outlook #

• The Company expects growth in demand from Indian Defence Services due to the Atmanirbhar Bharat vision and the geopolitical situation.
• The Company is also targeting growth in the commercial aviation sector, expecting increased demand for new aircraft and MRO services.
• The future projects such as LCA MkII, Advance Medium Combat Aircraft (AMCA), Indian Multirole Helicopter (IMRH), Twin Engine Deck Based Fighter (TEDBF) etc. will ensure technological lead of India.
• The Company is focusing on indigenization, diversification into the civil market, strategic partnerships, and operational efficiencies through adopting the latest technologies.

Detailed Analysis #

Financial Analysis of Hindustan Aeronautics Limited (HAL) #

Balance Sheet Analysis #

Assets #

Liabilities and Equity #

Significant Changes in Major Line Items (YoY > 10%) #

The following significant changes are observed in major line items based on the consolidated financial statements:

• Capital Work-in-Progress: Increased by 47.17% (from ‘63,690 lakhs to ‘93,688 lakhs).
• Other Intangible assets: Decreased by 7.59% (from 103,575 to 95,664).
• Intangible Assets Under Development: Increased by 24.70% (from ‘124,810 lakhs to ‘155,655 lakhs).
• Non-Current Investments: Increased by 7.83% (from'128,959 to 138,969)
• Deferred Tax Assets (Net): Increased by 29.18% (from ’ 112,571 Lakhs to ’ 145,433 lakhs).
• Other Non-Current Assets: Decreased by 33.24% (from ‘359,654 lakhs to ‘240,063 lakhs).
• Inventories: Increased by 8.71% (from 1,214,869 to 1,321,754).
• Contract Assets: Increased by 26.86% (from ‘937,640 lakhs to ‘1,189,396 lakhs).
• Bank Balances (Other than Cash & Cash Equivalents): Increased by 39.70% (from ‘1,587,584 lakhs to ‘2,217,692 lakhs).
• Other Current Assets: increased by 27.28% (from ’ 418,913 lakhs to ’ 533,257 lakhs)
• Other Equity: Increased by 23.95% (from ‘2,323,776 lakhs to ‘2,880,378 lakhs).
• Other Non-Current Liabilities: Decreased by 3.5% (from ‘1,092,600 lakhs to ‘1,054,376 lakhs).
• Other Current Liabilities: Increased by 21.65% (from ‘1,853,714 lakhs to ‘2,254,925 lakhs).
• Provisions (Current): Increased by 12.29% (from ’ 677,665 lakhs to ‘761,041 lakhs).

Working Capital Trends #

• Current Ratio (Current Assets / Current Liabilities):
  • 2024: 1.73
  • 2023: 1.68

Analysis #

HAL current ratio has remain somewhat consistent, indicating stable short-term liquidity.

Asset Quality Metrics #

• Impairment Loss on Financial Assets: An impairment loss of ‘1,495 lakhs was recognized in 2023-24 (PY 59743 lakhs), indicating proactive management of potential asset value reductions.
• Allowance made for Doubtful debt

Debt Structure and Maturity Profile #

• Borrowings (Non-Current & Current): ’ 0 lakhs as of March 31, 2024 and March 31, 2023. HAL has no long-term debt.
• Lease liabilities: Non-current: 33 lakhs, current 2 lakhs Total: 110 (PY: 196). The company’s debt consists mainly of short-term lease liabilities.

Off-Balance Sheet Items #

• Contingent Liabilities:
  • Claims / Demands against the Company not acknowledged as debts: ’ 1,184,568 lakhs (largely sales tax/VAT related).
  • Other contingent liabilities: ’ 38,772 lakhs.
• Commitments:
  • Estimated amount of contracts remaining to be executed on capital account and not provided for: ‘227,889 lakhs.

Operating Performance #

Revenue Breakdown #

Geographical Breakdown (2023-24) #

• Inland Sales: ₹27,851 Crore (98.9%)
• Export Sales: ₹311 Crore (1.1%)

Revenue Growth #

• Total Revenue from Operations: Increased by 12.82% (from ₹26,92,785 Lakh in 2022-23 to ₹30,38,084 Lakh in 2023-24).
• Turnover: Increased by 7% (from ₹26,36,056 Lakh in 2022-23 to ₹28,16,185 Lakh in 2023-24).
• Exports increased from 29,371 Lakh to 31,059 Lakh.

Cost Structure Analysis #

• Cost of Materials Consumed: Represents a significant portion of total expenses.
• Employee Benefit Expenses: Forms a major part of expenses.
• Changes in Inventories: Substantial changes in finished goods, stock-in-trade, and work-in-progress impact the overall cost.

Margin Analysis (with Trends) #

(Figures in Lakhs, unless otherwise specified)

• Gross Margin has increased.
• Operating Profit Margin: Increased from 18% in 2022-23 to 29% in 2023-24, due to LCA IOC Contract amendment Sales and Increased repair and overhaul sales.
• Net Profit Margin: Increased from 22% in 2022-23 to 27% in 2023-24 due to recognition of revenues from the LCA IOC Contract amendment and increased interest income.

EPS Analysis (Basic/Diluted) #

• Basic EPS: Increased from ₹86.89 (restated for share split) in 2022-23 to ₹113.57 in 2023-24.
• Diluted EPS: Increased from ₹86.89 (restated for share split) in 2022-23 to ₹113.57 in 2023-24.

Cash Management #

Cash Flow and Liquidity Analysis #

Detailed OCF, ICF, FCF Components (Standalone) #

(Figures are for FY 2023-24, in Lakhs, unless otherwise stated)

• Operating Cash Flow (OCF): 822,574

  • Profit After Tax: 759,504
  • Major Adjustments:
    • Depreciation & Amortization: 140,645
    • Interest Income: -163,338
    • Provision created :330,538
    • Changes in Working Capital (net of some elements): -135,195

• Investing Cash Flow (ICF): -641,173

  • Major Components:
    • Purchase of Property, Plant & Equipment: -91,615
    • Purchase of Intangible Assets: -83,875
    • Investment in short term deposits:-630,053
    • Interest Received: 174,477

• Financing Cash Flow (FCF): -199,885

  • Major Components:
    • Dividend Paid: -197,289
    • Interest paid: -2,565
    • Payment of lease liabilities: -31

Working Capital Management Efficiency (Standalone) #

• Debtors Turnover Ratio: 6.03 (FY23: 5.63). Improved, indicating faster collection of receivables.
• Inventory Turnover Ratio: 2.22 (FY23: 1.99). Improved.
• Changes in Inventory, WIP & SIT: 1956Cr, shows a growing business.

Capex Analysis (Standalone) #

• Total Capex (Property, Plant & Equipment + Intangible Assets): 216,786 (FY23: 208,173, includes 2014 additon of investment in subsidiaries). The investments are mainly towards the Green Field Helicopter project at Tumakuru, augmentation of facilities of LCA, ROH of SU-30, ROH of AL-31FP Engine, etc.
• Capex is classifed as Property, Plant and Equipments, Intangible assets and Right of Use assets.

Dividend and Share Buyback Trends (Standalone) #

• Interim Dividend: ’ 22 per share (’ 5 face value), totaling 147,130.50.
• Proposed Final Dividend: ’ 13 per share (’ 5 face value), pending shareholder approval, totaling 86,940.75.
• Total Dividend (FY23-24): ’ 35 per share (700% on ’ 5 face value), totaling 234,071.25 (including /final dividend).
• Share Sub-division: During the year, there was a stock split and shares of face value of 10 split in two shares of face value 5.
• Share Buyback: No buyback during FY23-24. The last buyback occurred in FY17-18.

Debt Service Coverage (Standalone) #

• Debt Service Coverage Ratio: Not applicable, as the Company had no borrowings.

Liquidity Position and Cash Conversion Cycle (Standalone) #

• Current Ratio: 1.7:1 (FY23: 1.7:1). Stable liquidity position.
• Cash and Bank Balance: 2,642,184 (FY23: 2,030,615). A signi/ficant increase indicates strong cash reserves.
• Trade Receivables: 461,667, shows that the company holds signi/ficant amount of Trade receivable.
• Trade payables:341,467, shows low dependancy on Trade payable.

Free Cash Flow Yield Trends (Standalone) #

• Free cash /flow yield trend cannot be made as Market price per share is not provided.

Consolidated Figures #

Some information available for the consolidated entity that adds further detail.

• Market Capitalization: Reached 2.22 Lakh Crores.
• Cash and Bank Balance : Increased from 2,030,615 lakhs to 2,642,184 lakhs
• Total Revenue for the year: 30,38,108
• Pro/fit After Tax (PAT) increased by 31% from 5,81,117 lakhs to7,59,504 Lakh

Financial Analysis of Business Segments #

Revenue and Profitability Metrics with Growth Rates #

• Overall Revenue: Revenue from Operations increased by 12.82% from ₹26,92,785 Lakh in FY 2022-23 to ₹30,38,084 Lakh in FY 2023-24. Turnover saw a growth of 7%, reaching ₹28,16,185 Lakh from ₹26,36,056 Lakh in the previous year.
• Profitability: Profit Before Tax (PBT) surged by 57%, from ₹6,49,294 Lakh in FY 2022-23 to ₹10,19,897 Lakh in FY 2023-24. Profit After Tax (PAT) also increased by 31%, from ₹5,81,117 Lakh to ₹7,59,504 Lakh.
• Operating Profit Margin grew from 18% during 2022-23 to 29% in 2023-24
• Net Profit Margin grew from 22% to 27% in the same period

Key Products/Services Performance #

• Manufacturing: Production includes Light Combat Aircraft (LCA) Tejas Mk1A & Mk1, Do-228 aircraft, Advanced Light Helicopter (ALH) Dhruv, Light Utility Helicopter (LUH), engines, accessories, and aerospace structures.
• Repair, Overhaul, and Maintenance (ROH): Overhaul of various aircraft, helicopters, and engines, contributing significantly to revenue. Mid-life upgrades have also taken place on several aircrafts.

Geographic Distribution and Market Penetration #

• Domestic: HAL primarily serves the Indian Defence Services (Indian Air Force, Indian Army, Indian Navy, and Indian Coast Guard).
• Export: Export sales are a smaller portion of revenue. HAL has supplied two Hindustan-228 aircraft to Guyana Defence Forces. It operates a regional office in Kuala Lumpur, Malaysia.

Segment-wise CAPEX #

• CAPEX: The Company incurred a CAPEX of ₹2,16,786 Lakh in FY 2023-24 (₹2,08,173 Lakh in FY 2022-23), mainly directed towards the Green Field Helicopter project at Tumakuru, and facilities augmentation for LCA, ROH of SU-30, and ROH of AL-31FP Engine.

Operational Efficiency Metrics #

• Inventory Turnover Ratio improved from 1.99 in 2022-23 to 2.22 in 2023-24
• Debtors Turnover Ratio improved from 5.63 to 6.03.

Growth Initiatives and Challenges #

• Growth Initiatives:

  • Focus on indigenous design and development of platforms like HTT-40, LUH, LCA Mk1A, IMRH, and engines.
  • Establishing MRO Facilities
  • International collaboration

• Challenges:

  • Dependency on foreign OEMs for critical materials and Line Replaceable Units (LRUs).
  • Increased competition from the domestic private sector and foreign companies.
  • Geopolitical instability can disrupt supply chains.

Risk Framework #

Strategic Risks #

• Severity: High, due to the Company’s dependence on the Indian Defence Services and government funding.
• Likelihood: Increasing, given the growing role of the private sector in defense R&D, driven by policy changes.
• Trend: Growing competitive pressure from domestic private companies’ collaborations with global OEMs.
• Mitigation Strategies: Focus on launching Design and Development programs, diversifying into the civil market, enhancing indigenization, expanding global operations, strategic partnerships, and strengthening marketing.
• Control Effectiveness: Partially effective. Initiatives are in place, but external market forces create ongoing challenges.
• Potential Financial Impact: Not Quantifiable from the report.

Operational Risks #

• Severity: Medium to High. Supply chain disruptions and reliance on foreign OEMs for critical components are major concerns.
• Likelihood: Medium, due to geopolitical instability and ongoing supply chain challenges across the industry.
• Trend: Increasing obsolescence of technology.
• Mitigation Strategies: Indigenization efforts, creation of a dedicated Indigenization Fund, exploration of alternative sourcing, adoption of Industry 4.0, and third-party inspections.
• Control Effectiveness: Moderate. The Indigenization Fund and vendor development programs indicate proactive steps, but the complexity of aerospace technology creates continuous challenges.
• Potential Financial Impact: Not Quantifiable from the report.

Financial Risks #

• Severity: Medium.
• Likelihood: Medium, linked to contract terms, customer concentration, and reliance on government budgetary allocations.
• Trend: The Interim Union Budget 2024-25, has been allocated to the Defence sector 4.7% higher than BE of FY 2023-2024.
• Mitigation Strategies: Focus on customer satisfaction, building relationship and communication.
• Control Effectiveness: Adequate. The reported instances were related to non-appointment of Independent Directors and were outside the company’s control.
• Potential Financial Impact:
  • Revenue from Operations in FY 2023-24 increased by 12.82%.
  • PBT for the year increased by 57% to 10,19,897 lakh
  • PAT increased by 31% to 7,59,504 Lakh.
  • Order Book position stood at 94,129 Crore.

Compliance/Regulatory Risks #

• Severity: Medium to High. Non-compliance with SEBI (LODR) Regulations and DPE guidelines.
• Likelihood: Medium, as the appointment of Independent Directors is controlled by the Government of India, impacting compliance with Board composition requirements.
• Trend: There is also non-compliance with Regulations 17(1) of SEBI (LODR) Regulations 2015.
• Mitigation Strategies: Multiple requests/reminders made to the Ministry of Defence for /filling vacant Independent Director positions, seeking waiver of /fines.
• Control Effectiveness: Limited. The Company is actively pursuing compliance but is dependent on external appointments.
• Potential Financial Impact:
  • Bombay Stock Exchange Ltd (BSE) and National Stock exchange (NSE) have imposed total fine of 43,18,800 for non-compliance under Regulation 17(1) of SEBI(LODR).
  • Application for wavier of fines was made to Stock Exchanges.

Emerging Risks #

• Severity: High
• Likelihood: Low.
• Trend: Increased.
• Mitigation Strategy: Establishment of a dedicated indigenization fund and earmarked indigenization as “Key Thrust Area.”
• Control Effectiveness: Partially effective, ongoing implementation.
• Potential Financial Impact: HAL has indigenized 2,046 items with anticipated annual foreign exchange savings of 385 crore.

Hindustan Aeronautics Limited (HAL) Strategic and Management Analysis #

Long-Term Strategic Goals and Progress #

• HAL aims to be a global leader in the Aerospace & Defence Industry, focusing on delivering technology solutions. Revenue from operations during 2023-24 reached a record ₹28,16,185 Lakh, a 7% growth from the previous year, with Profit Before Tax (PBT) increasing by 57%.
• The order book stood at a healthy value of ₹94,12,900 Lakh.
• HAL is strategically moving towards indigenization (“Atmanirbhar Bharat”) and has created a dedicated indigenization fund.
• HAL successfully obtained the release of military certification for the HTT 40 Aircraft program and secured pivotal projects such as the Indigenous Multi-Role Helicopter (IMRH) and Utility Helicopter Maritime (UHM).

Competitive Advantages and Market Positioning #

• HAL possesses design, manufacturing, and service skills in the Aerospace & Defence sector, forming a key competitive advantage.
• HAL has expertise in the repair and overhaul (ROH) of aircraft, a significant contributor to revenue.
• HAL is the primary supplier to the Indian Defence Services, indicating a strong market position, though this also represents a customer concentration risk.
• HAL is facing an increasing threat from the collaboration of Indian Private Companies with Global OEMs.

Innovation Initiatives and R&D Effectiveness #

• HAL invests significantly in R&D, with expenditures at 10.04% of turnover (₹2,82,624 Lakh) in 2023-24.
• R&D achievements include the indigenous HTT-40 trainer receiving certification, successful flights of the LCA Naval Trainer, and firing of an indigenous BVR missile.
• HAL actively files for intellectual property rights, with 186 applications filed during the year.
• The establishment of a New Design and Test facility at the Aero Engine Research & Development Centre demonstrates a focus on accelerating aero-engine R&D.
• HAL has earmarked Indigenization as a Key Thrust Area.

M&A Strategy and Execution #

• HAL formed a Joint Venture Company (SAFHAL Helicopter Engines Pvt. Ltd.) with Safran Helicopter Engines, France, for the design and development of engines for IMRH, demonstrating a focus on strategic partnerships.
• HAL has entered into an agreement with M/s Airbus, France, and signed a contract for establishing up to 6 yearly C Checks facility for A-320 family of aircraft.

Management’s Track Record in Execution #

• Management achieved record financial performance (highest-ever turnover) and increased profitability.
• Delivery of two Hindustan-228 aircraft to Guyana Defence Forces within one month of contract signing demonstrates operational efficiency.
• The company has obtained approvals for series production of Hindustan-228 aircraft and a Maintenance Type Training Certificate.
• Management guided HAL to receive multiple awards and recognitions.

Capital Allocation Strategy #

• HAL is investing heavily in CAPEX (₹2,16,786 Lakhs in FY 2023-24), focusing on projects like the Green Field Helicopter project and augmenting facilities.
• The company allocates a part of its operational profits towards a dedicated fund, transferring 3% of its operating profit after tax every year.
• A significant portion of profits is distributed as dividends, with an interim dividend of ₹22 per share and a recommended final dividend of ₹13 per share for 2023-24.

Organizational Changes and Their Impact #

• HAL established marketing offices abroad.
• HAL implemented an Online Claim Bills Realization System (e-CBRS).
• HAL created a Customer Service Organization.
• These strategy initiatives’ impact is reflected in financial performance growth.

ESG Framework #

Environmental Metrics and Targets #

• HAL has implemented environmental protection and conservation measures, governed by various Acts & Rules, including the Hazardous and Other Wastes Rules, 2016, Solid Waste Management Rules, 2016, The Air Act, 1981, Environment (Protection) Act, 1986, Water (Prevention and Control of Pollution) Act, 1974.
• All divisions of HAL are ISO 14001 certified.
• HAL has installed 7.57 MW capacity rooftop-based solar power plants, with projects for another 1.4 MW in progress.
• A total of 26.50 MW capacity ground-mounted solar power plants have been installed.
• 14.7 MW capacity wind power plants exist in Karnataka.
• HAL has invested in energy-efficient temperature and humidity chambers and thermal shock chambers, as well as a sand-washing facility to reclaim sand.
• Captive renewable energy consumption avoided more than 66,000 Tons of CO2e emissions.
• Total energy consumed went down from 1,221,542 GJ to 1,203,844 GJ.
• HAL reduced its total energy consumed from non-renewable sources by 4.1% Year-over-year.
• Energy intensity improved from 45.36 GJ per crore of revenue in FY23 to 39.63 GJ in FY24.
• Total Scope 1 emissions were 48,876 metric tons of CO2 equivalent
• Total Scope 2 emissions were 89,066 metric tons of CO2 equivalent
• Water withdrawal by source has been disclosed with groundwater and third-party water being the most relevant. Total Volume is 13,493,486 KL.
• Water intensity per rupee of turn over is 444.14 Kilolitres per crore.
• Air emission data is available for NOx, SOx, and Particulate Matter (PM) and Other - (CO, Acid mist, alkali mist).
• Waste management practices are in place, including segregation of municipal solid waste and management of hazardous waste through authorized agencies.
• Waste generated went up from 5566.33 metric tonnes to 11060.62 metric tonnes.

Social Responsibility Programs #

• HAL spent ’ 11,998 Lakh under CSR in FY 2023-24 against the CSR budget/obligation of ’ 10,931 Lakh.
• CSR thrust areas include Healthcare, Skill Development, Education, and Enhancing Employability through Training, Environment Sustainability, Sports Development, Rural Infrastructure Development, Sanitation, etc.
• HAL Football Academy in Bangalore is a notable CSR initiative.
• The company has implemented the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 and constituted Internal Complaints Committees.
• The employee strength as on March 31, 2024, stood at 23,766.
• Women employees constitute about 9% of both employees and workers.
• Town Hall meetings have been introduced for open communication between Executives and Top Management.

Governance Structure and Effectiveness #

• The Board of Directors is the apex body, headed by the Executive Chairman and Managing Director (CMD).
• As of March 31, 2024, the Board comprised four Whole-time/Functional Directors, two Government Nominee Directors, and two Independent Directors (including one Woman Independent Director). The position of CMD and five Independent Director positions were vacant.
• During the year, 12 Board Meetings were held, and the maximum interval between any two meetings was not more than 120 days.
• Five statutory committees exist: Audit Committee, Nomination & Remuneration Committee, Corporate Social Responsibility & Sustainable Development Committee, Stakeholders Relationship Committee, and Risk Management Committee.
• The company complies with mandatory Secretarial Standards issued by the Institute of Company Secretaries of India.
• The Company has a Whistle Blower Policy and encourages employees to raise concerns.

Sustainability Investments and ROI #

• The company incurred Capital Expenditure (CAPEX) of ’ 2,16,786 Lakhs in FY 2023-24, mainly towards the Green Field Helicopter project at Tumakuru, and augmentation of facilities.
• R&D expenditure for the year was ’ 2,82,624 Lakh, which is 10.04% of the turnover.
• A dedicated indigenization fund has been created, with 3% of operating profit after tax transferred annually.
• While specific ROI figures for sustainability investments are not explicitly provided, the investments in renewable energy, waste management, and employee well-being programs suggest a long-term commitment to sustainability.

Regulatory Compliance and Future Preparations #

• The Company complies with the Companies Act, 2013, SEBI (LODR) Regulations, 2015, and DPE Guidelines.
• Annual Return and Secretarial Compliance Report filed as per regulatory requirements.
• The Company is continuously reviewing and updating the Policies.
• The Company is adapting to Industry 4.0, Automation, and AI, indicating preparation for technological changes.

Hindustan Aeronautics Limited (HAL) Financial Outlook #

Management Guidance and Assumptions #

• Continued growth based on the Government of India’s (GoI) vision for achieving ‘Atmanirbhar Bharat’ (self-reliant India) and the current geopolitical scenario.
• The majority of sales from Indian Defense Services.
• Continuous growth from the Defence Segment.
• Air travel’s upward trajectory on the commercial side, leading to increased demand for new aircraft and MRO services.
• Indigenization fund created by transferring 3% of its operating profit after tax, to provide impetus for indigenisation.

Market Growth Forecasts #

• India’s annual Defence production is expected to reach 3 lakh Crore by 2028-29, with arms exports of 50,000 Crore.
• The global A&D industry is expected to grow substantially, driven by defense projects, policies, and GoI funding.
• 16469 orders were placed through GeM portal amounting to ‘2903 Crore.
• Domestic and international air travelers are expected to exceed 500 million by 2030.

Planned Strategic Initiatives #

• Launch Design and Development programs for Indian Defence Services, initially funded internally.
• Diversification into the civil market for both manufacturing and MRO.
• Expand operations globally and acquire core technologies through collaborations with global OEMs/partners.
• Establish marketing offices in target geographies, enhancing global market reach.
• Strengthening and leveraging Marketing and Business Development functions.
• Enhancement of customer satisfaction and improved quality of products and services.
• Focusing on indigenization of components and systems to enhance self-reliance, reduce import dependency, and to reduce foreign exchange savings.
• Outsourcing the production of sub-assemblies and components to Tier -I and Tier -II suppliers.
• Focus on operational efficiency by adopting latest technologies such as Industry 4.0, automation, additive manufacturing, etc.
• Accelerating Research and Development of aero-engines, and earmarked Indigenization as ‘Key Thrust Area’.

Capital Expenditure Plans #

• Incurred a CAPEX of `2,16,786 Lakhs in FY 2023-24, mainly towards the Green Field Helicopter project at Tumakuru and the augmentation of facilities for LCA, ROH of SU-30, ROH of AL-31FP Engine.
• Investments directed towards the replacement and rationalization of existing facilities.
• The company may require capital for expansion.

Efficiency Improvement Targets #

• Implementation of Industry 4.0 concepts, Third-Party Inspection (TPI) model for inspection activities at vendor premises.
• Introduction of Fleet-wise SPOCs (Single Point of Contact) for customer issues.
• Centralized payment and payroll processing centers.
• Issued a new version of Outsourcing Manual(Rev 05-2024) towards enhancing the ease of doing business with HAL, from the vendor’s perspective.
• Implementation of AI-based inspection systems and online data fetching.

Potential Challenges and Opportunities #

• Challenges:

  • Dependency on foreign OEMs for critical materials and Line Replaceable Units (LRUs).
  • Geo-political instability potentially disrupting the supply chain.
  • Limited export market presence outside India.
  • Heavy reliance on a limited number of customers (primarily Indian Defence Services).
  • Growing competition from domestic private companies and foreign OEMs.
  • Potential shift in Defence procurement from nomination to competitive bidding.
  • The Strategic Partnership (SP) Model may reduce opportunities for high-value defense orders for HAL.

• Opportunities:

  • ‘Atmanirbhar Bharat Abhiyan’ and government policies promoting self-reliance and indigenous products, leading to new orders.
  • Government support for export promotion to friendly foreign countries.
  • Growing domestic civil MRO market and development of new potential markets (e.g., regional jets, UAVs).
  • Potential for growth through alliances and partnerships in global markets.

Scenario Analysis and Sensitivity to Key Assumptions #

• Increased Indigenization: Faster-than-expected success in indigenization under ‘Atmanirbhar Bharat’ could improve margins due to reduced import costs.
• Order Book Growth: HAL order book position is at ‘94,129 Crore as on March 31, 2024, which has increased significantly as compared to previous year.
• Geopolitical Risks: Increased geopolitical tensions could increase defense spending but may disrupt supply chains, particularly for imported components.
• Domestic Competition: Increased participation of the private sector in defense manufacturing could lead to a more competitive bidding environment, potentially impacting HAL’s order book.
• Civil Aviation Growth: Sustained growth in civil aviation could present significant MRO and potentially new aircraft manufacturing opportunities.

Audit and Compliance Analysis #

Auditor’s Opinion and Qualifications #

• The Statutory Auditors, M/s. A John Moris & Co., issued an unmodified (clean) opinion on the standalone and consolidated financial statements.
• The Statutory Auditors issued a clean report under CARO.
• The Auditor’s Report includes an Emphasis of Matter paragraph regarding:
  • Revisions of pay scales of executives and workmen, with recoveries being made, subject to a stay order from the Hon’ble High court of Karnataka. The excess amount paid and provided is material.
  • Ministry approval for increasing the Company’s contribution to the Pension Scheme of Executives, leading to material additional liability during the current year.
  • Inventory damage due to floods, with provision adjustments.
• Joint Venture, HALBIT Avionics Private Ltd’s financial statement expresses material uncertainity related to going concern.
• Joint Venture, Infotech HAL Ltd., submitted an application to windup due to non-perfomance.
• Joint venture company, HAL-Edgewood Technologies Pvt. Ltd. has not prepared the /financial statements for the year 2023-24.
• Branch audits for 29 divisions were conducted by separate auditors, and this report relies on their findings.
• The C&AG issued Nil comment certificates under Section 143(6)(b) of the Companies Act,2013.

Key Accounting Policies and Changes #

• The Company uses Indian Accounting Standards (Ind AS).
• Property, Plant, and Equipment (PPE) are stated at cost, less accumulated depreciation and impairment. Depreciation is calculated on a straight-line basis over estimated useful lives, with assets under ‘50,000 fully depreciated in the year of purchase.
• Inventory is subject to redudancy provision with 100% provision for items that have not moved for more than 5 years.
• Revenue recognition for product sales occurs upon transfer of control, generally upon customer acceptance. Service warranties are recognized on a straight-line basis.
• HAL has Implemented Maya OS, in line with recomendations of the Cyber Information Research Agency.
• The Company maintains a defined contribution plan for its employees and the liabilities are based on actuarial valuations.
• The company revised it’s outsourcing procedures to enhance ease of doing business with vendors.

Internal Control Effectiveness #

• The auditor’s report includes a statement on the adequacy of internal financial controls over financial reporting, indicating they were operating effectively.
• An independent Chartered Accountant firm reviewed and confirmed the effectiveness of the Internal Financial Controls (IFC).
• The Systems Audit Department evaluates internal controls and identifies weaknesses, recommending improvements.

Regulatory Compliance Status #

• The Company complies with mandatory Secretarial Standards.
• The Company complies with SEBI (LODR) Regulations and DPE Guidelines, except for the composition of the Board of Directors due to vacant Independent Director positions. Multiple requests have been sent to the Ministry of Defence for appointments. Fines have been imposed by BSE and NSE for non-compliance, with waiver applications pending compliance.
• The Company has implemented the Public Procurement Policy for Micro and Small Enterprises (MSEs) Order, 2012.
• The Company has implemented the Public Procurement (Preference to Make in India), Order 2017.
• The Company complies with Integrity Pact (IP) requirements for procurement.
• The Company is compliant with the provisions of applicable environmental laws/regulations/guidelines in India; such as the Water (Prevention and Control of Pollution) Act, Air (Prevention and Control of Pollution) Act, Environment protection act and rules thereunder.
• The Company is not required to be registered under Section 45-IA of the Reserve Bank of India Act, 1934.
• The Company has complied with all applicable mandatory Secretarial Standards issued by the Institute of Company Secretaries of India.

Legal Proceedings and Their Potential Impact #

• There were pending litigations disclosed, but no significant material orders impacting going concern status.
• Employee Union and Officers Association filed Writ Petition with Hon’ble High Court of Karnataka to stay recovery of excess amount of salary.

Related Party Transactions #

• The Company entered into related party transactions with approval from the Audit Committee and/or Board.
• No material related party transactions exceeding the threshold mentioned in the RPT policy.
• Disclosure of related party transactions is provided in Clause No. 45A of the Notes to the financial statements, in accordance with accounting standards.
• Forms AOC-2 is attached to the Board Report.

Subsequent Events #

• No material changes or commitments affecting the financial position occurred after the year-end (March 31, 2024) and up to the date of the Board’s Report (July 23, 2024).

Analysis of Accounting Quality and Regulatory Risk Assessment #

• Accounting Quality: The use of Ind AS and the clean audit opinion indicates a high standard of accounting quality. Emphasis of Matter paragraphs highlight areas requiring attention, but the auditors haven’t qualified their opinion, suggesting these are being appropriately managed and disclosed. Regular review of accounting policies, the use of actuarial valuations for employee benefits, and inventory redundancy provisions demonstrate a commitment to accurate financial reporting.
• Regulatory Risk: The primary area of regulatory risk lies in the non-compliance with Board composition requirements under SEBI (LODR) Regulations. While the Company is actively pursuing appointments, the pending fines from stock exchanges pose a financial risk. Furthermore, reliance on government contracts and defense sector policies makes the Company susceptible to changes in government spending and procurement procedures. The Company’s compliance with environmental regulations and other laws indicates a low risk in those areas.