Hindustan Aeronautics Limited Rs 4,230 crore IPO: Top things you should know before investing

The firm will sell 10.20% of its equity through an offer-for-sale route through the IPO and has fixed a price band of Rs 1,215-1,240 a share for the offer that will close on March 20.

New Delhi: Public sector helicopter-maker Hindustan Aeronautics Limited (HAL) Rs 4,230-crore initial public offer (IPO), through which government is divesting 10.20 percent holding, will hit the market on Friday.

The company will also sell 10.20 percent of its equity through an offer-for-sale route through the IPO and has fixed a price band of Rs 1,215-1,240 a share for the offer that will close on March 20. The sale is part of the government's Rs 75,000-crore divestment process, which for the first time in many years, has already crossed the target.

The Navratna company, which made a profit of Rs 3,580 crore in fiscal 2017 on a revenue of over Rs 18,600 crore, is offering a discount of Rs 25 on offer price to retail individual bidders, and employees which have come in for at least 12 or the multiples of 12 shares.

The IPO will see the Bengaluru-based HAL selling 34,107,525 shares through an offer-for-sale by the President, acting through the department of defence production, HAL said.

The offer comprises a net offer of 33,438,750 equity shares and an employee reservation of up to 668,775 shares. Acting chairman V M Chamola said HAL has an order book of over Rs 68,000 crore, which covers the next three years. The issue is being managed by SBI Caps and Axis Capital.   

Here are five key things you should know before subscribing the issue:

IPO details

The largest defense player, HAL's IPO is a complete offer for sale consisting of 3,41,07,525 equity shares sold by the President of India, for the Department of Defence Production. Notably, the IPO has reserved up to 6,68,775 equity shares for employees. According to HAL’s prospectus, the price band is Rs 1,215-1240. 

At the higher end of the price band, the issue size works out to Rs 4,198 crore. The company is also offering a Rs 25 discount to retail investors and eligible employees. Bids can be made for a minimum lot of 12 equity shares and in multiples of 12 equity shares thereafter. Hindustan Aeronautics’ IPO date is from 16th March-20th March 2018.

Objects of the issue

As its an offer for sale involving the Government of India, the objects of the offer are to carry out the disinvestment of 3,41,07,525 equity shares by the selling shareholder which constitute 10 percent of company’s pre-offer paid up equity share capital. 

Further, the company also looks to achieve the benefits of listing on the exchanges. Since, its a complete offer for sale, Hindustan Aeronautics Limited will not receive any proceeds from the offer.

Strengths

Hindustan Aeronautics Limited is a niche player in the aerospace with proven its research, design and development capabilities. In a report, Angel Broking notes that the company has a robust order book provides revenue visibility, with an order book at Rs 68,461 crore as on December 31, 2017. 

Further, services contract worth Rs 6,000 plus crore are executed by Hindustan Aeronautics Limited annually. In India, HAL enjoys the privilege of being the sole manufacturer/integrator of defence aircrafts, helicopters, etc, which provides an excellent competitive advantage.

Key risks

In its HAL IPO note, ICICI Securities said that the company has a heavy dependence on MoD contracts/funding from defence budget and large, complex programmes of HAL are susceptible to performance challenges, Further, HAL has a heavy dependence on domestic, international licensors for key technologies and faces stiff competition from large international majors. “HAL’s failure to compete effectively with respect to any of these could have an adverse effect on its business, prospects, financial condition or operating results,” the firm noted.

Valuation

Top brokerages say that the company is reasonably valued and offers a good medium to long-term bet. Giving a subscribe rating on the issue, ICICI Securities said that the stock is being offered at a reasonable valuation of 15.8x FY17 EPS of Rs 78.5 calculated at the upper price band of Rs 1,240 per share. 

Angel Broking said that it expects HAL to maintain a healthy growth trajectory in the coming few years, considering its robust order book, opportunity in the defence space. Further, the firm points out that it is also a good dividend play with over 30 percent of the yearly earnings mandated to be paid as the dividend, adding that it recommends a subscribe for a mid-to-long term period.

(With agency inputs)