By Jambakulam Sivakumar

India Ratings and Research (Ind-Ra) has assigned Hindustan Aeronautics Limited’s (HAL) INR25bn non-fund-based working capital limit an ‘IND A1+’ rating, and INR430m fund-based working capital limits (sublimit of INR25bn non-fund-based working capital limit) an ‘IND AAA’ rating with a Stable Outlook.

KEY RATING DRIVERS

Public Sector Entity: The rating is principally driven by the government of India’s (GoI, Fitch Ratings Ltd Issuer Default Rating: ‘IND BBB-’/Stable) ownership of HAL and the company’s strong links with the sovereign. HAL undertakes manufacture, repair and overhaul of aircraft, helicopter and engines mainly for Indian defence forces. Ind-Ra considers HAL as a dependent public sector entity and expects GoI to extend a high degree of support to the entity in the event of distress, if required. 

Strategically Important Entity:
 The rating factors in the strategic importance of HAL to GoI. Any disruption in HAL’s operations relating to either aircraft building or repair could adversely impact national security as it has near monopoly in the place within India. HAL is a defence public sector undertaking under the Department of Defence Production, Ministry of Defence and is wholly owned by GoI. GoI periodically infuses equity in HAL (FY14: INR3.615bn). 

Control and Oversight:
 HAL’s chairman-cum-managing director is appointed by GoI. HAL’s accounts are audited by a chartered accountant appointed by the Comptroller and Auditor General of India. HAL signs an annual memorandum of understanding with GoI that sets its operational and financial performance targets. 

Adequate Margins:
 Barring FY12, HAL has maintained adequate operating margins (FY15: 22.93%). Although EBITDA margins have stabilised over the years, the net profit margins declined to 13.22% in FY15 from 16.99% in FY13. 

Low Debt:
  HAL has a working limit of INR25bn from a consortium of bankers and had no secured term liability on 31 March 2015 (FYE15). The non-fund-based facility is mainly used for the import of raw materials for manufacturing aircraft. Its use of the fund-based working capital limit is low. HAL has not borrowed any long-term loans in the recent past. HAL had INR68.15bn as contingent liabilities at FYE15 (FYE14: INR46.18bn) towards statutory dues such sales tax, income tax etc. 

High Liquidity Strength:
It maintains huge cash reserves year on year (FY15: INR176.71bn (98% of FY15 revenue) and FY14: INR169.34bn (95% of FY14 revenue)) due to advance receipts from defence customers. 

Import Dependent Raw Material
: Cost of materials and employee costs are the major components of total expenditure, proportioning 52.84% and 22.79%, respectively, in FY15. Presently, most of its raw material requirements are met through imports (89% in FY14 and FY15). As a prudent financial policy, adverse forex fluctuations on materials, if any, are passed on to the customers.


RATING SENSITIVITIES

Negative: Material changes to HAL’s strategic importance to GoI and substantial dilution in the government shareholding, if any, could result in the entity no longer being classified as a dependent public sector entity in which case it may no longer be credit linked to the GoI rating.
 


COMPANY PROFILE

Incorporated in October 1964, HAL is the largest defence public sector undertaking under the Department of Defence Production, Ministry of Defence and is wholly owned by GoI.



SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Jambakulam Sivakumar

    Associate Director
    India Ratings and Research Pvt Ltd 4th Floor, D South, TIDEL Park No 4, Rajiv Gandhi Salai, Taramani Chennai 600 113
    +91 44 43401714

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121