By Rajaraman S

India Ratings and Research (Ind-Ra) has affirmed Hindustan Aeronautics Limited’s (HAL) bank loans as follows:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Non-fund-based working capital limit

-

-

-

INR20.5

IND A1+

Affirmed

Fund-based working capital limit

-

-

-

INR4.50

IND AAA/Stable

Affirmed

KEY RATING DRIVERS

Public Sector Entity: The government of India’s (GoI, Fitch Ratings Ltd: Issuer Default Rating: ‘BBB-’/Stable) wholly owns HAL. Moreover, HAL has strong links with the sovereign, given it undertakes the manufacture, repair and overhaul of aircraft, helicopters and engines, primarily for the Indian defence forces. Ind-Ra considers HAL a dependent public sector entity and expects the GoI to extend a high degree of support to the entity in the event of distress, if required.

Bank Loans: HAL has a total working capital limit of INR25 billion from a consortium of bankers. It had no term liability as on 31 March 2016. The non-fund based facility is mainly used for raw material imports.

Strategically Important Entity
: HAL is strategically important to the GoI. Any disruption in HAL’s operations either relating to aircraft building or repair could adversely affect the national security, as it has a near monopoly in India. HAL is a defence public sector undertaking (DPSU) under the Department of Defence Production, Ministry of Defence. The GoI periodically infuses equity in HAL (FY14: INR3.615 billion). However, in FY16, HAL bought back INR120.5 million worth of equity shares (equivalent to 25% paid-up share capital) from the president of India.

Control and Oversight
: HAL’s chairman-cum-managing director is appointed by the 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 the GoI that sets its operational and financial performance targets.

Order Book
: HAL’s order book includes deals for new aircraft and helicopters. HAL’s domestic sales remained at about INR116 billion on average over FY11-FY16. HAL faces production constraints due to high gestation period orders of its major customer. However, it benefits from high-value orders and advances. In FY16, HAL manufactured 60 new aircraft and helicopters, in addition to engines and accessories, at its various sites.

Dependent on Raw
Material Imports: In FY16, cost of materials and employee costs (at 58.08% and 21.45%, respectively) were the major components of expenditure. At present, the majority of its raw material requirements are met through imports (FY16: 87.88%; FY15: 89.43%). As a prudent financial policy, adverse forex fluctuations on materials, if any, are passed on to customers.

Adequate Margins
: HAL’s operating margin was adequate at 26.65% in FY16 (FY15: 22.93%). EBITDA margin was about 23% on average over FY12-FY16. Net profit margin declined to 8.94% in FY16 from 13.22% in FY15. The decline was mainly due to high tax payments. Ind-Ra expects a stable net profit margin.

Low Debt; High Liquidity Strength
: HAL has availed a working capital facility from a consortium of banks to meet non-funding requirements by way of letter of credit and bank guarantee. HAL had INR109.11 billion worth of contingent liabilities in FY16 (FY15: INR68.14 billion) towards statutory dues such as sales and income tax. It continues to maintain huge cash reserves (FY16: INR133.03 billion; 72% of revenue in FY16 and FY15: 176.71 billion; 98% of revenue) due to advance receipts from defence customers.


RATING SENSITIVITIES

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


COMPANY PROFILE

Incorporated in October 1964, HAL is the largest DPSU under the Department of Defence Production, Ministry of Defence. It is primarily engaged in the design, development, manufacture, repair and overhaul of aircraft, helicopters, engines and related systems such as avionics, instruments and accessories.


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Outstanding Limits (billion)

Rating

 30 March 2016

Non-fund-based working capital limit

Short-term

INR20.5

IND A1+

IND A1+

Fund-based working capital limit

Long-term

INR4.5

IND AAA/Stable

IND AAA/Stable


COMPLEXITY LEVEL OF INSTRUMENTS

Bank facilities are instruments with low complexity levels, where the relationship between inherent risk factors and intrinsic return characteristics is straightforward.

For more information, visit
https://www.indiaratings.co.in/complexity-indicators.

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.

ABOUT INDIA RATINGS AND RESEARCH

India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies and project finance companies. 

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For more information, visit www.indiaratings.co.in.

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Rajaraman S

    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

    Committee Chairperson

    Dr. Sunil Kumar Sinha

    Principal Economist and Director Public Finance
    +91 11 43567255

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121