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: HAL is majorly owned (89.97%) by the government of India (GoI, Fitch Ratings Ltd: Issuer Default Rating: ‘BBB-’/Stable). The company has strong linkages with the sovereign, given it undertakes manufacturing, repairing and overhauling 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 2017 and 30 September 2017. The non-fund based facility is mainly used for raw material imports.


Strategically Important Entity: HAL is strategically important to the GoI. Any disruptions 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. On 16 March 2018, it offered 34,107,525 shares through an initial public offering and received bids for 33,642,996 shares, representing 98.6% of the shares offered. Post the initial public offering, the GoI holds 89.97% of shares.


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. As of 31 December 2017, HAL’s order book was valued at INR684.61 billion. HAL’s domestic sales remained at about INR116 billion on an average over FY11-FY17. HAL faces production constraints due to high gestation period orders of its major customer. However, it benefits from high-value orders and advances. In 2017, HAL manufactured 56 new aircraft and helicopters, in addition to engines and accessories, at its various sites.


Dependent on Raw Material Imports: In FY17, cost of materials and employee costs (54.51% and 23.16%, respectively) were the major components of expenditure. Cost of material was INR20.68 billion in 1HFY18 (FY17: INR84.01 billion, FY16: INR88.05 billion) and employee cost was INR17.92 billion (INR35.69 billion, INR32.62 billion). At present, the majority of its raw material requirements are met through imports (FY17: 86.49%; FY16: 88.73%). 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 24.40% in 1HFY18 (FY17: 26.26%, FY16: 26.65%). Average EBITDA margin was about 23% over FY12-FY17. Net profit margin improved to 13.77% in FY17 (FY16: 8.94%) mainly due to lower tax expenses. Ind-Ra expects net profit margin to remain stable on account of continuous orders

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 INR107.34 billion worth of contingent liabilities in FY17 (FY16: INR88.44 billion) towards statutory dues such as sales and income tax. It continues to maintain huge cash reserves (FY17: INR111.21 billion (59% of FY17 revenue), FY16: INR133.03 billion (72% of FY16 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.


FINANCIAL SUMMARY

 

Particulars

FY16

FY17

Revenue (INR million)

184,982.81

189,960.90

EBITDA (INR million)

41,429.09

43,056.50

Trade payables (INR million)

21,512.20

17,972.20

Trade receivables (INR million)

51,318.19

42,102.80

Operating income (INR million)

169,194.53

179,518.50

Operating expenses (INR million)

124,111.42

132,378.70

EBITDA margin (%)

22.4

22.67

Operating margin (%)

26.65

26.26

Debtors collection period (days)

110.71

85.6

Days payable outstanding (days)

63.27

49.55

Source: HAL


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

23 March 2017

30 March 2016

Non-fund-based working capital limit

Short-term

INR20.5

IND A1+

IND A1+

IND A1+

Fund-based working capital limit

Long-term

INR4.5

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments, please 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.

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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

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121