Hindustan Aeronautics' Initial Public Offer

The HAL IPO is a good albeit slightly expensive investment. If you compare it with the general pricing trend, it is reasonably priced. I normally avoid subscribing to IPOs. I always prefer to wait and buy the shares in the secondary markets (stock exchanges) when the markets are depressed. Therefore I recommend the same to you. However, if you believe in subscribing to IPOs, you may invest. Hindustan Aeronautics Limited is decent central public sector company. It is profitable, has negligible borrowings and paying good dividends. The business outlook is also good.

The Company

Hindustan Aeronautics (HAL) is a state-owned company enjoying Navratna status. It is the largest Defence Public Sector Undertaking (DPSU) in India. HAL is engaged in the design, development, manufacture, repair, overhaul, and upgrade and servicing of a wide range of aircraft, helicopters, aero-engines, avionics, etc.

HAL was established as a private company by Shri Walchand Hirachnad in the year 1940 in Bangalore. He established the company with a purpose to manufacture aircraft in India. The company has grown from this humble beginning to the present stature of the largest defence PSU, gradually over the years.

HAL’s Financial Highlights

You can see that Hal’s operational results decent. An ‘earnings before tax (EBT)’ margin of 13.65% is good even though not fantastic. Its ‘profit after tax (PAT) margin also is reasonable at 14.15%.

We can see from the balance sheet that HAL has negligible borrowings. This is the very good management of the company. It also has a significant cash and cash equivalents at Rs.11,153.34 crores. I don’t know why the company is having a high figure of other current liabilities.

HAL IPO at a Glance

The Government of India is bringing out this IPO of the size of 4,200 crores entirely as an offer for sale (OFS) of 3,41,07,525 shares (10.2 percent stake) it owns. The lead managers have fixed the price band between Rs 1,215 to Rs 1,240. They are offering a discount of Rs 25 per share to retail investors.

HAL IPO Price Evaluation

I evaluate the HAL IPO based on various important aspects in the following paragraphs.

Price to Earnings Ratio

The offer fixes the price to earnings ratio or the ‘PE Multiple’ at a reasonable at 17.08 times. I have derived this from the 2016-17 financial year’s consolidated profit and loss account. Even though the value investing principles recommend a maximum PE multiple of 15 times, if you look at the general trend of IPO pricing it is reasonable.

Price to Book Value Ratio

However, if you look at it from the price to book value ratio (P2BV) angle, it is very expensive. The P2BV ratio is 8.70. But value investing recommends a maximum multiple of 1.5. I assess the total book value per share at Rs.142.61. But, If I consider the book value based only on tangible assets, it is Rs.136.30. I wonder how an assets heavy aircraft manufacturing company like Hindustan Aeronautics Limited can have such low book value per share.

Dividend Yield

HAL has distributed a dividend of Rs.22.13 per share for the financial year 2016-17. This dividend translates into a poor dividend yoeld of 1.78%. But please don’t come to the conclusion that HAL is stingy in paying dividends. HAL has distributed Rs.800 crores as dividends for the financial year 2016-17. This means that HAL has distributed 30.48% of its net profits of Rs.2624.81 crores by way of dividends. Thus HAL has distributed a handsome portion of its net profits in the form of dividends. So the high IPO price is the real culprit behind the low dividend yield.

Conclusion

Finally, I conclude that the issuers of this HAL IPO have fairly fixed the price. It is reasonable from the PE perspective. But from the P2BV perspective, it is expensive. The IPO price makes the dividend yield low. While I would wait and buy HAL shares on the secondary market later, if you are keen on subscribing to this IPO, you may. Investing in HAL at this price of the share is not bad.

Credible Stock Market Tips for October 2017

Investors look forward to credible stock market tips at the beginning of every month for investing. The stock news is full of junk tips from equally rubbish quacks. So what the investors are looking for is credible stock recommendations. So, as usual, I write this monthly article providing reliable stock market tips based on sound logic.

This month, October 2017,  I have liberalised the rules for buying stocks a bit.

Why?

Because the market is too hot. Perhaps there is excess liquidity in the market? Of course there have been a few crashes in September but still, the stock market is at a high. The scorching markets have made stocks expensive across the board. And if we don’t make the belt loose we will not be able to buy any stocks and do justice to the good companies listed in the ‘Portfolio2K15‘.

As in the last month, I have tightened the dividend yield criterion this month too. But unlike last month, this month I set a hurdle rate of a minimum 4.00% dividend yield. Only those stocks that jump over this hurdle will get allocation under this category.

I have set a liberalised yet strict rules such that besides being a member of our ‘Portfolio 2K15’, the stocks shall satisfy the four criteria prescribed below:

1. The Price to Book Value (P2BV) Ratio shall be less than 1.50. This means we will allocate money to a stock under this rule to only those stocks that are available at or at a discount to the price to book value ratio of 1.50. This is liberalization from a stringent 1.00 earlier.
2. The Price to Earnings (PE) Ratio shall be below 15. This is again liberalization from the tough hurdle of 10 earlier.
3. The product/ combination of PE*P2BV shall be less than 22.50 (1.5*15)
4. The Dividend Yield shall be more than 4.00%. This is tightening from the last month’s 3.50%. Further, a mere good dividend yield is not sufficient. In addition, the stock must have passed at least one of the three previous tests. Meaning if the share proves expensive under the P2BV, PE and PE*P2BV criteria, it is ineligible for allocation merely on the grounds of an attractive dividend yield.

The total investable sum is taken as multiples of 20,000, that is Rs.20,000, 40,000 or 120,000 and so on, depending on the investible surplus available with the investor.

The basic unit of 20,000 is equally distributed among the four criteria at Rs.5,000 each or multiples thereof.

Summary of Stock Market Tips/ Recommendations

This October 2017 all the stocks constituting our Portfolio 2K15 qualified, however National Aluminium Company Ltd., whose price had appreciated throughout September, though managed to qualify could not earn enough allocation even to buy a single share! On the other hand MOIL Ltd., which could not earn enough allocation for many months in past made the mark this month.

13 stocks qualify for investment in October 2017. An unlucky 13? Please don’t bother. I assure you that these 13 stocks will be the luckiest thing ever happened to you.

Stock Market Tips Based on Price to Book Value Ratio

Let us examine the stocks under the important price to book value ratio criterion.

Stock Recommendation Based on Price to Earnings Ratio

Please see the table depicting the stock recommendation based on price to earnings ratio criterion.

Stock Market Tips Based on PE x P2BV Criterion

The product of the price to earnings and price to book value ratios is also an important criterion. As per value investing principles, this number shall not be more than 22.5 (1.5 * 15). Let us see what stocks pass this test.

Stock Recommendation Based on Dividend Yield Criterion

The dividend yield is an important aspect in stock selection. Let us see how our stocks fare under this key criterion.

We see that five of the 14 stocks could not pass the hurdle.

Conclusion

To conclude my stock recommendation for this October 2017 is to buy the 13 stocks in the recommended numbers for each 20000 of your investment. Happy Deepavali and investing!