Sunday, March 18, 2018

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.

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.


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