Investment Rationale


Revenue growth visibility on strong order book
Hindustan Aeronautics Ltd. (HAL) order book remains healthy at Rs. 82,000 crores for Q1FY24. HAL expects an estimated order value of almost Rs. 48,000 crores to be concluded in FY24. Moreover, the company was awarded an average order book towards Repair and Overhaul (ROH) contracts worth Rs.18,000 crores. HAL expects to reach a double-digit growth of 10% from FY24 onwards, with significant improvement towards the delivery of LCA Mk1A, and HTT-40 aircraft. Even the long-term order pipeline continues to remain robust with projects like i) Tejas MK II, ii) AMCA, iii) TEDBF, iv) IMRH, v) LCH, and vi) ALH expected to provide HAL with a business opportunity of Rs. 4,500 billion over the next decade. Thus, with a robust pipeline in place and expectations of a fair execution, we remain optimistic about the future revenue growth trajectory of the company.

Government’s significant push toward the Aerospace and defence industry
The defense budget increased to Rs. 5.94 lakh crores for FY24 from last year’s allocation of Rs. 5.25 lakh crores. A total of Rs 1.62 lakh crores has been set aside for capital expenditure which includes purchasing new weapons, aircraft, warships, and other military hardware which makes well-established players like HAL a direct beneficiary of this move. Additionally, the government is focusing on developing civil MRO opportunities in India. Tapping into this growing space, the company has strategically emphasized diversifying into the civil market for both manufacturing and MRO opportunities going ahead. Further, the company aims to strengthen its presence in the global markets


Dominant market position along with diversified geographical reach

The company is a dominant market player in the domestic as well as global marketplace, with presence across 10 countries and long-term relationships with reputed global customers. The company committed towards organic growth projects of around $3.5 billion in Novelis & $1.13 billion projects in India are on track. Hindalco’s product offering is significantly diversified with a dominant presence in value-added products such as beverage can sheets, auto body sheets and building  construction items.

Strong operational performance despite adverse market conditions

The company reported an EBITDA of Rs. 6,109 crores in Q1FY24 (vs Rs. 5,818 crores in Q4FY23), up 5% QoQ, supported by recovery in Novelis and India Downstream Business. An enhanced  product mix saw the Aluminium India Downstream Business generate higher value, with Q1FY24 EBITDA increasing 31% QoQ. Despite significant market headwinds, Novelis continued to show sequential improvement in adjusted EBITDA and EBITDA per ton, backed by record sales of automotive aluminum sheets. Its copper business achieved record metal sales and maintained market share despite undergoing a planned shutdown.

Mahindra & Mahindra Ltd

Domestic automobile business growth is driven by the PV segment 

M&M continued its strong performance for August as we believe that the festive fervor has arrived early for the company, especially in the PV and CV segments. We believe that the robust sales  numbers can be attributed to the inventory build-up by dealers in anticipation of strong demand during the upcoming festival season. Additionally, the management indicated the continuing  momentum in the auto segment with the outstanding bookings at 281k units and expects higher capacity and newer models to drive volume growth.

Farm equipment segment driven strong performance despite industry headwinds

Despite an industry decline, M&M reported robust farm equipment segment performance during the quarter led by strengthened leadership through new launches and network expansion. However, farm equipment segment exports faced challenges in markets like the US and South Asia due to industry dynamics and regional issues. The company’s market share in the tractor segment stands at 42.9% and further plans to gain share from the OJA global tractor platform and Swaraj Target to grow in the food production market. With the outlook for tractor segment remaining positive, we expect market share gain to continue through new launches.   


Strong project launch pipeline provides revenue visibility

The company’s Pokhran Thane launch is expected before Diwali 2023 and Kolshet Thane in Q4FY24. The initial phase launch for Pokhran will see 3-4msf of the parallel launch of a residential, international school and a five-star hotel. Apart from these, one high-end sports club and a small 0.10.2msf  high street retail is also expected. The company continues to pursue the closure of a large land acquisition in Gurugram, NCR with a potential GDV of Rs. 50 billion along with a large MHADA redevelopment project in Andheri, Mumbai.

Experienced promoter and professional management reduces execution risks

The promoter of the company has over three decades of experience in executing real estate projects in the MMR. The promoter and the promoter group hold a 67.71% stake in the company, with no pledge against such holding. The company is managed by a team of qualified and experienced professionals. Over the years, the company has executed several projects in the residential, commercial, retail, and hospitality segments and has a good reputation amongst home buyers


Healthy capital adequacy and solvency ratio in the life insurance space 

The life insurer has been able to consistently maintain an adequate capital position. They have a comfortable capital adequacy position and are reflected in the healthy solvency ratio of 2.15 times (as of June 30, 2023) against the regulatory requirement of 1.5 times. The absolute net worth was Rs 13,530 crores as on June 30, 2023 (Rs 11,760 crores a year earlier). Further, the solvency margin remained healthy despite no capital infusion since fiscal 2008. The steady increase in internal cash accrual enables the company to maintain a healthy capital position while achieving strong business growth.

Improvement in operational metrics reflection of superior performance

The insurance company witnessed a notable improvement in its longer duration persistency. The 61st-month persistency improved to 56.7% in Q1FY24 from 50.3% in Q1FY23 led by a focus on better quality of business and leveraging technological capabilities to provide a superior customer experience. Additionally, the value of new business margin remained healthy at 28.8% in Q1FY24.


Strong leadership position and well-established brands augur well for the company

United Spirits is a leading beverage alcohol company due to its leadership position in the spirits  industry in India, with well-established brands such as McDowell’s No.1, Royal Challenge, Signature, and Antiquity along with Diageo’s iconic brands such as Johnnie Walker, VAT 69, Black & White, Smirnoff, and Ciroc. We believe that the company’s pan-India presence along with its diversified product portfolio across product categories (Scotch whisky, IMFL whisky, brandy, rum, vodka, gin, and wine) and price points makes it a formidable player in the highly fragmented alcohol beverages industry. Moreover, the company’s strong subsidiary support from Diageo Plc in terms of operations and technical aspects ensures a competitive advantage for United Spirits compared to other players in the industry. The favourable industry dynamics along with the comfortable balance sheet position offer further confidence about the growth prospects.

Easing raw material prices, price hikes and upcoming festive season key triggers ahead 

We believe that the alcohol beverage sector has benefitted from the easing of key raw material prices. Additionally, the recent price hikes in Indian-Made Indian Liquor (IMIL) in a subdued volume environment have supported gains for the company. On the volume front, we anticipate strong  upcoming festive demand backed by the ICC World Cup to be positive for the sector for the next few quarters. Further, the rise in on-trade socialization and the revival of global travel indicates a    promising season ahead for the company. 


Capacity expansion and commissioning of new facilities bodes well for growth

The company commissioned its production facility in Rajasthan and Madhya Pradesh, as well as expanded capacity in six of its existing locations. Along with this, the company is undertaking a green-field expansion in Maharashtra, Uttar Pradesh, and Odisha. This increase in production capacity is in line with the company’s aim to augment its juice and dairy-based beverages business. Additionally, this will reduce the company’s dependence on the Northern region before the commencement of the next season. Incorporation of the new subsidiary ‘Varun Beverages South Africa (PTY) Ltd.’ in Johannesburg, South Africa can be considered as the next growth driver for the business. The market size is around 1 billion cases, with the industry size expected to be around 50% of the Indian   market.

Resilient quarterly performance despite soft demand environment in India 

VBL registered a 13.6% YoY revenue growth to Rs. 56,997.3 million in Q2CY23. The revenue was above market expectations of Rs. 53,746.6 million, with volumes of 314 million cases compared to 300 million cases in Q2CY22. The EBITDA and PAT showed an annual growth of 20.8% and 25.4%, respectively, in the current quarter. The company delivered such resilient results despite the unseasonal rains causing subdued demand in the overall market.

Click here to view the detailed report.

You might also Like.