Why HAL Share Price is Falling

In recent years, the defense sector has been a beacon of optimism and robust performance, with many stocks enjoying meteoric rises in value. Investors have eagerly capitalised on this trend, turning many defense stocks into multibaggers.

Among the star performers in this rally was Hindustan Aeronautics Limited (HAL), which saw its share price soar an astonishing 1,339.2% over the past five years. This surge not only underscored HAL's pivotal role in the sector but also made it a veritable gold mine for investors seeking substantial returns.

However, the elation surrounding HAL's stock seems to have hit a sudden snag in the past five days, as its share price plummeted by a sharp 12%.

This dramatic drop begs the question: what is causing this sudden downfall? Let's find out.

#1 Profit Booking

The recent decline in HAL's share price can be attributed to profit booking by investors and the stock's high valuations. After a remarkable performance and substantial price appreciation, many investors decided to lock in their gains.

This profit booking is a common occurrence, especially after significant upward movements in share prices.

Adding to this, HAL's stock is currently trading at an expensive valuation with a price-to-earnings (PE) ratio of 48 and a price-to-book (PB) ratio of 12. High valuations can make a stock more vulnerable to price corrections, as any negative news or performance can have a significant impact.

If HAL fails to meet growth expectations, the stock is likely to suffer, as much of the optimism is already priced in.

#2 FII Selling

Another factor contributing to HAL's recent share price decline is the selling activity by foreign institutional investors (FIIs).

FIIs have reduced their stake in HAL, which triggered a downward trajectory in the stock price. At the end of December 2023 quarter, FIIs held a 12.9% stake in HAL, but by the end of June 2024 quarter, this stake had decreased to 11.7%.

FIIs are influential market participants, and their buying or selling actions can significantly impact stock prices due to the large volumes they trade.

When FIIs start selling, it often creates a ripple effect, prompting other investors to follow suit, further driving down the stock price.

Additionally, mutual funds have also reduced their stake in HAL, from 6.8% in March 2024 to 5.9% in June 2024.

This simultaneous reduction in holdings by both FIIs and mutual funds indicates a cautious sentiment among institutional investors, contributing to the recent decline in HAL's share price.

Why This Fall May be a Temporary Blip

Despite the recent decline in HAL's share price, several factors suggest that this may be only a temporary setback.

The company is aggressively promoting its products globally, especially the Tejas aircraft and the Advanced Light Helicopter (ALH). These efforts could significantly boost its international sales and market presence.

HAL has also partnered with Airbus to establish a maintenance, repair, and overhaul (MRO) facility for the A320 family of aircraft in New Delhi. This MRO hub aims to provide a comprehensive solution for commercial airlines, potentially increasing HAL's revenue streams.

Another strategic move is HAL's collaboration with Israel Aerospace Industries (IAI) to convert civil aircraft into multi-mission tanker aircraft. This partnership is expected to enhance HAL's revenue and profitability by tapping into new business segments.

Similarly, HAL's tie-up with Safran, a French aircraft engine manufacturer, to develop a sales and support ecosystem for helicopter engines in India, promises to fortify its market position.

HAL's order backlog stands at Rs 940 billion (bn), which is three times its FY24 revenue. To meet this demand, the company is expanding its manufacturing capacity for both aircraft and helicopters.

A new facility for helicopter manufacturing is being set up in Tumkur, while a facility for Tejas aircraft manufacturing is under construction in Nashik, expected to be operational by October 2024.

The company's fundamentals remain robust. HAL is debt-free and enjoys high return ratios around 25%.

For the financial year 2024, HAL reported a 12.8% year-on-year (YoY) increase in revenue, a 25.4% increase in operating profit, and a 3.4% increase in net profit. Management has also guided for double-digit revenue growth over the next few years, along with stable operating margins of 26-27%.

Strong cash flows have enabled HAL to maintain good dividend payouts, with a final dividend of Rs 13 per share declared for FY24.

One of HAL's key business lines is the maintenance, upgrade, and overhaul of various aircraft, which includes integrating new weapon systems and software upgrades. This expertise has been a crucial driver of the company's success and will continue to be so in the future.

While the recent share price decline may cause concern, HAL's strong fundamentals, strategic partnerships, and robust order book suggest that this could be a temporary blip. However, investors should remain cautious, as high valuations still pose inherent risks.

How HAL Share Price has Performed Recently

In the past five days, HAL share price has tumbled 12.6%. In the last month, it is down 8.9%.

In 2024, so far its share price is up 71.2%. Additionally, it has rallied 151.6% in the last one year.

The stock touched its 52-week high of Rs 5,675 on 9 July 2024 and a 52-week low of Rs 1,767.9 on 26 October 2023.

About HAL

HAL is an important player in building India's defence infrastructure. It is the only Indian company to have specialisation in manufacturing and maintaining aircraft services.

To make the best out of the resources available, the company spends around 7% of its revenues into the research and development activity every year.

Additionally, as the company has focus on growth and expansion, they have signed memorandum of understanding (MOU) with several companies.

This includes -

• An MOU with Israel Aerospace Industries to convert civil aircraft to multi-mission tanker.
• MoU with Safran, a French company which manufactures aircraft engines to set up a development, sales and support of helicopter engines.

For more details about the company, you can have a look at the HAL fact sheet and quarterly results on our website.

You can also compare the company with its peers.

HAL vs Bharat Dynamics

HAL vs Paras Defence

To know what's moving the Indian stock markets today, check out the most recent share market updates here.

Happy Investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...