Inside HAL’s 37x P/E: Decoding the defence giant’s valuation premium

Source: Screener.in

Another lens to view the rally is its order book, which doubled in FY25 to Rs 1.89 lakh crore even as revenue growth plateaued at just 2%.

This raises important questions: Why is the stock rallying while sales and earnings lag? How should valuation multiples be interpreted? What is driving HAL’s premium?

What drives HAL’s valuation?

HAL’s core business is maintenance, repair, and overhaul (MRO) services for aircraft, helicopters, and power plants. MRO accounts for 70% of its revenue and is the key source of stable cash flow, zero debt, and dividends. However, it is not the main growth engine.

Growth comes from manufacturing, an area HAL has been expanding since 2023 in line with India’s push for defence indigenisation.

In manufacturing, HAL builds light combat aircraft (LCA) and light combat/utility helicopters (LCH) for the Army, Air Force, Navy, and Coast Guard. It also produces engines and components. However, India has never built a fully indigenous aircraft; even the LCA Tejas Mk1 relies on imported GE-404 engines.

Thus, when India signed a technology-transfer agreement for GE-414 engines, intended for the Tejas Mk2, HAL’s stock surged.

HAL’s Stock Price Momentum from 2023 to 2025

Source: Trading View

Supply bottlenecks slow growth

The IAF ordered 83 Tejas Mk1A jets in 2021, but due to GE’s delayed delivery of engines, the first GE-404 engine arrived only in April 2025, and the fourth in October. With supply finally picking up, the IAF ordered 97 more Tejas Mk1s in August 2025.

Meanwhile, technology-transfer discussions for the GE-414 engine are nearing completion.

These delays, combined with the 2024 election cycle, dampened HAL’s momentum as sales stagnated and inventory piled up. However, optimism around resumed engine deliveries pushed the stock up more than 60% between March and May 2025.

This supply-chain bottleneck explains much of the mismatch between HAL’s rising order book and sales and EPS growth. Higher inventory inflates working-capital needs, but HAL’s zero debt and Rs 38,000 crore cash reserve provide ample flexibility.

HAL’s next growth phase

HAL is now expanding its capacity to execute its Rs 1.89 lakh crore order book and capability to manufacture fully indigenous aircraft and helicopters through R&D investment.

It has opened a third Tejas production line in Nashik that will increase annual capacity from 16 to 24 aircraft, and is partnering with private companies to push capacity beyond 30 aircraft by FY27.

With supply issues easing and manufacturing ramping up, analysts expect revenue growth to accelerate. Brokerages such as Citi and Nuvama project HAL’s revenue CAGR rising from 8% in FY22-25 to 16% and 21%, respectively, in FY25-28. However, HAL’s management remains conservative, guiding for 8-10% growth in the near and medium term.

HAL diversifies revenue streams

HAL is broadening beyond defence aviation into space and civil aviation.

In September 2025, it signed a technology-transfer pact with ISRO for the Small Satellite Launch Vehicle (SSLV), forming the base of HAL’s space division.

In October, it signed an MoU with Russia’s United Aircraft Corporation (UAC) to manufacture the SJ-100 civil commuter aircraft. If things materialise, it will be the first time a complete passenger aircraft will be produced in India.

HAL also partnered with Airbus to set up an A320 MRO facility in Nashik, expected to generate revenue from FY27.

These initiatives reduce HAL’s dependence on defence budgets. However, due to long gestation periods, the stock has not immediately reacted. The current 7x P/E ratio has already priced in the short-term revenue and earnings potential.

HAL and its high risk

Manufacturing carries risks. In January 2025, an Advanced Light Helicopter (ALH) Dhruv crash led to the grounding of all ALHs in the Coast Guard and delayed new deliveries. This led to a 25% drop in HAL’s stock in the first two months of 2025. The rebound came only after GE engine deliveries resumed.

Diversification will help HAL offset such product-specific risks.

The company continues to invest in quality improvements and aims to increase indigenisation in the medium term, with long-term plans to export aircraft and helicopters.

What analysts have to say about HAL

Analysts’ Rating on HAL

Source: Brokerage reports

Analysts remain bullish due to HAL’s stable revenue, earnings growth, and a strong order pipeline, which gives 7-8 years of revenue visibility. The next major rally could occur once GE-414 technology transfer concludes or manufacturing execution improves further.

HAL’s balance sheet, long-term growth prospects, and dominant position in India’s defence aerospace sector make it a compelling long-term value stock.

Note: We have relied on data from http://www.Screener.in throughout this article. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information.

Puja Tayal is a financial writer with over 17 years of experience in the field of fundamental research.

Disclosure: The writer and his dependents do not hold the stocks discussed in this article.

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