Betting on Space [Part 1]: L&T and Hindustan Aeronautics
The world has started to recognize India’s space prowess with the success of the Chandrayaan-3 mission. First country to land on the Moon’s south pole. Only the 4th country in the world to land on the Moon. Executed at a cost of around $75 million, significantly lower than NASA’s planned mission (est. $433 million) to the lunar south pole.
To execute a mission of this level it takes years of planning, design & testing. You need to build rockets. Spacecrafts. Landers. Rovers. Propulsion modules. A bunch of other fancy stuff. You get the gist, this is ROCKET SCIENCE!
ISRO can’t build everything themselves. A lot of components need to be manufactured. You need powerful engines. You need precision engineering solutions. Satellite launch services. You need fuel, gas, liquid petroleum, communication equipments and LOT of other things for a successful space mission. Not to forget a team of scientists working their socks off!
More space missions = More business for companies catering to this segment = More investment opportunities
Indian space industry is currently valued at $8B and is expected to grow to $40B by 2040, which means that business is going to be a boomin’ for several players in this space. [peak wordplay :P]
Who are these players that you should keep in your watchlist? Let’s find out!
#1 Larsen & Toubro (L&T)
When you talk about engineering, construction & manufacturing in India — it would be difficult to not include L&T in that same conversation. It is one of the largest conglomerates in India with a market capitalization of INR 4.1 TRILLION and an engineering behemoth.
It has been a key contributor to India’s space program for the past 50 years, which means that it has a long [and sticky] relationship with ISRO. This matters, because this helps in winning engineering/manufacturing contracts. Plus, the scale of operations at which L&T operates, makes it quite difficult for other players to compete when it comes to pricing, quality and project execution. In India, pricing dictates everything. Growth in the space sector therefore — will directly benefit L&T.
L&T contributed to the Chandrayaan-3 mission by:
Manufacturing and pressure testing of critical booster segments. These booster segments are essential for providing the necessary thrust and propulsion during the launch phase.
Supply of ground and flight umbilical plates. These umbilical connections are crucial for ensuring the proper functioning of the rocket and spacecraft during pre-launch preparations and the early stages of flight.
Production of space hardware and subsystems and launch vehicle system integration.
Currently, space projects constitute a very miniscule part of L&T’s revenue. To put things in context, L&T’s revenue for FY23 stood at INR 183,341 CRORE with major contribution from Infra/Energy/IT projects (refer table below)
Space projects (forming part of the Hi-Tech manufacturing segment) looks like a high margin business. With growth in space missions and increase in private investments— L&T would see good order inflows in the future.
Trading at a P/E of 36 times, L&T is not exactly multi-bagger material but can give decent returns over a period of time and gives you a good bite into the growth of the Indian space industry.
#2 Hindustan Aeronautics Limited (HAL)
HAL is an aerospace and defense company with expertise in manufacturing aircraft, helicopters and related aerospace components and is owned by the Government of India.
The company recently won an order from the Indian Air Force (IAF) to make 100 LCA Mark1A fighter jets helping India reduce it’s reliance on defense imports and push the ‘Make in India’ initiative. From the Government’s perspective, it would make sense to give business to a state owned entity than to a private defense contractor especially in areas of defense and national security. And that plays to the benefit of HAL.
At the same time, HAL is critical for design and manufacture of specific components for Indian space missions. It recently inaugurated its cryogenic engine manufacturing facility in Bangalore, which will cater to the manufacturing of rocket engines for ISRO.
HAL finds itself in a sweet spot. Defense. Space. Make in India. It is playing on several themes.
HAL’s contribution to Chandrayaan-3 mission was as follows:
Supplied metallic and composite structures, all propellant tanks and the bus structure for the rover and the lander.
Supplied various components to National Aerospace Laboratories (NAL) crucial in enabling the Chandrayaan-3 mission.
HAL’s order book stands at INR 82,000 crore as at 31 March 2023 which is almost 3x its FY23 sales showcasing a robust order pipeline. It recently won a INR 860 crore contract from New Space India Limited to construct 5 PSLV rockets [in partnership with L&T]. Revenue segments are not reported in HAL’s annual report, so I don’t know how much money they made from space missions and related activities — but my guess is that it’s not a lot at the moment.
Some concerns that investors should be aware of are — sluggish revenue growth (5Y CAGR of 8%), high dependency on the Ministry of Defense for orders and low export revenues. Any drop in defense contracts could significantly affect the company.
However, compared to peers HAL looks attractively priced at a P/E of 22. Net profits have increased by reducing material costs over the years and a favorable revenue mix. It has been able to maintain a healthy ROCE of 29-31% over the last 5 years.
Conversion of order book to revenues looks slow. High dependency on defense contracts means that any slowdown in defense activity would adversely effect the stock price.
However, valuations looks attractive — even after a stock pop of >60% in the last one year. It has sticky customers like the IAF, various government agencies, Airbus, Boeing. Negligible debt. Good ROE. Dividend yield of >1%. R&D spend of 6-7% of revenues, which is critical to stay relevant in this business.
HAL is not a high growth company, but if you want to invest in a company which is going to be a major beneficiary from the growth in defense and space expenditures — this company should be in your watchlist.
Apart from listed stocks, India is witnessing a MASSIVE BOOM in space-tech startups.
Last year alone > 100 startups registered with ISRO. $205 million in funding has been raised between 2014 to 2023 across 30+ deals. The Government pitched in with exempting GST on startups offering satellite launch services. Skyroot — witnessed its first private rocket launch.
You can’t directly invest in these startups if you’re a retail investor — but if you’re employed in any of them, ask for ESOPS!
I’m going to cover more listed stocks catering to the Indian space sector in the next few articles. Stay tuned!
If you liked this article, share it in your investing network. Comment, like, show some love! I spend a lot of time in research & it would mean the world to me if you could recommend this blog to your friends as well OR you could contribute by donating a small token to fund my research!
[Note: The author is not a SEBI registered investment advisor and the contents of this article do NOT constitute investment advice. Always do your own research before you invest in a company]