The Investment Yield of an Aero Shield

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The stockmarket debut of India's only fighter-jet maker

IN ENGLISH, A ‘red herring’ is a distraction, a figurative smelly fish that describes a device to throw you off trail. In business, it refers to the prospectus of a public offer, a document that explains how an enterprise expects to make you money. Now that Hindustan Aeronautics Ltd (HAL) has filed such a draft with SEBI for an IPO, a debate appears to have arisen over the irony of the term—or lack thereof.

When the Centre set up HAL in 1964 as a state-owned aircraft maker, its purpose was clear. Its job was to equip Indian defence forces with armaments for air combat. The strategic aim was ‘self sufficiency’, a national objective that would acquire other adjectives as the decades rolled by; ‘Mirage’, for example, was particularly popular in the 1980s after India decided to import French fighters by that name for its Air Force, a word flung back to memory by Delhi’s recent 36-Rafale acquisition. To critics, ‘Hal’ was always more of a ‘lucination’ than a corporation.

Yet, HAL has much to its credit. It makes the Sukhoi-30 on licence from an eponymous Russian firm with competence enough to keep Air Force pilots confident of keeping Indian airspace secure. By virtue of a similar deal, it also makes the Hawk, a British trainer jet that young recruits are eager to earn their wings by. HAL hopes to find an export market for a combat version of it developed jointly with BAE. As a feather in its own R&D cap, the Bengaluru- based company boasts of Dhruv, a light helicopter that can perform civilian as well as military roles. It also has an unmanned plane, the Lakshya. Its great big hope, however, is pinned on its long- awaited light combat aircraft, the Tejas, which was designed in alliance with DRDO’s Aeronautical Development Agency and is finally under production.

Seen as a business rather than the repository of a state fantasy, HAL does have a story of profit potential to sell investors. It claims to have orders for 40 Tejas and 35 Sukhoi planes right now, with 83 more of the former likely to be requisitioned. What’s more, it adds to its income by churning out gas turbines, prides itself in its avionics expertise, makes parts for ISRO’s space launches and does not depend on state funds for its existence. On revenues of Rs 17,406 crore in 2016-17, the company reported pre-tax profits of Rs 3,294. In short, if a share is priced at a reasonable ratio to its earnings, it’s likely to attract interest.

Had HAL been up for outright privatisation, its ownership would have commanded a hefty premium, but the Government plans to offload just 10 per cent of its equity and retain full control of its management. This is easily justifiable on prudential logic: why let go of a captive defence supplier? What could prove vital here is an ability to crank out fighters not just at short notice in case of a war contingency, but also at low cost. The efficiency to ensure as much could depend on how well it responds to the pressure of competition. After all, private defence suppliers hope to enter the arena too: while Reliance has a joint venture with Dassault to make its Rafale here, Tata reportedly has a tie-up with Lockheed Martin for locally assembled F-16s, even as Adani engages Sweden’s Saab for its Gripen jets.

Given all that’s headed HAL’s way over the horizon, the Tejas looks like the fulcrum on which its fortunes will turn. Reviews of this fighter have been so sharply split that few know how good or bad it really is. Critics have scoffed at it, saying it’s not even worthy of a role in a lousy Bollywood remake of Top Gun. Other analysts of defence affairs have declared themselves both impressed with the aircraft and convinced of a conspiracy to run it down on behalf of shadowy interests in the arms trade.

Some perceptual gaps among aam investors might be traceable to confusion over what’s under its hood. Its earlier Kaveri engine was replaced with a GE import a few years ago, while its Mark 2 upgrade in the works has an even more powerful variant that has thrust its flight performance into a new league. Advocates of its bulk induction by the Air Force and Navy say that its overall build, avionics and other elements of hi-tech wizardry—mostly done inhouse—have acquitted themselves rather well under all manner of battle simulations.

India will get its Tejas squadrons alright. What’s unclear is whether other countries will want some of their own. For HAL to join the world’s aeronautical elite, it needs something of an export breakthrough. An order from overseas is all it would take to send its scrip soaring.