Will disinvestment help HAL take wings?
Hindustan Aeronautics Ltd, or HAL, is at the top of the government’s disinvestment list. In 2013, the government hopes to offload 10 per cent of its equity in the aviation company in an initial public offer (IPO). The move is a part of the government's larger plan to raise Rs 30,000 crore by selling its stake this financial year. The induction of non-government shareholders in the Bangalore-headquartered maker of aircraft, engines, components and accessories, if the IPO happens, will complete a circle of sorts. HAL traces its roots to a company called Hindustan Aircraft, which was set up in December 1940 by Seth Walchand Hirachand in association with the then princely state of Mysore. The government became a shareholder in 1941 and took over the management in 1942. In 1964, it was merged with Aeronautics India and Aircraft Manufacturing Depot, Kanpur, to form HAL.
HAL has a virtual monopoly in the sector. It is only now that large business houses (Tata, Godrej, Mahindra and Larsen & Toubro, to name a few) have shown interest in defence. But, they are all too small when compared to HAL, though at least one of these business houses, Mahindra, is known to be very keen to build its aviation business. As a result, HAL’s financial performance has been strong and steady (see table). It reported a profit before tax of Rs 3,200 crore on sales of Rs 14,001 crore in 2011-12. Its net profit margin has been upwards of 17-18 per cent. Its capital assets have risen from Rs 8,143 crore in 2008-09 to Rs 9,628 crore in 2009-10 and then to Rs 11,230 crore in 2010-11. HAL has huge land parcels in places like Bangalore, Nashik, Koraput (Odisha), Hyderabad, Lucknow and Kanpur. In Bangalore alone, it is said that the company owns around 900 hectares. The debt on its books is negligible. This makes the company an attractive buy. Also, say people in the know of things, the company sells on a cost-plus basis to its buyers, largely the Indian Air Force, and that leaves no room for negotiations on prices. On the flip side, there is no incentive for the company to become more efficient and prune costs.
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The finances also indicate that the company has not pursued growth aggressively. The cash and bank balances, including short-term deposits at the end of 2010-11, the last year for which such information is available, stood at Rs 20,099 crore, against Rs 18,657 crore for the previous year. This has often led observers to criticise the company’s conservative cash management. HAL, on its part, has indicated in the past that it is conserving cash to make investments in new facilities in the future. But, the company has often complained that it gets piecemeal orders from the Indian Air Force. In the absence of large orders, the company has alleged, it cannot invest in production lines and reap economies of scale. Till then, the company has been happy to pay handsome dividends to its only shareholder, the government. For 2011-12, for instance, it has paid dividend of Rs 814 crore in two installments, which is 6.75 times its paid-up share capital of Rs 120.5 crore.
HAL’s bread-and-butter business is licensed assembly of aircraft and helicopters. Whenever the Indian Air Force places a large order with a foreign aircraft maker, that company outsources production to HAL. In fact, this is a criticism often levelled at HAL: It is content to be a licensed producer of foreign aircraft, but does not design Indian planes. Last year, in an interview with Business Standard, HAL’s outgoing chairman & managing director, Ashok Nayak, had said that at least one aircraft made by the company, the HF-24 Marut fighter, more than 120 units of which were sold to the Indian Air Force, was “prevented from being a thumping success by foreign countries, which ensured it was not supplied with a suitable engine".
Still, the order book looks strong. In 2010-11, HAL had firm orders for helicopters and aircraft such as the Su-30MKi, Hawk, Dornier and Chetak worth Rs 68,265 crore. The major orders were for the Hawk (Rs 9,500 crore) and the light combat aircraft, or LCA, (Rs 5,989 crore). Some observers say the current order book does not leave HAL much scope to acquire new technologies, which can play a dampener because most of these are contracts for assemblies and involve no technology transfer. “The type of procurement is what dictates if it is desirable (from a technological viewpoint). Buying and making aircraft such as the medium multi-role combat aircraft (MMRCA) is an issue that needs to be considered in detail. While Rafale will give some aircraft in flying condition to the defence forces, the rest will come as kits to be assembled. It’s more like completely knocked down kits," says a person who retired from a senior position at HAL while expressing his scepticism of the shape HAL would take in the coming days. He adds that though the assembly line of MMRCA is ready, there’s no technology transfer.
This person points out another complication. “HAL has so many projects and, therefore, technologies from so many countries. It has Russian, British, Italian and French (technologies) among others. It’s a challenge of post-modernisation that we need to prioritise the technologies to focus on and retain. So, the company needs to correct the project pipeline. Some projects involve just fitting the required components," says he. But he is hopeful that after the IPO, when independent directors are inducted on the HAL board, such questions may be raised. “It’s a good thing the govt is going in for divestment of HAL. There’s value in the IPO," he adds.
HAL, which now outsources about 20-25 per cent of its work, is planning to enhance it to 30 per cent of the work content, while moving up the value chain. HAL claims it has brought about a paradigm shift, from a purchase-focused organisation with controls and validation-oriented systems and procedures for all its purchase, to partnership building through a well-defined architecture. This will help the shift to the role of an assembler/integrator of flying platforms and focus on manufacturing will shift to HAL’s partners/suppliers. “The company will retain the core technologies and focus on design and development," according to the company.
Another criticism HAL often faces is that, in spite of being around for a long time, it has not hedged its risks properly. It is still too dependent on the Indian Air Force for orders. The HAL website lists a whole list of customers apart from the Indian Air Force: The Indian Army, the Indian Navy, the Coast Guard, Defence Research & Development Organisation, the Indian Space Research Organisation, the Border Security Force, Oil & Natural Gas Corporation, the Geological Survey of India and governments of Jharkhand, Karnataka and Maharashtra. It also lists exports to about a dozen countries including USA, France, Vietnam Malaysia, Oman, Thailand, Israel and Russia. Numbers suggest HAL’s export growth has been very inconsistent: It fell from Rs 436 crore in 2008-09 to Rs 204.67 crore in 2009-10 and then increased to Rs 237 crore in 2010-11. It was less than two per cent of the total sales in 2010-11. But, things could improve in the future. Export orders worth Rs 352 crore were booked in 2010-11, including orders for the supply of avionics for Su-30 MKI to Rosoboronexport, and supply of spares, services and technical assistance to Malaysia towards maintenance of helicopters and aircraft.
|STEADY SHOWING |
HAL’s financial health
|In Rs crore||2009-10||2010-11||% growth|
|Profit before tax||2,688||2,840||5.65|
|Profit after tax||1,967||2,114||7.47|
|Earnings per share (in Rs)||163||175||7.47|
|Value added per employee||0.12||0.13||8.3|
Analysts have no clarity on how will divestment affect the company in the days to come. “Will it enforce better corporate governance? The answer is yes. There will be pressures to deliver growth, as any publicly-held entity should. So, there would be a better focus on improving efficiency, profit margins, and revenue growth," says KPMG Director Neelu Khatri. A former senior HAL functionary adds: “Ten or 20 years down the line, HAL will not exist in its present form because it will have to live in a competitive environment. As it will have external directors who are answerable to investors, there will be pressure to perform."
The disinvestment in HAL could improve productivity and quality. A good example of this is Rolls-Royce which was largely government-held at some point in time. But, today, it’s got huge global orders.
“If that is anything to go by, it's a great move by HAL. It’s an opportunity which will bring about a large degree of efficiency improvement, accountability and become more competitive in the market, though I don’t think there’s any benefit to the private sector," says a vendor of HAL.
“Bringing in public money brings in an amount of accountability and responsibility to the shareholders and stakeholders, and it brings in a degree of competitiveness," says Subramanian, vice-president (strategic initiatives), Quest Global Engineering, which is into aerospace engineering. Such companies become far more competitive globally when they induct public shareholding, he adds. Stock market analysts are already positive about HAL. “HAL had a good Rs 400 crore rise in its profit year-on-year. They give the comfort they will be able to command a good price. The market conditions are difficult though, and the policies are jammed up, and investor sentiment is not positive," says a stock market analyst.