HAL’s record turnover masks concern over dwindling order book

HAL's cash cow, the Sukhoi-30 line at Nashik, will soon go dry

By Ajai Shukla

Business Standard, 2nd April 18

On Monday, Hindustan Aeronautics Ltd (HAL) announced a record turnover of over Rs 18,000 crore rupees (provisional and unaudited) for the financial year (FY) ending March 31, 2018, narrowly edging past last year’s audited turnover of Rs 17,605 crore.

“During the FY 2017-18, the company has produced 40 new aircraft/helicopters and 105 new engines. The company has also carried out overhaul of 220 aircraft/ helicopters and 550 engines”, said a HAL release today.

Even so, company sources told Business Standard they are concerned about HAL’s dwindling order book, with the Sukhoi-30MKI production line at Nashik – its main cash cow – having almost completed delivery of the 222 fighters ordered by the Indian Air Force (IAF).

Priced at over Rs 500 crore each, HAL has barely 30-32 Sukhoi-30s left to build, and those will be delivered by 2020-end. With little progress on the India-Russia proposal to develop, and then manufacture, the eponymous Fifth Generation Fighter Aircraft (FGFA) at Nashik, the future of the Sukhoi-30 production line is uncertain.

Nor was the announcement of fresh orders this year reassuring. “The company has received order of 41 Advanced Light Helicopters and 8 Chetak helicopters from Indian Armed Forces in the FY 2017-18”, stated HAL on Monday. The total value of these orders is no more than Rs 3,000 crore.

For long an Indian aerospace monopoly, HAL once boasted of orders in hand worth Rs 150,000 – 200,000 crore – amounting to a production backlog for eight-to-eleven years at current rates. Besides the Sukhoi-30, there were orders for Jaguar fighters, Hawk advanced jet trainers, Dhruv advanced light helicopters (ALHs) and the Tejas light combat aircraft.

But now HAL chief, T Suvarna Raju, tells Business Standard: “I have just Rs 69,000 crore of orders, including 30-odd Su-30MKIs and seventy-plus Dhruv ALHs. That is barely three years work, at our current turnover.”

HAL’s meagre order book is assessed to be a reason for the underwhelming response to the company’s initial public offering (IPO) last month. Retail investors subscribed to just 40 per cent of their quota leaving it to domestic financial institutions and mutual funds to rescue the IPO.

One silver lining in HAL’s announcement on Monday was the initial operational certification (IOC) of the indigenous Light Combat Helicopter (LCH), an important milestone towards production. In December, the IAF and army initiated the purchase of the first 15 LCHs – an order worth Rs 3,465 crore.

Eventually, the army plans to induct 114 LCHs and the IAF is committed to buying another 65 – orders worth Rs 41,350 crore at the current price of Rs 231 crore per helicopter. However, this production will be spread over about a decade.

HAL anticipates another income stream from the production of 187 Light Utility Helicopters (LUH) and up to a hundred HTT-40 basic trainers, both of which are being indigenously developed in Bengaluru.

In December, Raju told an aerospace industry gathering in New Delhi that they could participate as sub-vendors in these two projects, which would generate income worth about Rs 12,500 crore. This would include the manufacture of 100 HTT-40 trainers for Rs 45-50 crore each, and 187 LUH for about Rs 40 crore each.

Notwithstanding the complexity of helicopter development, HAL’s major income stream has always come from building fighter aircraft. Besides earlier commitments for 40 Tejas light combat aircraft (LCA), the defence ministry kickstarted the procurement of another 83 Tejas Mark 1A fighters in December. At an anticipated cost of Rs 400 crore per Tejas Mark 1A, that contract would amount to about Rs 33,000 crore.

“We are trying to get the IAF to convert that into a firm contract for 83 Tejas Mark 1A, which would improve our production planning, and our order book”, says Raju.

However, HAL has faced recurring problems in ramping up Tejas production even to the initially targeted eight fighters per year. The planned production rate of 12, and then 16 Tejas per year, is some way off.

That leaves HAL Nashik heavily dependent on orders for overhauling the Sukhoi-30 fleet. With each fighter requiring an overhaul after 1,500 hours of flying (or 14 years of service, if that happens first) the IAF’s fleet of 272 Su-30MKIs would, at its peak, require 30 fighters to be overhauled each year.

Finally, HAL will generate income from an on-going upgrade being carried out to the IAF’s fifty-odd Mirage-2000 fighters, and then possibly to the 120-strong fleet of Jaguar deep strike aircraft. The latter order, however, has been in the procurement pipeline for long and there is little sign of it materialising soon.