The December quarter results paint a picture of operational resilience, with net sales reaching ₹7,698.80 crores, up 10.66% year-on-year and 16.15% quarter-on-quarter. This sequential acceleration suggests improving order execution momentum as HAL navigates its substantial order book. The company's ability to maintain an operating margin of 24.30% (excluding other income) demonstrates pricing power and operational efficiency in a capital-intensive sector, though margins contracted from the 26.61% achieved in Q2 FY26.
Post-results, HAL shares have exhibited volatility, with the stock declining 7.94% over the past month and 12.40% over three months, significantly underperforming the broader market. The stock's current position below all key moving averages—5-day, 20-day, 50-day, 100-day, and 200-day—signals persistent technical weakness that has prompted a "Sell" rating from proprietary scoring models, despite the company's fundamental quality remaining "Excellent."
| Quarter | Dec'25 | Sep'25 | Jun'25 | Mar'25 | Dec'24 | Sep'24 |
|---|---|---|---|---|---|---|
| Net Sales (₹ Cr) | 7,698.80 | 6,628.61 | 4,819.01 | 13,699.85 | 6,957.31 | 5,976.29 |
| QoQ Growth | +16.15% | +37.55% | -64.82% | +96.91% | +16.42% | +37.46% |
| YoY Growth | +10.66% | +10.92% | +10.85% | — | — | — |
| Net Profit (₹ Cr) | 1,866.68 | 1,669.07 | 1,383.77 | 3,976.66 | 1,439.83 | 1,510.48 |
| QoQ Growth | +11.84% | +20.62% | -65.20% | +176.19% | -4.68% | +5.10% |
| YoY Growth | +29.65% | +10.50% | -3.71% | — | — | — |
| Operating Margin % | 24.30% | 23.50% | 26.61% | 38.65% | 24.18% | 27.44% |
| PAT Margin % | 24.25% | 25.18% | 28.71% | 29.03% | 20.69% | 25.27% |
Financial Performance: Steady Growth Amid Margin Compression
HAL's Q3 FY26 financial performance reflects a company successfully navigating execution challenges whilst managing cost pressures. Net sales of ₹7,698.80 crores represent consistent double-digit year-on-year growth of 10.66%, with the sequential 16.15% quarter-on-quarter improvement signalling accelerating order deliveries. This revenue trajectory aligns with the company's substantial defence order book and ongoing modernisation programmes for the Indian Armed Forces.
However, profitability dynamics reveal nuanced pressures. The operating margin (excluding other income) of 24.30% in Q3 FY26, whilst improving 12 basis points year-on-year from 24.18% in Q3 FY25, contracted sharply from the 26.61% achieved in Q2 FY26. This sequential margin compression of 231 basis points warrants attention, potentially reflecting product mix shifts or rising input costs. Employee costs surged to ₹1,666.16 crores in Q3 FY26 from ₹1,334.46 crores in Q2 FY26, a 24.87% quarter-on-quarter increase that outpaced revenue growth and pressured margins.
The PAT margin of 24.25% in Q3 FY26 similarly declined from 25.18% in Q2 FY26, though it remained substantially ahead of the 20.69% recorded in Q3 FY25. Net profit growth of 29.65% year-on-year outpaced revenue growth, aided by a lower effective tax rate of 24.94% compared to 29.50% in the year-ago quarter. For the nine-month period ending December 2025, HAL generated cumulative net sales of ₹19,146.42 crores and consolidated net profit of ₹4,919.52 crores, positioning the company firmly on track for another record financial year.
Operational Excellence: Exceptional Capital Efficiency Underpins Quality
HAL's operational fundamentals remain exceptional, with the company demonstrating capital efficiency metrics that place it amongst India's highest-quality public sector enterprises. The five-year average return on equity (ROE) of 24.71% significantly exceeds most peers and reflects management's ability to generate superior returns on shareholder capital. This high ROE underscores HAL's pricing power, operational leverage, and dominant market position in India's aerospace and defence ecosystem.
Even more impressive is the company's five-year average return on capital employed (ROCE) of 100.13%, an extraordinary figure that highlights minimal capital intensity relative to profitability generation. This exceptional ROCE stems from HAL's asset-light business model in certain segments, substantial advances received from customers (which reduce working capital requirements), and the company's monopolistic position in several defence platforms. The interest coverage ratio averaging 100 times over five years reflects HAL's virtually debt-free balance sheet, with net debt-to-equity at negative 1.20, indicating the company holds more cash than debt.
Balance sheet quality remains pristine. Shareholder funds stood at ₹34,981.61 crores as of March 2025, up from ₹29,138.17 crores in March 2024, driven by retained earnings. Current assets of ₹90,094.60 crores comfortably exceed current liabilities of ₹44,095.25 crores, providing a robust current ratio of 2.04. Fixed assets of ₹6,670.78 crores represent just 8.44% of total assets, confirming the capital-light nature of the business. Cash flow from operations reached ₹13,643.00 crores in FY25, demonstrating strong cash generation capabilities that fund growth without external financing.
Quality Hallmarks
Exceptional Capital Efficiency: HAL's five-year average ROCE of 100.13% and ROE of 24.71% place it amongst India's highest-quality companies. The company operates with minimal debt (net debt-to-equity of -1.20), exceptional interest coverage (100x average), and generates substantial operating cash flows (₹13,643 crores in FY25). This combination of high returns, zero leverage, and strong cash generation reflects HAL's monopolistic market position and operational excellence.
The Other Income Question: Non-Operating Profits Raise Sustainability Concerns
A notable characteristic of HAL's profitability profile is the substantial contribution from other income, which reached ₹913.80 crores in Q3 FY26, representing 36.75% of profit before tax. This proportion has remained elevated across recent quarters, with other income of ₹887.67 crores in Q2 FY26 and ₹747.09 crores in Q1 FY26. For the full year FY25, other income totalled ₹2,561.00 crores, up from ₹1,896.00 crores in FY24, indicating a rising trend.
Whilst other income primarily comprises interest earned on customer advances and surplus funds, its growing contribution to overall profitability raises questions about earnings quality and sustainability. Operating profit (PBDIT excluding other income) of ₹1,870.97 crores in Q3 FY26 represents only 67.18% of total operating profit including other income (₹2,784.77 crores). This dependence on non-operating income suggests that core business profitability, whilst healthy, benefits materially from treasury operations rather than purely operational excellence.
The trend becomes more pronounced when examining annual figures. For FY25, other income of ₹2,561.00 crores constituted 23.57% of profit before tax of ₹10,867.00 crores. Adjusting for this, HAL's core operating profit margin (excluding other income) stood at 31.1% in FY25, down from 32.1% in FY24, indicating modest margin pressure at the operational level. Investors must recognise that a significant portion of HAL's profitability derives from balance sheet management rather than manufacturing operations alone.
| Metric | Q3 FY26 | Q2 FY26 | Q1 FY26 | FY25 |
|---|---|---|---|---|
| Other Income (₹ Cr) | 913.80 | 887.67 | 747.09 | 2,561.00 |
| Profit Before Tax (₹ Cr) | 2,486.81 | 2,226.98 | 1,854.31 | 10,867.00 |
| Other Income as % of PBT | 36.75% | 39.86% | 40.29% | 23.57% |
| Operating Margin (Excl OI) | 24.30% | 23.50% | 26.61% | 31.10% |
Industry Leadership: How HAL Compares to Defence Peers
Within India's aerospace and defence sector, HAL occupies a unique position as the second-largest company by market capitalisation (₹2,74,482 crores), trailing only Bharat Electronics Ltd. The peer comparison reveals HAL's relative valuation attractiveness on certain metrics, though absolute valuations remain elevated across the sector following the multi-year defence rally.
HAL trades at a price-to-earnings ratio of 32.84x, significantly below peers such as Bharat Dynamics (80.40x), Bharat Electronics (54.40x), and Cochin Shipyard (54.16x). This valuation discount partly reflects HAL's larger scale and more mature business profile, but also investor concerns about execution risks and margin sustainability. The company's price-to-book value of 7.49x similarly trails peers like Bharat Electronics (15.04x) and Bharat Dynamics (11.06x), suggesting the market assigns a lower premium to HAL's asset base.
However, HAL leads on profitability metrics. Its return on equity of 24.71% surpasses most peers, with only Mazagon Dock Shipbuilders (24.55%) achieving comparable levels. Bharat Electronics posts 23.15% ROE, whilst Bharat Dynamics (15.00%) and Cochin Shipyard (13.02%) lag materially. HAL's dividend yield of 0.96% also exceeds the peer average, reflecting its consistent dividend policy (30.71% payout ratio). The company's net cash position (debt-to-equity of -1.20) provides financial flexibility unmatched by most peers.
| Company | P/E (TTM) | P/BV | ROE % | Div Yield % | Debt/Equity |
|---|---|---|---|---|---|
| Hind.Aeronautics | 32.84 | 7.49 | 24.71% | 0.96% | -1.20 |
| Bharat Electronics | 54.40 | 15.04 | 23.15% | 0.54% | -0.37 |
| Mazagon Dock | 40.48 | 10.93 | 24.55% | 0.48% | -1.46 |
| Bharat Dynamics | 80.40 | 11.06 | 15.00% | 0.72% | -0.99 |
| Cochin Shipyard | 54.16 | 6.91 | 13.02% | 0.73% | -0.27 |
| Garden Reach Sh. | 41.52 | 12.46 | 20.10% | 0.71% | -1.36 |
The peer comparison suggests HAL offers superior profitability and balance sheet strength at a relative valuation discount within the defence sector. However, the absolute P/E of 32.84x remains elevated by historical standards, particularly given the company's modest 8.56% five-year sales CAGR. The valuation premium across the sector reflects investor optimism about India's defence modernisation, but leaves limited room for disappointment.
Valuation Analysis: Premium Pricing Leaves Limited Margin for Error
HAL's current valuation reflects the euphoria surrounding India's defence sector, with the stock trading at multiples that embed substantial growth expectations. At a P/E ratio of 32.84x trailing twelve-month earnings, HAL commands a 25.41% discount to the sector P/E of 44x, yet remains expensive by absolute standards. The company's five-year average P/E has expanded materially from historical levels, driven by the defence re-rating that commenced in 2022.
The price-to-book value of 7.49x represents a significant premium to the company's net asset value, justified partly by HAL's exceptional ROE of 24.71%. Using the traditional P/BV-to-ROE framework, HAL's ratio of 0.30 (7.49 ÷ 24.71) suggests reasonable valuation relative to return generation. However, this metric assumes ROE sustainability, which faces challenges from margin pressures and the high contribution of non-operating income to overall profitability.
Enterprise value multiples paint a more expensive picture. EV/EBITDA of 23.80x and EV/EBIT of 27.84x significantly exceed long-term averages for capital goods and defence companies. The EV/Sales ratio of 7.28x appears particularly stretched for a company growing sales at 8.56% CAGR over five years. These elevated multiples reflect market expectations of accelerating growth driven by India's defence capex cycle, but leave little room for execution disappointments or margin compression.
The dividend yield of 0.96% provides minimal income support, whilst the PEG ratio calculation proves challenging given earnings volatility. HAL's valuation grade has remained "Very Expensive" since June 2023, having previously oscillated between "Fair" and "Expensive" in 2022-23. This persistent expensive rating, combined with deteriorating technicals and a proprietary score of just 44/100, suggests risk-reward has turned unfavourable at current levels.
Shareholding: Foreign Investors Reduce Stakes Amid Domestic Accumulation
HAL's shareholding pattern reveals divergent institutional behaviour, with foreign institutional investors (FIIs) reducing exposure whilst domestic mutual funds and insurance companies incrementally increase positions. Promoter holding remains stable at 71.64%, with the President of India (representing the Government of India) maintaining majority control, providing governance stability and policy alignment with national defence priorities.
Foreign institutional investor holding declined to 10.86% in Q3 FY26 from 12.00% in Q2 FY26, marking a significant 114 basis point sequential reduction. This FII selling accelerated from the gradual decline witnessed over previous quarters (12.08% in Q1 FY26, 12.26% in Q4 FY25), suggesting foreign investors are booking profits after the stock's multi-year rally. The number of FII holders stands at 720, indicating broad-based foreign participation despite recent selling pressure.
Conversely, domestic mutual funds increased their stake to 5.78% in Q3 FY26 from 4.87% in Q2 FY26, a notable 91 basis point sequential rise. This represents the largest quarterly increase in mutual fund holding over the past year, with 40 mutual fund schemes now holding positions. Insurance company holdings also rose to 3.22% from 3.06%, adding 16 basis points. This domestic institutional buying partially offset FII selling, though aggregate institutional holding declined marginally.
| Investor Category | Dec'25 | Sep'25 | Jun'25 | Mar'25 | QoQ Change |
|---|---|---|---|---|---|
| Promoter | 71.64% | 71.64% | 71.64% | 71.64% | 0.00% |
| FII | 10.86% | 12.00% | 11.90% | 12.08% | -1.14% |
| Mutual Funds | 5.78% | 4.87% | 4.51% | 4.31% | +0.91% |
| Insurance | 3.22% | 3.06% | 3.53% | 3.34% | +0.16% |
| Other DII | 0.75% | 0.78% | 0.68% | 0.65% | -0.03% |
| Non-Institutional | 7.76% | 7.65% | 7.73% | 7.98% | +0.11% |
The shareholding dynamics suggest a shift in investor base from foreign to domestic institutions, potentially reflecting differing views on valuation and growth prospects. FII selling may indicate profit-booking after the stock's 246.30% three-year return, whilst domestic accumulation reflects confidence in India's defence modernisation story. However, aggregate institutional holding of 20.60% remains modest for a large-cap public sector enterprise, limiting institutional support during market weakness.
Stock Performance: Recent Underperformance Erodes Long-Term Gains
HAL's stock performance presents a tale of two timeframes: exceptional long-term wealth creation marred by recent sharp underperformance. Over five years, the stock has delivered a staggering 710.77% return, vastly outperforming the Sensex's 62.34% gain and generating alpha of 648.43 percentage points. This extraordinary performance reflects HAL's transformation from a struggling public sector unit to a market darling riding India's defence modernisation wave.
However, recent performance has deteriorated sharply. Over the past three months, HAL declined 12.40% whilst the Sensex fell just 0.94%, resulting in negative alpha of 11.46 percentage points. The six-month return of negative 5.61% compares unfavourably to the Sensex's positive 4.29% gain, indicating sustained underperformance. Most concerningly, HAL has underperformed its aerospace and defence sector peers by a massive 52.87 percentage points over the past year, with the stock gaining just 15.64% against the sector's 68.51% surge.
Technical indicators uniformly signal bearish momentum. The stock trades below all key moving averages—5-day (₹4,106.18), 20-day (₹4,340.03), 50-day (₹4,371.19), 100-day (₹4,555.26), and 200-day (₹4,643.60)—indicating persistent selling pressure. The MACD shows bearish signals on both weekly and monthly timeframes, whilst the overall technical trend turned "Bearish" on February 4, 2026, from "Mildly Bearish." Immediate support lies at the 52-week low of ₹3,045.95, whilst resistance clusters around the 20-day moving average near ₹4,340.
| Period | Stock Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | +3.07% | +0.43% | +2.64% |
| 1 Month | -7.94% | -0.24% | -7.70% |
| 3 Month | -12.40% | -0.94% | -11.46% |
| 6 Month | -5.61% | +4.29% | -9.90% |
| 1 Year | +15.64% | +9.85% | +5.79% |
| 3 Years | +246.30% | +37.89% | +208.41% |
| 5 Years | +710.77% | +62.34% | +648.43% |
The stock's beta of 1.05 indicates higher volatility than the broader market, with annualised volatility of 29.37% over the past year classifying HAL as a "Medium Risk Medium Return" investment. The positive Sharpe ratio of 0.53 compares unfavourably to the Sensex's 0.86, suggesting inferior risk-adjusted returns. Current price action suggests HAL remains in a corrective phase, with technical momentum firmly bearish and no immediate catalysts visible for trend reversal.
Investment Thesis: Quality Company Trapped in Valuation Correction
HAL's investment narrative centres on the tension between exceptional fundamental quality and stretched valuations. The company's "Excellent" quality grade reflects consistent profitability, exceptional capital efficiency (100.13% average ROCE, 24.71% average ROE), zero debt, strong cash generation, and a dominant market position in India's aerospace and defence sector. These fundamental strengths remain intact, with Q3 FY26 results confirming operational resilience.
However, valuation remains the critical constraint. HAL's "Very Expensive" valuation grade, persistent since June 2023, reflects P/E of 32.84x, P/BV of 7.49x, and EV/EBITDA of 23.80x—multiples that embed substantial growth expectations. The company's modest 8.56% five-year sales CAGR and recent margin pressures (operating margin declining from 32.1% in FY24 to 31.1% in FY25) challenge the sustainability of premium valuations.
Technical trends compound valuation concerns. The stock's "Bearish" technical classification, position below all moving averages, and persistent underperformance versus peers (-52.87% relative return over one year) signal deteriorating market sentiment. The proprietary Mojo score of 44/100, firmly in "Sell" territory, reflects this confluence of expensive valuations, bearish technicals, and flat recent financial trends. FII selling of 114 basis points in Q3 FY26 suggests institutional investors are reducing exposure at current levels.
Key Strengths & Risk Factors
KEY STRENGTHS ✓
- Monopolistic Market Position: Dominant player in India's aerospace and defence sector with substantial entry barriers and government backing
- Exceptional Capital Efficiency: Five-year average ROCE of 100.13% and ROE of 24.71% rank amongst India's highest-quality companies
- Zero Debt Balance Sheet: Net debt-to-equity of -1.20 indicates net cash position, providing financial flexibility and eliminating refinancing risks
- Strong Cash Generation: Operating cash flow of ₹13,643 crores in FY25 demonstrates robust cash conversion and self-funding capability
- Consistent Profitability Growth: Net profit CAGR of 17.65% over five years driven by operational leverage and improving margins
- Large Order Book: Substantial defence orders provide multi-year revenue visibility and execution certainty
- Government Support: 71.64% promoter holding ensures policy alignment and preferential treatment in defence procurement
KEY CONCERNS ⚠
- Stretched Valuations: P/E of 32.84x and EV/EBITDA of 23.80x embed substantial growth expectations with limited margin for disappointment
- Bearish Technical Momentum: Stock trading below all moving averages with deteriorating momentum indicators signalling further downside risk
- High Other Income Dependency: Other income constitutes 36.75% of Q3 FY26 PBT, raising concerns about core earnings quality and sustainability
- Margin Compression: Operating margin declined from 32.1% in FY24 to 31.1% in FY25, with Q3 FY26 showing sequential pressure
- Sector Underperformance: Stock underperformed aerospace and defence peers by 52.87 percentage points over past year
- FII Selling Pressure: Foreign institutional investors reduced stake by 114 bps in Q3 FY26, indicating profit-booking at elevated levels
- Execution Risks: Complex defence projects carry inherent delivery delays, cost overruns, and quality challenges
Outlook: What to Watch
POSITIVE CATALYSTS
- Order Inflow Acceleration: New defence contracts or export orders could reignite growth optimism
- Margin Stabilisation: Successful cost management reversing recent margin compression trends
- Technical Reversal: Stock reclaiming 200-day moving average (₹4,643.60) would signal trend change
- Valuation Correction: Time correction bringing multiples to reasonable levels relative to growth
RED FLAGS
- Further Margin Erosion: Operating margins declining below 24% would signal structural profitability challenges
- Continued FII Selling: Sustained foreign institutional selling could trigger cascading price declines
- Technical Breakdown: Break below 52-week low (₹3,045.95) would open downside to ₹2,800-2,900 levels
- Order Execution Delays: Slippages in major defence programmes impacting revenue guidance
The forward outlook for HAL hinges on the interplay between India's defence modernisation momentum and valuation normalisation. The company's order book provides multi-year revenue visibility, whilst government support ensures preferential treatment in domestic procurement. However, elevated valuations leave minimal room for execution disappointments, margin pressures, or slower-than-expected order inflows. The stock's technical weakness suggests market participants are re-evaluating risk-reward at current levels.
For long-term investors, HAL remains a high-quality proxy for India's defence sector, with operational fundamentals supporting the investment case over a 3-5 year horizon. However, near-term headwinds from expensive valuations, bearish technicals, and margin pressures suggest a cautious approach. Existing holders may consider partial profit-booking to lock in gains from the multi-year rally, whilst fresh investors would be prudent to await better entry points following valuation correction.
The Verdict: Quality Company Awaiting Valuation Comfort
Score: 44/100
For Fresh Investors: Avoid initiating positions at current valuations. Await correction towards ₹3,500-3,700 levels (P/E of 25-27x) for better risk-reward. The stock's "Very Expensive" valuation grade and bearish technical momentum suggest patience will be rewarded with superior entry opportunities.
For Existing Holders: Consider booking partial profits (30-40% of holdings) to lock in gains from the multi-year rally. Retain core positions given HAL's excellent fundamental quality and long-term sector tailwinds, but recognise that near-term returns may remain muted as valuations normalise.
Fair Value Estimate: ₹3,600 (13.43% downside from current levels), based on P/E of 26x FY26 estimated earnings, reflecting premium justified by quality but below current excessive multiples.
Note- ROCE= (EBIT - Other income)/(Capital Employed - Cash - Current Investments)
⚠️ Investment Disclaimer
This article is for educational and informational purposes only and should not be construed as financial advice. Investors should conduct their own due diligence, consider their risk tolerance and investment objectives, and consult with a qualified financial advisor before making any investment decisions. Past performance does not guarantee future results. The views expressed are based on data available as of February 12, 2026, and may change with evolving market conditions.
