From Buy to Neutral! UBS downgrades PSU defence giant HAL post Q4 — stock slips 4% in 2 days

In a surprising move that raised eyebrows on Dalal Street, global brokerage UBS has downgraded HAL (Hindustan Aeronautics Limited) from a ‘Buy’ to a ‘Neutral’ rating, even as it raised the target price from Rs 5,440 to Rs 5,600 — indicating a 14 per cent upside from the current market price of Rs 4,901 (as of Tuesday afternoon).

The PSU defence stock, which had surged strongly in recent weeks on the back of renewed geopolitical tensions and robust order inflows, has declined nearly 4 per cent in the past two sessions. The UBS call has added pressure on the sentiment around the stock.

Why did UBS downgrade HAL?

Despite the long-term growth potential, UBS has flagged slower-than-expected execution and subdued revenue guidance as key concerns.

• The brokerage pointed out that resolution of the GE F404 engine delay, along with deliveries of LCH helicopters and LCA Mk1A fighter aircraft, have already been factored into the current valuations.

• HAL has also extended the timeline for upgrading the Su-30 MKI fleet, impacting short-term execution timelines.

• UBS slashed its orderbook CAGR forecast from 21 per cent to 14 per cent for the FY26–FY28 period due to these developments.

• The manufacturing ramp-up has been slower than expected, posing downside risks.

• The company’s revenue growth guidance of 8–10 per cent for FY26 is viewed as conservative, especially following contract amendments.

• Management is expected to re-evaluate this guidance in the next 6 months.

What’s supporting the higher target?

Despite the downgrade, UBS sees long-term positives that justify a higher target:

• The share of manufacturing revenue is projected to rise from 23 per cent to 40 per cent by FY28, driven by capacity at Bengaluru and Nashik LCA factories and the helicopter facility in Tumkuru.

• HAL remains a monopoly in domestic defence MRO (maintenance, repair, and overhaul), with 13 per cent CAGR growth in maintenance revenue.

• The MRO segment is expected to clock low double-digit growth, aided by the growing LCA fleet and SU-30 aircraft demand.

• Recent geopolitical developments have boosted overall visibility for India’s defence sector, helping sustain investor interest.

Market Outlook

UBS believes HAL’s long-term thesis remains intact, but the slower order execution and cautious revenue outlook warrant a neutral stance for now. Investors will closely watch HAL’s performance over the next two quarters, especially any upward revision in revenue guidance, to assess re-entry points.

For now, the brokerage’s note reflects a balanced stance — acknowledging HAL’s strategic importance and robust fundamentals, but urging caution due to near-term growth uncertainties.