STOCK IDEAS- Taneja Aerospace & Aviation Limited

Taneja Aerospace & Aviation Limited

BSE Code: 522229

Taneja Aerospace & Aviation Limited (TAAL) manufactures small civilian aircrafts, aero-structures and aircraft parts, provides aircraft maintenance services from its own airfield and represents Cessna Aircraft Company, USA for the sale of their aircrafts in India. TAAL is the only private sector company manufacturing entire aircraft in India. Given the breadth of this product portfolio, TAAL enjoys a very strong position in the Indian aviation market.

Business:

Incorporated in the year 1988, Bangalore based TAAL has structured its business into three distinct business divisions, namely, Aerostructures, MRO/Airfield services and Aircraft Sales.

Aerostructures Division:

TAAL started operations in 1994, entering into a collaboration agreement with an Italian firm, Partenavia, to manufacture twin piston engine 6 seater P68C and the 11 seat twin turbo-prop Viator aircraft. Towards this, TAAL created manufacturing and assembly infrastructure in Hosur, Tamilnadu. Since then the business has evolved to cover manufacturing aero structures and

air craft parts for Hindustan Aeronautics Limited (HAL), the Indian Space Research Organization (ISRO), the National Aerospace Laboratory (NAL) and the Aeronautical Development Establishment (ADE).

TAAL has been major subcontractor for the 14-seater multi-role ‘Saras’ aircraft for NAL manufacturing complete fuselage and control surfaces of the aircraft (excluding wings) including tooling, parts and assembly. TAAL has partnered NAL for series production of two-seater full composite (glass fiber) trainer aircraft ‘Hansa’ developing airframes. TAAL has manufactured all composite (carbon and glass -wet lay up cured at room temperature) airframes for Unmanned Air Vehicle ‘Nishant’ developed by ADE and also manufactured all the composite components like tail cone, nose cone and air-intake for Pilotless Target Aircraft (PTA) ‘Lakshya’ which is now in series production.

TAAL is also manufacturing the Elevator and Stabilizer for the Intermediate Jet Trainer (IJT) and a variety of aircraft toolings for the Advanced Light Helicopter (ALH) and the Light Combat Aircraft (LCA) projects of HAL. TAAL has also been subcontracted the work for part manufacturing and assembly of the Indus Aviation ‘Thorpe T211’ Light Sport Aircraft for export to the US and for the domestic market too.

TAAL also manufactures plastic cabin parts for Jet Airways, Indian Airlines, Air India and Pawan Hans. TAAL has also developed several structures for ISRO for their PSLV and the GSLV programs such as thermal shrouds inter tank structures, protection plates, strap on base shroud, reaction control structures etc.TAAL’s core competence in this area is in the manufacture of sheet metal details and assemblies.

“We currently have order book position of 30 crores for Aerostructure division to be executed over a period of two and half years” said Mr. Salil Taneja, MD of TAAL. TAAL expects decent growth from this segment with few more orders in pipeline from defense sector & couple of orders from foreign tier-1 vendors for Airbus.

MRO & Airfield Services Division

TAAL’s new and promising activity is in the field of Maintenance, repair and overhaul (MRO) business. TAAL owns a private airfield (2225m long and 45m in width) strategically located at Hosur, just 50 km from Bangalore city. The airfield is capable of receiving an A320/ B737- 900 class of aircraft and is equipped with a night landing facility, ATC tower with VHF set, basic navigation aids and support services like refueling, parking, aircraft hangar accommodation, aircraft maintenance facilities, aircraft cleaning services, crew rest area, guest house etc.

TAAL has recently signed MoU with Sabena Technics for setting up a MRO business at its private airfield at Hosur. This MRO facility shall initially be targeted at Regional turboprop aircraft like ATR 42/72. Subsequently, mid size single aisle Commercial Jet aircraft like Airbus A320 and Boeing 737 Series shall be included in the service portfolio. This will enable all airlines in India and those in other countries in the region to have their aircraft maintained here, thus saving them from aircraft ferry and higher manpower costs in other countries, in this labor-intensive industry, where India has a natural advantage.

TAAL maintains three BAE ATP aircraft on behalf of First Flight Couriers and provides hangar space to Air Deccan for their ATR42 and ATR72 aircraft. TAAL has recently entered into a MRO Facility Agreement with M/s. Air Works Commercial MRO Services Pvt Ltd (AWACS) wherein the Company would be licensing 7 acres of land and upto 5 hangars space on a long term basis.

TAAL has closed agreements for licensing 2 hangars space which would result in cash inflow of around Rs 5 Crore per annum. TAAL expects substantial revenues of Rs. 8 crore this year from high margin MRO business on the basis of current contract visibility which may grow with addition of hangars.

Aircraft Sales Division

TAAL represents the Cessna Aircraft Company in India for their Citation range of Business Jets and for their Caravan aircraft. With companies in India looking to replace their outdated turbo-props with modern Business Jets and with Cessna dominating the Light and Mid-sized Jet market worldwide, TAAL sees a tremendous business opportunity in this area. They have 7-10 inquiries currently and expect sales of 4 aircraft this year. TAAL’s Cessna annual sales commission alone would be around Rs. 5.5 crore. In addition, TAAL also provides consulting support to help potential customers evaluate their flight and travel requirements and thereby find an appropriate solution.

SEZ development to boost business: TAAL has already received in principle approval from Government to set up an Aviation SEZ at their current location that has 250 acres of land for new facilities in addition to the present airfield. This SEZ can house many investments that several foreign and Indian companies would want to make, to take advantage of multi-billion dollar defense and civil offset business.

Investment rationale:

The Indian aviation sector is set to boom with rapid expansion in deregulated civil aviation. Also Indian Government’s offset clause mandating 30% offset provisions for all aviation purchases would benefit TAAL. TAAL is the only Indian company other than the Government owned HAL that has garnered such broad-based experience in aviation field in India. TAAL has substantial intangible aviation business assets (in regulatory, quality and safety areas), experience in integration, expansive aviation related civil assets and dedicated manufacturing and engineering assets for aero structures and aviation detail parts. SEZ concessions along with the massive opportunity for aviation manufacturing and services arising out of the Defense and Civil Aviation offset policy, present very interesting future for TAAL.

Concerns:

TAAL being in aviation segment faces risk from economic slowdown, political uncertainty affecting SEZ and fuel price increase thereby affecting its revenues due to lower demand for parts.

Valuations:

We believe TAAL the only listed company in aerospace manufacturing in India is expected to gain from its aerostructure & airfield services apart from getting boost due to SEZ plans. TAAL revenues are expected to grow at CAGR of 39% over FY08A-FY10E and net profit at CAGR of 110% over FY08A-10E. At CMP of Rs 64.45, TAAL trades at a P/E of 21.68x & 15.97x its FY09E and FY10E earnings respectively. Considering the strong margin growth, TAAL looks attractive at current levels from long term perspective.

		Annual	Annual	Annual
in Rs. Crore	Q1 FY09	FY08	FY09(E)	FY10(E)
Net sales	6.48	18.16	26.00	35.00
OP	2.23	2.84	9.10	12.51
PAT	1.87	1.56	7.41	10.06
Capital	12.47	12.47	12.47	12.47
EPS (Rs.)	0.75	0.06	2.97	4.04

Price	64.45	Date	14/08/2008
PE	21.68	PB	1.34
Book value per share	48.00	EV	174.18
EV/EBIDTA	19.14	Mcap	160.68

Share holding	Jun 2008
Promoter owned	42.51
Public owned	25.71
FIIs owned	16.96
Others owned	14.82