HAL Shares Down By 3% After Tejas Crash: Is There A Reason To Worry?

The crash of the Indian Air Force Tejas aircraft at Dubai has triggered a panic sell-off of defence stocks. While no evidence of foul play has been found so far in the joint investigation by IAF and UAE authorities, fears that exports of the aircraft may take a hit have led traders to sell stocks of Hindustan Aeronautics Ltd.

Shares of HAL were trading nearly 3 per cent down at Rs. 4,454.80 on the National Stock Exchange. This led to a fall in the Nifty India Defence index to trade 2 per cent lower at 7998.05 points on the NSE at the same time. Shares of GRSE, Zen Tech, Data Patterns, Paras Defence, BEML, Cochin Shipyard and others were also down 2 per cent each.

What happened in Dubai Air Show?

On November 21, the Tejas fighter jet crashed during the air show while performing an aerial manoeuvre. The single-seat light combat aircraft crashed and erupted in flames immediately. The IAF, in a statement, confirmed the death of a pilot in the crash.

"An IAF Tejas aircraft met with an accident during an aerial display at the Dubai Air Show today. The pilot sustained fatal injuries in the accident. Indian Air Force deeply regrets the loss of life and stands firmly with the bereaved family in this time of grief. A court of inquiry is being constituted to ascertain the cause of the accident," The Indian Air Force (IAF) said.

Tejas is a single-engine, 4.5-generation multirole combat aircraft with a delta wing design. The aircraft is manufactured by HAL for the Indian Air Force and is developed by Aeronautical Development Agency (ADA).

The crash triggered speculation of a technical malfunction and claims that an oil leak was detected before the fatal flight. A PIB Fact Check has clarified that the allegation was false, stating that the fluid seen in the video was part of a routine draining process, not a technical malfunction.

This was the second such instance when a Tejas aircraft crashed during its 24 years of run, but the first one with a fatality. The previous crash, which happened in Jaisalmer in May, where the pilot had ejected safely.

Should investors be worried?

The crash came at a time of heightened military cooperation in defence technology between China and Pakistan. Tejas is also expected to be a frontrunner for the IAF, with plans to induct as many as 351 aircraft in the future and orders for 182 already placed so far.  The workhorse MiG-21 retired in October, and the IAF previously said old MiG squadrons will be replaced by Tejas pilots.

Questions about the aircraft’s capabilities and its hit in exports have troubled investors.

“IAF has full confidence in the aircraft; that’s why they are flying it. The only issue is HAL’s inability to meet delivery timelines. If we cannot meet our own timelines, how can we export?” Air Vice Marshal Anil Golani (retd.), Director General of the Centre for Air Power Studies (CAPS) told The Hindu.

However, analysts say that though export of the aircraft may be delayed, the impact on stocks may be limited.

“The exports might get impacted a bit in the near term, and books might get impacted a bit for HAL,” an analyst at a private brokerage said. “But as deliveries get started in the subsequent months, the impact will offset and stocks will see an uptick.”

Analysts said that the long-term impact of the crash will be muted in HAL’s valuations, unless there is a structural flaw found by the investigation. HAL still holds large contracts for Tejas, but in the short term, the reputation of the company could take a hit due to the crash at a global stage.

"...The recent incident during the aerial display at the Dubai Air Show is an isolated occurrence arising out of exceptional circumstances,” HAL said in a release. “We would like to assure that there is no impact on the Company’s business operations, financial performance or its future deliveries. The Company is extending its full support and cooperation to the agencies conducting the investigation. The Company will continue to keep the stakeholders informed of any material developments."