Azad Engineering Limited (AZAD) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Azad Engineering Limited Q1 FY '26 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on beliefs, opinions and expectations of the company as on the date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rakesh Chopdar, Chairman and Chief Executive Officer. Thank you, and over to you, sir.

Thank you so much. Good morning to everyone. Welcome, and thanks for joining us today on the Q1 FY '26 earnings call. On this call, we are joined by Mr. Murali Krishna, Managing Director; Mr. Vishnu Malpani, Whole-Time Director; and Mr. Ronak Jajoo, CFO; and SGA, our Investor Relations Adviser. Results are -- results and presentations are uploaded on the stock exchange and the company website. I hope everybody had a chance to look at it. I'm glad to update that we started the year on a promising note with our best-ever financial performance and delivered stand-alone revenues in INR 135 crores, looking at a year-on-year growth of 36.7%. This robust growth was accompanied by margin improvement in both EBITDA and PAT. EBITDA margin grew from 33.6% in Q1 FY '25 to 36.1% Q1 FY '26. Similarly, PAT margin rose from 17.4% in Q1 FY '25 to 22.3% in Q1 FY '26. This growth reflects our continued efforts across multiple areas, including capacity expansion in the new plant, qualifications of new components across business verticals and operational excellence among other initiatives. With a very strong order book position of INR 6,000 crores plus, we are confident that we will continue to maintain this trajectory. The energy sector, which is our oldest business segment constitutes the largest part of our book of approximately around $400 million, that's around INR 3,400 crores. And this is followed by the Aerospace and Defense at $200 million. That's around INR 1,700 crores. And then oil and gas at approximately $100 million. That's around INR 850 crores. This order book provides us with strong revenue visibility across all business segments. In anticipation of this growing demand, we are gearing up with our new manufacturing facilities. As you are well aware, we have already inaugurated two of our dedicated lean factories in March and April 2025. Overall, in the next 12 to 18 months, we plan to have a total 8 dedicated lean manufacturing facilities, including one state-of-art world-class forging plant at Tunikibollaram, Hyderabad. However, it has been challenging to match the growing demand with our facility ramp up. The team at Azad has done a great job handling the situation, including, but not limited to, facility readiness, equipment order, deployment and certifications. Workforce hiring and training, all of this while ensuring customer deliveries and output of the company are on target. So it's not easy, of course, it's challenging, but team Azad is doing a great job. We anticipate to similarly address these challenges to continue for a couple of upcoming quarters. Towards this expansion, we plan to deploy a CapEx of INR 450 crores during FY '26. Also very happy to share the two subsidiaries that we acquired last year are now EBITDA neutral and should contribute to growth and profitability from FY '26. Guidance, we are progressing with our strategy of positioning the company for sustainable differentiated growth and reiterating our top line growth guidance of 25%, 30% during FY '26. Now I hand over the call to Mr. Murali Krishna Bhupatiraju, our Managing Director. Thank you.

Thank you, Mr. Rakesh Chopdar. It is heartening to see broad-based growth across all sectors. While we remain focused on scaling operations, we're equally committed to driving greater efficiency across our value chain, which is reflected in our growing margin profile. Azad being a key supplier in global supply chain for the OEMs, we see a sizable market opportunity from our end-use industries. Energy OEMs are making unprecedented investments with the need for reliable power, infrastructure and decarbonization. We also see a demand for turbines in industrial applications as well as a replacement market. Likewise, the Aerospace and Defense segment is also witnessing strong demand, which is driven by increased commercial aircraft orders, fleet modernization programs and heightened defense spending. Our existing order book resonates with these growing opportunities. We are actively working with existing and new customers to enhance our wallet share in this space. Now I hand over the call to Mr. Vishnu Malpani, our Whole-Time Director, to take this further.

Thank you, Mr. Murali Krishna. The growth trajectory demonstrated by Azad thus far echoes our commitment to high growth while achieving operational excellence. Focusing on our stand-alone segment-wise business performance this quarter, let me share with you the contribution from Energy and Oil and Gas segment for us in Q1 FY '26 is at INR 109 crores, contributing to approximately 81.2% of the total revenue. This growth represents a healthy 41.7% year-on-year increase, which is largely on account of capacity addition. With significant values of orders in hand that was shared by Mr. Chopdar, we continue to see a healthy growth from here in the years to come. Talking about the Aerospace and the Defense segment. This segment contributed to 17.1% of our revenue during quarter 1 of FY '26 at INR 23 crores of revenue, representing a 26.3% year-on-year growth. We are upbeat about the growth in this segment with the recent order wins, capacity expansion plans and also the fact that we are moving from component manufacturing to assemblies and subassemblies in the future as well. We are confident about the upcoming quarters by taking small steady steps now, we can build momentum in FY '26. These efforts will lay the foundation for a significant future -- growth in the future, allowing us to progress from small steps to larger leaps and eventually achieving great strides. Lastly, I would also like to update that our credit ratings have now been updated from A- to A by CARE Ratings. We view this performance of quarter as a strong endorsement for our -- of our operational resilience, commitment to excellence, and it positions us well as we continue to scale new heights. Further, I now hand the call over to our CFO, Mr. Ronak Jajoo, to further talk about our financial performance. Thank you.

Thank you, Vishnu. I would like to begin by sharing our stand-alone financial performance for quarter 1 FY '26. Let me take you through revenue from operations. Revenue from operations stood at INR 135 crores, reflecting a 36.7% year-on-year growth compared to quarter 1 of FY '25 and 8% growth over quarter 4 of FY '25. This growth was primarily driven by the SPS plant, which was operationalized in quarter 4 of FY '25 and started contributing to revenue from this quarter. On the consumption side, our gross margins has improved by 3.4% on a year-on-year basis and remained stable compared to last quarter largely due to product and segment mix. Employee cost has increased by 60 bps during this particular quarter. This is attributable towards the onboarding of key personnel as we prepare the organization for the next phase of growth. The EBITDA for the quarter came at INR 48.5 crores, making a 46.8% growth year-on-year basis from INR 33 crores in quarter 1 FY '25. Our EBITDA margin guidance remain continue to be in the range of 33% to 35% depending upon product and segment mix. We are pleased to announce that we have operationalized the first facility at Tunikibollaram plant with 3 additional units scheduled to go live during FY '26. As a result, we expect our depreciation to step up and projecting to be INR 48 crores in depreciation for the full year FY '26. Other income saw an increase during the quarter, primarily from the treasury income because of unutilized QIP funds. This is expected to taper down in coming quarter as these funds are deployed for capacity expansion. Profit after tax for the quarter stood at INR 30 crores with a PAT margin of 20.88%. Here, I'm taking denominator as a total income for calculating the PAT margin, up from 17.3% in quarter 1 of FY '25 and 20.29% in quarter 4 FY '25. Lastly, I'm happy to share that both Azad Prime and Azad VTC has turned EBITDA neutral within just a few quarters of operations, and we are confident they will become PAT positive by quarter 4 of FY '26. With this, we conclude our presentation and open the floor for question and answers. Thank you.

[Operator Instructions] We have first question from the line of Amit Dixit from Goldman Sachs.

Congratulations for a very good set of numbers. I have a couple of questions. The first one is essentially on the domestic aerospace and defense segment. If we see the focus of the government is now for the indigenization of the engine that would be probably fitted on AMCA, the co-production of Tejas Mark 2 and there have been funds allocated for Kaveri as well. So in light of these developments, I just wanted to get your thoughts on the potential that Azad sees in the domestic market, particularly aerospace and defense. That is my first question.

Okay. Amit, thank you so much. On the Indian defense, as Azad's focus is mainly on the niche components of the engines. And you're right, our focus is only on the components where we can value add, and that's the first engine what we are manufacturing for DRDO. So our focus wish to stay here because we have to deliver 2 engines in FY '26. And once they are delivered, and that opens the big door for all the programs which are live going on in the Indian defense as this will be the first jet engine to be manufactured, right, for this -- in India for this capacity. And that's definitely going to open doors, and we are confident once we deliver these engines and the defense MoD will recognize Azad for its efforts, and we look forward and fingers crossed.

Okay. The second one is essentially on another segment of energy, nuclear power. A lot of your customers and peers have been quite vocal about the potential of this space. Now Azad, as we understand, is the only company in India, which is accredited by EDF. So just wanted to get your thoughts on the potential that we see in both global and local market from nuclear energy segment.

Yes, Amit, like the major worldwide EDF controls the nuclear power and there are stringent approvals you need to get from EDF and which we broke all the qualifications and we could really get there, and we are now qualified by EDF as an approved supplier globally, not just for 1 project or 2 projects. And that has helped us get recognized worldwide wherever nuclear plants are coming up. And similarly, in India, it's NPCIL. And so EDF and NPCIL work very closely. And definitely, there is a massive big opportunity coming up for the nuclear. Whatever power demand comes up, nuclear power project comes up, we will be the first choice. And we are the only choice, to be honest, today.

We have our next question from the line of [ Karan from Jetha Global ].

Congratulations again on great results. I just wanted to address, obviously, the topic du jour, which is tariffs. We don't know how this is going to play out for sure. But if you can help contextualize for us, let's say, the 25% holds, how would that, if in any way, impact your business? And then I guess the second question would be just, I guess, more generally, on the order book, we've obviously started executing against a very large order book. But what would also be interesting to see is that order book growing and doubling and tripling from here. So as you think about the drivers of what may -- I think you mentioned the domestic defense side. I think you just -- we just talked through nuclear, those could be drivers of the order book growth. Are there any other drivers that you would like to kind of call out or tease out that could manifest over the next 12 to 18 months?

Yes. Karan, first thing, thank you so much for the question. I would like to clarify on this tariff thing. It's a big question mark for everyone in India, what's going to happen, right? So let me be very specific on this part. One thing is very sure is if we have got this business now or before, right? Definitely, it's before. So we have competed someone and got this business. And the next competition to us is China. So if you talk about the Azad's competition, it's in China, Europe, Japan, America and Korea, right? These are our competitions. Now if the business has come, so I can give you an idea from China, we are 20%, 25% competitive. From Europe, and Japan, we are around -- Europe, we are around 30%, 35%. Japan, we are 40%, 45% and similar to the global levels where we compete them. So today, if we talk about the closest competition, that's China, okay? Now we are 25% already very -- we are competing them. And China has a 30% tariff. India has a 25% tariff. So the situation doesn't change for Azad. It remains the same for the customer. So still, we are the only option, again, no matter if another tariff goes up by 10%, 15%, it will not matter us, right? So that -- and if China is the closest and then Europe and if you talk about Japan or someone, they are already 40%, 50% higher than us. So definitely, it's not going to affect Azad for its product line where we are competing the global peers, what we have at the moment, right? That's one point. Sorry, Karan, I need to have your second question again. I just lost it.

Sure. Just in terms of order book growth, I just wanted to understand what the drivers of that would be? We talked about nuclear. We talked about domestic defense. What would be the other drivers over the next 12 to 18 months?

Yes. So look, our focus is like we -- what the facilities which are coming up, there is -- there are already we have order books in our hand and already commitments are being given, contracts have been signed, and we are committed for next 4 to 5 years for the certain contracts we have signed and the preparations are going well accordingly. We are setting up the plants coming up. However, there are many more opportunities which we are discussing. And we will just pick them up as we get the right time up, right? So current focus is what we have in hand, the conversion of -- the setting up the plant. It's not easy to set up one massive facility, right? And such 8 are going on in parallel. So you can imagine how tough the situation is for the team to handle the growth, to handle the day-to-day commitments, to handle the new facility coming up, the certifications, the machines coming in. So I think next 2 quarters is what we assume that we have to just stay calm and focus on what we are doing at the moment, set this up. Opportunities are definitely lined up, and we are not going to stop here somewhere. So there is a massive opportunity lining up before Azad. So we'll take it at the appropriate time. We'll not lose it.

We have our next question from the line of Aditya Bhartia from Investec.

My first question is on the capacity addition that we have already undertaken. With this kind of capacity addition, what would be the revenue potential that we can achieve? How much more can we kind of generate from the existing capacity that we are already having? And if I heard you correctly, you spoke about roughly INR 450-odd crores of CapEx for this year. So what kind of further addition would we see once that kind of CapEx number gets concluded?

Yes. Thanks, Aditya. So see, again, I would like to again get the same answer what I gave in the previous question, what I answered, is the setup is still going on, right? We are talking about a massive facility. We're not talking of adding a few machines or we are not adding -- we are not seeing the capacity just buying the machines and putting, there's a whole factory is coming up, right? So it's a very -- it's a very, very big challenge to manage everything. However, the growth trajectory, what we are seeing is the guidance what we are giving, 25%, 30%, definitely, that's going to be maintained, right? And we have to have these facilities coming up, which we see in FY '26, we stabilize with almost all the facilities coming up in the next 12 months. And then we can definitely see an upside once the factories are up, right? So this is where I could answer on the capacity and the growth. So we should give at least 2, 3 quarters more to stabilize everything, keeping the growth 25%, 30% together, which goes in parallel.

Sure, sure, sure. Rakesh, the way we were kind of thinking about it earlier is that these are modular facilities. We'll keep kind of making one operational after the other, ramp them up and then go for the other expansion. Has there been a change in that thought process wherein we want to be making operational a few more manufacturing facilities at tandem? And is it a reflection of the confidence that you're driving from the order book? And in that context, can this growth be much, much higher than 25% to 30% that we are speaking about?

I agree with you, Aditya. That's why I mentioned the 25%, 30% is coming from the existing orders and as we are adding machines, as we're adding capacity. And definitely, once it is up, definitely, we expect a shift, yes.

So from the perspective of next year, would you be anticipating a much stronger growth than this 25%, 30%? And...

Yes, we expect that, Aditya.

Sure. And even for this year, Rakesh, like we have started the year at a good rate, and you also mentioned that you expect this kind of momentum to be continuing. But for the year as a whole, we are retaining the guidance. So is it that we're just being conservative and we actually -- from our internal targets, we are looking at more like a 35%, 40% growth, but speaking of 25%, 30% only?

Yes. Look, I have to be a little conservative, right? I should have -- once the facilities are up because it's -- again, I mentioned it's not a small thing what is happening here in Azad, right? And managing altogether and 25%, 30% is what we look forward. But definitely, we all know once the factory is up, once things stabilize, we'll definitely see a shift for sure.

Understood. And one just last kind of follow-up on the same aspect. We have spoken about, let's say, fixed asset turns of over 1x, closer to like 1.5x. Now that we are doing INR 450 crores of CapEx, does that mean that we have the additional lever of doing maybe somewhere around INR 500 crores, INR 600-odd crores of revenues over and above what we are already doing? Is that the magnitude of investment that we are undertaking? And consequently, growth over the next couple of years can be significantly faster, not by a magnitude of 10%, 20%, but significantly faster than what we've seen in the past?

Vishnu, would you like to take this? Yes.

Aditya, thanks for the question. Yes. So Aditya, we are looking at a deployment of roughly INR 450 crores. And this deployment would happen towards three broad areas. One is infrastructure, one is towards plant and machinery, and we are also investing in some strategic assets like forging hammers, et cetera. So if you look at the overall deployment, we should be deploying anywhere between INR 250 crores to INR 300 crores towards creating capacity. Now when you look at a INR 300 crore investment, I would suggest that with an asset turn of roughly about 1.8, we should be able to generate INR 550 crores of incremental revenue, right? Now we had already delivered INR 450 crores. So this should be good to go to take us to about INR 1,000 crores. That's how -- that's the right way to look at it.

Understood. And from that perspective, this year possibly is the peak CapEx year and from next year, CapEx drops meaningfully...

So we will efficiently deploy CapEx looking at the demand that we are having, looking at the capacity that is needed to achieve the numbers that we have committed to our customers. So it takes us back to the guidance where we are pretty confident of delivering 25% to 30% that Mr. Chopdar said in the coming years.

We have our next question from the line of Vikash Singh from ICICI Securities.

Congratulations on a very good set of numbers. Sir, coming back to the tariff again, you explained about the orders. We are cheaper than most of the countries. But what about the existing orders? Is there any clauses which protects us for the existing orders, any tariff changes and doesn't impact our margins?

Yes, thank you for the question. Now this is what I'm trying to say is we have already competed and got these contracts. It's already done. It's nothing that there is going to be effective more from this. This is already -- we are competing them already. We are competing with the whole world, right? So we are the best cost. The other -- the next competition to us is around 20%, 25%, they are expensive than us. So example -- I'll give you an example like example, China is 100 for a component A. Azad is 75 for the same component for the customer, right? And China has got 30% to 40% tariff. Now India, they have put 25% tariff. Still we compete. We still compete.

So where I'm coming from, so we have, let's say, competed and got the orders already. And post that, there is a 25% tariff which has been imposed. We have exposure to U.S. as well. So is the additional tariff would be borne by the buyer that is in the clock because if you have to bear that, then your margins will get eroded. That's what...

Okay. I'll give you another -- again, I'll take back you to 100. So 100 plus, say example, 30% China is the tariff. So it becomes 130 from China. 75% plus 25% tariff. Still we compete, right? Okay. So we are still at 93.

Understood, sir. Understood.

Got my point?

Yes, I got your point.

Just adding to Mr. Chopdar's point, Also, it's important to note that our scope of production or manufacturing is FOB Hyderabad, right? So it works, and so that's why it does not impact us to that extent. And also, see, we need to understand that this is an ever-evolving situation for all parties in this ecosystem, right? So, so far, I think our deliveries are lined up perfectly for the next few months and quarters, and we don't see any impact as of now.

No, there is no impact...

Noted, sir. Sir, my second question pertains to the Aero and Defense segment. Now that we have already 29% in the order book, you have a long-term plan of taking it to 40%. So just from the margin perspective, would aero and defense incremental share in the revenue will have a positive impact on the overall margin in the longer term? And how should we look this segment increasing on our working capital requirement as well?

Yes. So first of all, the product line what Azad is very differentiated. We don't do what this -- we do only the niche, right? As we spoke -- I spoke earlier on the engineering. So we are the only company. We are the only company in India who's producing those engines. There's no competition to us today. It's 100% awarded to us. right? So we don't go in such segments where we see a lot of competition or we participate in this kind of programs where we need to look at sometimes like if you talk about the Indian MoD, Ministry of Defense requirements coming up, we don't participate every. We participate where we can value add, right? The engine is a nationwide project. It's a need of the hour. And we are contributing to such projects. It's really, really appreciable for us to be there and keeping the growth in A&D in total. Likewise, in MOD, what we are doing in India is also in the global scale. We have only chosen the products which -- where we can really have a value add. So we are very secured in whatever margins we are adding while we take our orders. So that's also secured.

So I would just want to echo Mr. Chopdar's thoughts that the way we are estimating these components across sectors, we ensure that these are not margin dilutive in nature and the blended margins of the business will remain consistent at 32% to 36%.

We have our next question from the line of Pratik Dharmshi from Union Mutual Fund.

Many congratulations, Rakesh and team, for a splendid set of numbers. A couple of questions from my side. On the product side, do we see in terms of new product introduction, is there a material scope for improving the wallet share and introducing a lot more products for our customers where we can do more of R&D and get through with higher share of the wallet of the customers from here? Or is winning new clients our goal basically? How should one see it from a slightly medium-term point of view?

Yes. Yes, good question. So as the products where Azad plays in are very niche, okay? That's very clear that it's very, very niche and it's not easy to just produce these components, right? So it takes massive time to get the qualifications approval per product, per family, right? So if you talk about the wallet share, first of all, we are on average around 2% -- 1.5% to 2% of every customer's wallet share Azad is holding today for the product line which we have already qualified and approved. So one way, it's going to increase the wallet share from 1% to 2% to 3% to 5%, okay? That's one way in which the facility is coming up. The other way to look at it is to what to add more to add more families in qualification and all. That's the second activity parallelly which is going on, which we're just waiting for -- like that is a continuous process. That will never stop. That's keep on going. Only thing is to ramp up -- once you get approvals, you have to ramp up immediately. So that's why these facilities are coming up. So we're very curious and very excited to close all the growth -- I mean, to close all the upcoming facilities to start the production ASAP in [indiscernible].

Got it. And when we hear likes of Boeing, Airbus talking about a lot of opportunities coming to our side of the world in terms of their order backlog is completely full. They want to move the value chain outside the Western side. Considering the large opportunity which lies ahead of us in terms of catering the global clients as well, margin trajectory from what we have been guiding, that 32% to 35%, 36% band, as more and more niche and more and more aerospace-related stuff would come through, trajectory-wise -- I'm not talking about the next 1 or 2 years, but trajectory-wise, ideally, this band should go up. Is my understanding right? Or how should one see it?

Yes, yes. Primarily, again, Azad is component manufacturers for the engines, components and assemblies, right? Boeing and Airbus doesn't manufacture engines. They buy engines from Rolls-Royce, from GE, from Pratt & Whitney, from Safran. So our main focus is these companies. Also, we want to do a lot of business with Boeing and Airbus, but not all, right? Not all, and we would like to enter in the niche segments also in Airbus and Boeing of getting into the landing gear systems or something, which is again niche. So again, the prime focus stays with the engines where we have already committed, we have already taken the responsibility of committing -- completing a lot of projects in this coming next 2, 3 quarters. And definitely, as you rightly said, the massive growth opportunity is already there, and we'll be going step by step.

We have our next question from the line of Jayesh Shah from Ohm Portfolio Equi Research.

My question is to Rakesh. And again, it's on the similar lines as the previous question. Based on your answer, do I really come to a conclusion that Azad will continue to operate in niche areas and perhaps over time, will cap the customer wallet share to 4%, 5% to protect the margins? Or Azad has ambitions to really grow with each customer and perhaps become a system integrator where the long-term margins may come up to 20%, 25%. So I mean, at what point would you choose growth versus margins? And when would the trajectory change? Is that 5 years, 10 years down the line? Or what is it?

Okay. On a lighter note, what if we have both? Growth as well as...

That's an ideal scenario. We will be very happy to go wrong here.

So just for information, the contracts which are signed have already covered these both aspects, right? Here, we are saying 25%, 30% growth, consistent growth with high margins, right? So these are already captured, covered, signed off. So that's a good news for everyone, right?

Right. Right. But when we have seen companies like -- global companies like Apple, Airbus, Boeing beyond a point, they do end up checking your bill of materials and do really negotiate and come to some kind of a cost plus understanding because they become as meaningful for you as you become as meaningful for them.

Okay. So I'll tell you one thing. Now Mitsubishi, like -- okay, I'll not name a customer, but I'll say Japanese customer is placing an order. We know we are 40% to 50% cheaper, right? If they're spending $100 in Japan, we are at $40 to $50, right? We are -- while maintaining our EBITDA. Would -- and I know -- and they know that we know they're paying $100, okay? Will they come and ask us, okay, reduce further? Rather, we can say, okay, you want me to increase the prices further. So again, this is again on a lighter note, right? So I don't see any challenges. That's the transparency Azad maintains with all and enjoys the customers' attention that we are very transparent. They know everything about us. We know everything about them. So we don't -- I don't think we'll see any kind of such kind of thing of having this price thing. They may not challenge us or something like that, though everything is open.

And I think just adding to Mr. Chopdar's point, I think it's really about a balance that we are trying to strike. We do not want to compromise on our growth or our margins. We're trying to balance both of them simultaneously. If you look at our growth for the last 5 years between FY '21 to '25, we've grown at a CAGR of about 40%. But if you look at our CAGR in terms of EBITDA, we have grown at upwards of 45%. If you look at our CAGR in PAT, we've grown at a CAGR of 60%. So ultimately, for us, I think the focus has been to scale the business by improving our wallet share and keeping our margins intact or attempting to further improve margins. So we are on the same path.

We have our next question from the line of Rakesh Roy from Boring AMC.

Sir, I missed, sir. Sir, how much is our order book, sir, currently?