Azad Engineering Limited (AZAD) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Azad Engineering Q2 FY '25 Conference Call hosted by ICICI Securities. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinion and expectation of the company as on 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. Amit Dixit from ICICI Securities. Thank you, and over to you sir.

Thanks, Nikita. Good afternoon, everyone. On behalf of ICICI Securities, I welcome all the participants for today's call. At the outset, I would like to thank the management for giving us an opportunity to host the call. From the management today, we have with us Mr. Rakesh Chopdar, Chairman and CEO; Mr. Vishnu Malpani, Whole-Time Director; and Mr. Ronak Jajoo, Chief Financial Officer. We will have brief opening remarks from the management post which we will open the floor for an interactive Q&A. Without much ado, I would hand over the call to Mr. Chopdar to take this forward. Over to you, sir.

Thank you, Amit. Thanks a lot. Good afternoon, and Season Greetings to everyone. Welcome, and thanks for joining today on Q2 Earnings Call. On this call, we are joined by our Mr. Vishnu Malpani, Whole-Time Director; and our CFO, Mr. Ronak Jajoo and SGA team; our Investor Relations Advisors. The results and presentations are uploaded on the stock exchange and the company website. I hope everybody had a chance to look at it. We have delivered a strong performance in this quarter with our revenues growing significantly to INR 111 crores, demonstrating robust growth on a year-on-year basis, showcasing a growth of 35%. Adjusted EBITDA for this quarter stands at INR 41 crores. Further, the PAT has grown from INR 19.5 crores in Q2 FY'24 to INR 21 crores in Q2 FY '25 showcasing a growth of 8%. We have come a long way in our journey from doing business of INR 100 crores per annum to INR 100 crores per quarter, demonstrating an exponential growth in the last few years. This progression is a result of our commitment to excellence and our persistence and dedication. We spent the initial few years concentrating on getting our products qualified and approved. And today, we are in this unprecedented growth phase. The growth momentum has just started, and we are confident that we will be able to capture a larger pie of our customers, wallet share by leveraging our capabilities to better serve our customers' need with our new and existing facilities in place. Allow me to spend some minutes on the new orders that we have won during this quarter. We are honored to share that we have signed an MOU with Baker Hughes, Kingdom of Saudi Arabia in the presence of his Royal Highness, Prince Abdulaziz Bin Salman Al Saud, Minister of Energy and distinguished officials and committee members of local content forum at Riyadh, Saudi Arabia. This arrangement amongst other things, enables us to set up a facility to manufacturing supply of precision components, subassemblies, assemblies to cater requirements within the King of Saudi Arabia. In another remarkable achievement, we bagged an order win from Mitsubishi Heavy Industries, Japan. This is approximately INR 700 crores order, which will be executed over 5 years. This win is a testament of Azad's grit and vision as we are the only critical suppliers in India for airfoils. This demonstrates Mitsubishi's continuous confidence in us as an efficient strategic supplier and carry forward the long outstanding partnership with them, which was started in the way back 2012. This order is a way for them to block our capacities in the dedicated manufacturing -- upcoming manufacturing plant that we are building for them in our new upcoming facility through foundation stone laid in the year 2022. Additionally, we secured $16 million order from Honeywell to manufacture and supply complex companies for the aerospace and defense requirements. Another critical contract is Siemens Energy to manufacture and supply complex -- rotating complex components for the energy sector for a tenure of 5 years. These wins not only demonstrate our strategic partnership we have built with these OEMs, but also reflects our growth journey. Way back, I recollect, I started Azad with just one machine and today, we have become a global leader in providing high-precision engineered companies and solutions for the largest OEMs across energy, defense, oil and gas sectors. I am very happy to share that just now, just now, Azad Engineering has received a signed supply agreement with Arabelle Solution France, a French company for the supply of critical and highly complex rotating stationary components to meet the global demand in the nuclear power generation industry. The value of the supply agreement for its term is valued approximately $40 million, that is INR 340 crores. This supply agreement had initiated a strategic collaboration with Arabelle Solutions France. With above wins, our order book stands at INR 4,200 crores as on today, adding the INR 340 crores somewhere around INR 4,500 crores. We are confident that it will continue to increase significantly as we have a strong pipeline of contracts with our key customers. To update you on our CapEx plan for the new upcoming plant, the civil work is progressing as per the plan in line with the order book and the deliveries. We have placed orders for the machines and other equipments, everything is on track to start commissioning at our factory beginning Q1 FY '26. On the expansion front, as you all are aware, we are increasing our capacity to 10x. And as an update, we are well on track, and we will start generating revenues from new plant from FY '26. Further, we continue to provide a guidance of 25% to 30% for FY '25 with improvement in our margins due to operating leverage, process efficiency along with backward integration. Now I hand over the call to Mr. Vishnu Malpani, our Whole-Time Director, to take this conversation further. Thank you.

Thank you, Mr. Chopdar and Season Greetings to everyone. Good afternoon, and welcome to our earnings call for Azad Engineering. Azad story has always been about breaking new ground, and that journey continues. From being one of the first Indian companies to be able to manufacture complex and critical components such as 3D airfoils to now building a plant with 10x more capacity for these life and mission-critical components. Our progress has nothing but short -- nothing short of being extraordinary. Today, we are a trusted partner to some of the world's biggest OEMs, whether it's the energy sector, aerospace and defense sector or the oil and gas sector. And our commitment to innovation remains stronger than ever. We've worked very hard in our business to diversify and it started to pay off. Our energy business which contributed to about 78%, 79% of our revenue in the first half of FY '25, continue to grow at a very healthy rate with major orders from companies such as Mitsubishi, GE and Siemens, we are on a path for increasing our wallet share in the segment from the current 1.5% to about 2% to 5%. Similarly, with Baker Hughes, we are strengthening our position in the oil and gas sector with tremendous potential and opportunities of setting up a manufacturing plant outside of India as well. Our Aerospace and Defense business has more than doubled in the last year now accounting for 16% to 17% of our revenue. Key orders from clients such as Rolls Royce, GTRE, DRDO, Honeywell, among others, will drive further growth in this sector. And I think it's important to note that we are not just making life critical and mission-critical components, we are also moving to full assembly. We are manufacturing. We are on a verge to be manufacturing an engine end-to-end for GTRE moving up the value chain in manufacturing as well. But this is just a beginning. Our new facility will unlock even more growth, allowing us to serve our current customers better while opening doors to newer opportunities and markets. Two smart acquisitions that Mr. Chopdar mentioned of Leo Primecomp and VTC Surface Technologies, we are building deeper capabilities and creating new avenues for growth. We are not here to settle for the status quo. Our goal is very clear: to grow our addressable market from $28 billion to upwards of a much, much higher number and to increase our wallet share from 1%, 2% to 5%. We are on a path to become something far greater than we are today. Together, we are building not just a company, we are building the future. I would like to now hand over to Mr. Ronak Jajoo, our Chief Financial Officer, to discuss the key highlights on our financials. Thank you.

Thank you, Vishnu. Let me talk about our financial highlights for quarter 2 FY '25. Revenues from operations came at around INR 111 crores in quarter 2 FY '25. The blended average growth rate in H1 FY '25 was 32.17% when we compare to H1 FY '24. The blended average growth rate for quarter 2 FY '25 is 34.5% compared to quarter 2 FY '24. The blended average growth rate for quarter 2 FY '25 is 13.21% compared to quarter 1 FY '25. The other income mainly consists of interest income and foreign currency fluctuation during the H1 FY '25. In H1 FY '24, it was higher on account of sales of our two subsidiaries and land, which has resulted into INR 9.8 crores of other income within that period. EBITDA improved due to operating leverage and the process improvement and stand at INR 41 crores in quarter 2 FY '25. The EBITDA margin has increased by 200 bps during the last quarter to this quarter. This improvement is largely driven by operating leverage in employee costs, tools expenses and job work expenses. The finance costs mainly represent the interest towards the working capital and term loan in our books as there are no Piramal CCD, which was converted into the equity during the IPO process. The adjusted PBT for quarter 2 FY '25 stood at INR 31.4 crores and there is an improvement of 273 bps, which is in line with our EBITDA margin improvement as explained earlier. Profit after tax stood at INR 21 crores with 19% of healthy PAT margins. Our net debt position as on 30th September is INR 112 crores. Working capital is at peak in this particular quarter and they will taper down as major qualifications have been completed and we are able to indigenize the raw material with one of the millers as I explained in the earlier call. Now I would like to open the floor for questions and answers. Thank you.

[Operator Instructions] The first question is from the line of Bala Murali Krishna from Oman Investment Advisors.

So my first question is regarding the new facilities, which we are building in Bollaram, in FY'26 by which quarter we can expect that to be on stream and another facility we are planning in Sangareddy for RFP. So by when we can...

Sorry for interrupting, your voice is not clear. Could you speak a little loud?

Yes. My question is regarding the new facilities which are coming on stream. So this Bollaram facility you told in FY '26, so in which quarter we can expect that to be on stream and by when we can expect to reach the optimum level? And second is on Sangareddy new facility also. What is the plan for that one also?

Yes. So the first facility what we are building at Tuniki Bollaram, that's going in a phase-wise manner because it's a very large facility, right? And we are setting out dedicated facilities for every customer. So what we intend to do is we -- now the facility for GE steam power system is SPS, GE Vernova that is the first facility which is going to come up. It will be ready in the calendar year of '25, in the first quarter of, I think by January, February, the facility should be done and from March that will be operational. And then similarly every 2-3 months, we will be having one facility for Mitsubishi machine and this is progressive, it cannot be done all at a time, right? So, do you understand what I am trying to say Mr. Balakrishna?

Yes. Regarding the Sangareddy facility?

Not sure. We are going to finish this first and then take up that facility. So, we are going phase wise. So this will be a continued process. So, first it will come for GE Steam Power system, then it will come for Mitsubishi and all the customers are lined up. I can't name them because we have not disclosed yet, but every customer has their own facility in our own factory. So, it is a factory within the factories. End of that you can expect from FY '26, the incremental value, the incremental sales will be added up from the new facility in a nutshell, if I want to answer you.

Understood. And regarding this order wins so -- since we are listed, so we have won a lot of orders, we know that value. So when we can -- I mean almost are 5 years to 7-8 origin. So from FY '26 onwards we can expect execution of all these orders?

Yes, that is the plan, Mr. Balakrishna. So, FY '26 onwards, you will see an incremental revenue coming up from the new facility, which we are adding as the capacity what we are building is 10x size with what existing it is.

So, then we can expect a good jump in the numbers from FY '26 as compared to the existing guidance?

Yes, it is interesting. Hopefully, everything goes well as we have planned and till now, whatever planned everything is on track.

And lastly, on this Baker Hughes agreement, so you are going to set up a plant in Saudi Arabia, right?

Yes, we already signed the MoU. We are now planning to set up a shop in Saudi Arabia.

But my concern is that like in Gulf or Saudi Arabia, so the cost of production would be much higher as compared to India, so it can impact the margins slightly?

No, nothing is going to happen, and this requirement is basically for Saudi Arabia in Saudi Arabia, right? And the pricing structure is not as India structure, correct. So, what we see is the technology, everything is ours, right? So, we have our own way of manufacturing. It doesn't matter if it is in Saudi Arabia, or if it is in India, or it is in US or Europe. For us, it doesn't matter.

Yes. lastly, one small suggestion, sir. So, in order wins, in few orders, we are not getting the value of order. So, it would be helpful...

We can't disclose Mr. Balakrishna. We can't disclose. What we can disclose, we are disclosing. We just now uploaded it on our website. We got a contract from Arabelle French company. We got a large contract of INR 340 crores...

[Operator Instructions] The next question is from the line of Jeevan Patwa from Sahasrar Capital.

Congratulations, Rakesh. Wonderful set of numbers, and excellent order wins in last quarter and even today's order. Just one question on this. So, we are now saying we have won the contract with Arabelle Solution, which is for nuclear power. So, are we exploring any domestic opportunities in the same sector and the area?

This contract, Arabelle Solution, is a complete EDF. I hope you have heard about EDF; it is a part of EDF. It is a French government Company and EDF and Arabelle controls the major Nuclear power across the world. So, it is a pride moment for us to have this contract for nuclear power. It is very, very stringent and to getting approvals from EDF is very, very stringent, right? So, this is where we stand for and this is just the beginning of this last contract, and I can tell you the boom which is coming up in the power generation is quite crazy. Coming to the second question of yours on the domestic, domestic look, we have only have BHEL and you will come to know very soon because we are in talks with the very senior management of BHEL. There are many parts which BHEL still imports, right. So, we got into collaboration with them and what Azad is Manufacturing, exporting and there are some components which BHEL is importing. So we had a discussion with them and hopefully we could crack something which is coming up big from BHEL as well. So equally, you're right, there is a good requirement from BHEL as well.

And secondly on the Saudi, so we are going to set up manufacturing facility in Saudi. So, any color on that, how big it would be, what will be the investment and what would be the potential?

I can't give you much details Jeevan, but I can tell you one thing, I can give you an idea of flavor that this requirement is nothing to do with the existing business what we are doing with Baker Hughes. So, this is for the Kingdom within the Kingdom, right? And they do not have many manufacturing facilities. I mean it is not just see what Azad plays a role. Azad plays a role where it is not just technology where you can buy -- if you have money, you buy technology, and you start producing parts. It is not that, we value add. We value add in the process engineering and all. That skill set what Azad has got. Its very rare. So, this is where Baker Hughes selected us to set up a facility where we can provide solutions to them. So, whatever business will come in, it is for Saudi, within the Saudi. So, this is quite large numbers, I can't disclose any numbers right now, but it is quite significant.

The next question is from the line of Kamlesh Jain from Lotus Asset Managers.

Congrats for strong set of numbers and very strong commentary, sir. Just one question on the part that we have a very ambitious target of around 10x capacity growth. So, what would be our CapEx spread over the next like say, 3-4 or 4-5 years?

CapEx again depends on the business cases, right? As Vishnu mentioned like we are going in component manufacturing. That is of course that is on track when we are going in assemblies, we are going in sub-assemblies. So, every business case has its own business case of investments. So, it is a very detailed discussion, and you are most welcome to visit Azad, so that we can showcase you all these things, what exactly we are talking about. It is very difficult to justify one particular investment and one particular customer. So it is very diversified, right? Azad is playing multiple roles in multiple verticals. So every vertical has its own set of investments, so it is very well planned and very detail planned.

You have a guidance of roughly around INR 200 crores CapEx in this particular year. So, going forward like over next 3-4 years like how the CapEx would be there because you have stated your...

That is what I was trying to say, Mr. Kamlesh that we are doing phase wise, right, as Mr. Balakrishna also asked the same question, all the CapEx is not going to get consumed once, it is phase wise. Like it is not small facility what we are doing, it is 10x. And every customer has this large project like we were given INR 800 crores. So, we are investing ahead of the curve to balance their requirements. Same thing we signed big contracts with Arabelle. This is for again large contracts. So these contracts are coming because we are building a capacity. So hard part was done already back, long back and that is how what Vishnu was mentioning, we are increasing the wallet share within the customers from 1% to 3% to 5% to 10%. That is the reason this is a very well laid out 10x capacity. There is a plan behind this 10x capacity. So, I request your presence in Azad, then we can discuss more in detail. I can share you all the things because it is not just one customer, I would have given you one number.

And the last, on the debt side, like our net debt in this quarter has risen to roughly around INR 127-odd crores and I do appreciate that you had a CapEx of roughly around INR 127 crores in this quarter and like sir, going forward as we expand and increase our CapEx, so what is the debt level or net debt to EBITDA we would be comfortable with?

Mr. Kamlesh, Ronak here. So, our net debt to EBITDA guidelines will be around 1.2 to 1.3. We always maintain that particular ratio and we are on that track.

So, that would remain in that particular range?

Yes. Yes.

The next question is from the line of Aditya Bhartia from Investec.

Sir, my first question is also on the new large contracts that you have got from companies like Mitsubishi and Honeywell, now these have been our existing large customers’ and we have already been executing orders for them. So, just want to understand these new orders should be seen as something which is completely incremental to what we were already doing, or part of the existing business gets consummated in the new order wins that we are speaking about especially for Mitsubishi, given that is a fairly large order?

Yes, it is purely incremental of the wallet share increment, Aditya. The existing business, what we are doing with every customer is we have limited capacity, right? This is the revenues what we are doing at the moment. And we are going into 10x, so there is a plan behind 10x, why we are going 10x is because we know that these orders are on its way and as we are showing capacity, we are showing progress, they are releasing the purchase orders, so this is an incremental which will be continuing. Like Vishnu mentioned, 1% to 3% to 5% to 10% wallet share, increment of wallet share from every customer. This is a classic example how wallet share is increasing.

Understood. Perfect. And one should assume...

We just now uploaded one more for Arabelle Solutions, Aditya, for nuclear power.

Right, right, the EDF one, correct.

Yes.

And we should be assuming slower and gradual kind of a ramp up as capacity keeps becoming operational and fair to assume that revenues that we will be getting from some of these new contracts two years down the line will be higher than the first year, third year will be higher than second year. Is that how we should be building that?

Aditya, Vishnu here. So, just adding to the first question that you had asked, if you look at the way the Japanese generally work is they work on purchase orders and then that needs to be executed. But since the new capacity is coming up, every OEM is making efforts to sort of book our capacity for the next 4-5 years, so that there is a clear clarity on how the ramp up is going to happen in terms of wallet share, so all the contracts that you see with our customers, with our existing customers and existing product lines are towards increasing our wallet share. So that is how we are looking at it. And secondly, see today we are constrained by capacity, right? So when you see a ramp up, you will see -- you should look at customers that we have been talking to that we are in production mode. So, those customers will constantly keep ramping up at a faster rate. The customers that are currently in developmental phase or qualification phase will slowly ramp up as is the nature of the industry because these are mission and life critical components.

But Vishnu, given that the Mitsubishi order that we spoke about is INR 700 crores for I think over a 5-year period, on an average it kind of works out to be INR 140 crores per year, let us say we build in a ramp up over there. By third year, we will be having INR 150 crores to INR 170 crores of possibly revenues coming from this order. That is a fairly substantial part of incremental growth that then we are speaking about, right, and we are speaking about not one such order, but multiple such orders. Then should we think about growth possibly being faster than what we have been speaking until now? Is it a possibility that with so much capacity coming on stream and with the kind of order wins that we have had instead of 25%-30% growth, we can be at a faster growth trajectory?

Definitely, Aditya, I think that is the most logical response to this question, but then for the market, we are still guiding 25%-30%. But internally we are obviously chasing higher numbers as you would know because these contracts, like you rightly said, come in with specific delivery schedules and specific timelines. So, we are ramping up quickly, right, so if you look at our addition in our capacity, it is not 25%-30%, it is higher than 25%-30% per annum. So, we are obviously internally targeting higher number by guiding the market at 25%-30%. That is how I would like to answer it.

And even for FY '25, this 25%-30% guidance looks to be on the conservative side unless it is a scenario that we are facing big capacity constraints until the time new capacity comes on stream it is difficult to further expand because we are now already doing INR 100-odd crores per quarter even if we assume, let us say, 3%-4% sequential growth every quarter for the next two quarters we are speaking about hitting the upper end of the guidance. And historically, we have done a sharper sequential growth than that. So, is it that just we are just being conservative or are we facing capacity constraints at this stage?

So, first point is there is definitely capacity constraint, right? So, in the current facilities that we have, we are going to be busting our capacity very, very soon and that is why you see our endeavor or our attempt is to start productionizing the new facility as soon as possible. So, today, while the 25%-30% guidance as we rightly said, we have hit INR. 100 crore revenue per quarter. So we are looking at delivering at the upper end of the guidance for sure. Trying to manage our capacity internally, but since the new plant comes up, I think the growth can be much higher. So, there is definitely capacity constraint for the current year, but we are still managing with 25%-30% and we should be at the upper end of the guidance.

And just last question from my side, obviously there's capacity expansion that we are undertaking, there is the capacity that we have to set up in Saudi Arabia, any breakup of CapEx that you can provide at this stage about how we should be thinking about the CapEx numbers for next 2 or 3 years and how much CapEx we would have already incurred in the FY'25 in respect of the new capacity that will be coming on stream?

Aditya, for this conversation, I would like to take you back to a couple years behind where we were like say, INR. 100 crores per annum. So, we build capacity of 4x and today we reached a point where we reached INR. 100 crores per quarter, right? So, we do have a plan of ramping up in a pragmatic way until FY '27-'28 and we internally have also started planning our business beyond FY '27-'28 onwards to much higher number as well. So, the capacity planning, the CapEx planning is underway, and I think today, we do more the capacity addition that we need to do till FY '27-'28. We are working towards going from FY '27-'28 to say FY '32. So we are in the process of doing the math around the CapEx deployment, but in all likelihood, you understand the asset turns that we have in our business, you understand the kind of potential that we are looking at. It will be a fair assumption to look at that and make a good guess, but from our perspective, I think it is going to take us maybe a couple more months to come out with more concrete exact numbers for capital deployment.

The next question is from the line of Sanjay Shah from Pranishta.

Actually, most of the questions have been answered, so I don't have any questions left. I do want to take this opportunity since I'm on the line to congratulate you. I don't think we have a better exponent of manufacturing excellence in the country than you. So all the best, but all my questions have been answered.

So nice of you. Thank you.

The next question is from the line of Rajesh Vora from Jainmay Ventures.

Congrats on winning prestigious orders from some of the top marquee clients in the world and also good numbers. You mentioned in your opening remarks that first quarter of next financial year, you're going to start the Phase I of the expansion, so what percentage of 95,000 square meters of facility 1 will be ready in first quarter.

It doesn't come that like that, Mr. Rajesh. Thank you so much for your question. It doesn't go like that. It's every OEM has their own requirements, right? So we can't compare that with space occupancy, we have to compare with the capacity, what we are trying to add in that space. That is -- that could be an ideal thing to explain you. And it's too technical to give you the number of machines and all that. So you are also most welcome to visit Azad, so I can give you more detailed presentation on this.

No. I understand. I have already met you and visited your plant. Thank you so much for that. No, what all of us are trying to understand Mr. Rakesh is that there is a 10x capacity expansion being planned, which is -- there is a soaring order book, which is also very, very commendable. What we are trying to get our arms around is what percentage of that is going to be ready. Out of that 10x is 1x going to be ready in first quarter, '26 when you say we are going to start, how do we scope that?

What guidance we are giving Mr. Rajesh, is the 25%, 30% guidance is to the market. And we have our internal targets are different, correct? So this is where we are trying to explain you that the growth rate what we are saying for FY '25 and FY '26 onwards, the incremental. As you come nearer to FY '25 and as we also see how progressive we can build this facilities ASAP, that would be an ideal situation to give you exact quarter-wise how it's going to come and incremental things.

Sure, sure. I understand that. And wallet share target that you have set out for your company, 5% from each customer on an average basis, will that be achieved once you have the entire 10x capacity under your belt? Every OEM has a different number, so we -- when we say 1% to 3% to 5% to 10% is the average number. Yes. So that target will be achieved once we have the 10x capacity?

Yes, 10x is now. And then there's -- as earlier also another gentleman asked on the first question, what the first -- Mr. Balakrishna also asked that Phase 1 is 90,000, 95,000 square meters, and we have another 70,000 square meters facility ready. So if we finish this first, then we go move to that. So these 10x may become 12x, 14x, 15x, hopefully. So basis the requirements the wallet share as it increases, we are ready.

The next question is from the line of Partha from Eastern Financiers Limited.

Congratulations on wonderful set of numbers. I have a couple of questions. First one is, do you have further scope of margin improvement from here onwards?

Of course. Of course, we all die for that, right? So we will not leave anything which it is not -- will not let it go either ways. Even if you go to the customer or you come to us, either of it.

Okay. Excellent. Next is on working capital, I missed whether our working capital days has been stretched, has there been challenges on procurement and raw materials?

Yes. Yes. So this is the biggest problem of procurement of all because everything is we have to import. And now what we're doing is while we try to place an order for the raw material, these are all as we have to import major of it. You have to pay in advance and then they manufacture, then the shipping time, then it comes in at inventory, then we start manufacturing, it takes quite a time to turn out that. So we are now in EV are successful in developing few Indian mills here and these Indian mills has just started right now, okay? And if you can see very much taper off and major of the qualifications are done now. So very soon, we will get out of this, so this is a temporary issue. This working capital issue is a temporary issue. And very soon, you will see a taper off the number of the days which are coming up. So that way, you will very soon see that this -- we will come out of this problem very soon.

And the last one, sir, with regards to the...

We request that you return to the question queue for a follow-up question.

It was the last one, if you could, please.

So you can also return to the question queue for a follow-up question. The next question is from the line of Mayur from Wealth Manager India Private Limited.

Congratulations on a good set of numbers. Just 2 questions I could actually join the call a little late because of network issues, but then I hope if you can answer me again, if this is already been asked. The point I was trying to understand was, we have the customer confirmations and orders in place. We are putting up the capacities in order to execute that. We have the product approvals and validations all done. Sir, what is the risk? I am trying to understand what is the risk in theoretically trying to ramp up 3x in 2 years. Why can't it be done? I understand that just capital costs...

I will answer you. I understood your question, I'll answer you, right? Building, construction, people, money, everything is available. What about the equipments, every equipment is all imported. The deliveries of these equipments are not handy as -- okay construction-wise, some buildings take 3 months and the same building if we add more resources, we can do it in say 2 months, right? We can add more people, we can train more people. We can do all sort of things which we are in our control. But when we talk about these kind of equipments, what we need to manufacture these components are also majorly are imported, right? This is where we sometimes have these long lead delivery items, which is not in our hands. And we cannot anticipate an order which will come after 6 months and place an order today on the equipment. We will only place an order once we have a contract in hand. Do you get my point, sir.

Sir, we already have INR 4,000 crores worth of order where is the...

Yes, we placed equipment orders. They are just all coming in. That's the reason we are telling you, you will see an incremental revenue from FY '26, correct? So you will see a shift from FY '26 for sure because the capacity will be, done equipment will be in place. .

Okay. Got it, sir. And the other question was around -- normally, when we see what we have understood about airfoils and other parts, which are there or the other, which goes into the -- it's critical in nature. It is important in nature. Why is it -- and we say we are among the lowest cost for some of -- for most of our parts which are there. Why is it this advantage, which is for the customer which is it is low cost. It is critical in nature. We have the orders in hand. Why is that advantage not getting reflected in terms of our working capital cycle, which can be much, much lower than what normally a critical manufacturer of suppliers would normally get the benefit of, sir?

Yes, of course, you are right. Of course, you're right. So when you say qualification, this is a very continuous process. You keep qualifying, you keep your wallet share increasing, you keep your order book in an incremental phase, right? Today, if we capitalize our development costs for this what do you call the qualification part, our EBITDA is 3% to 4% higher, but we expense it out. We don't show that as -- we don't show that taking that consideration in our -- we don't capitalize that amount. If we stop doing that, we cannot do that. We cannot stop it, right? We don't want to start at INR 4,000 crores. We are addressing a TAM, which is what product Azad is related to is around $30 billion plus, right? This is just a start. Now when you're trying to reflect things, we need to have this facility, first thing is for most this facility coming up. Second, the qualifications which we finish, as you can see in our working capital, which is having a higher number of days because of the reasons which I am sure you must have heard in the previous question that the raw material, the qualification as a minimum order quantity, you have to qualify 5 pieces. For that you need to buy 500 castings. We have to import all the 500 castings which stays in inventory. Once you finish the qualification, then the inventory slowly starts getting reducing. That means the taper-off is coming, correct? So that phase is -- just coming out of that phase. We are just coming out of that phase. And from FY '26, you'll see a beautiful story coming up.

So sir, you think that -- so just to understand it better at INR 1,000 crores turnover you believe that the working capital will it be meaningfully lower than the current working capital days?

Of course, of course, of course. We can survive having such long working capital, right? It's not a thing, but this is a temporary phase I'm telling you. Not me, anyone has to go through this. Because the business is like that and as you mentioned, we have best cost, we have good margins, we have good customer profile. That's why we are the only one in the country for such product like. There's no one else.

So this will start seeing from FY '26 is what you say?

Yes, yes. Hard work is just done sir. The hard work is just done. Now you will see, you will definitely witness. We all wish to do this, right? All these years, we did this struggling, now we have coming capacity addition.

[Operator Instructions] The next question is from the line of Akshay from C D Integrated Service Limited.

Congratulations on the great set of numbers. I just want to understand the thing I was looking for the presentation and our total addressable market for FY '27, even if we consider the 1% of that, then it would be around INR 2,500 crores to INR 2,600 crores in all the 3 segments we are working. So is it understanding right that if we can just grab the 1% share of total addressable market, we can do that revenue or turnover around FY '27, FY '28.

Of course, Akshay, that is the reason we are putting a 10x capacity, right? We know the addressable market. We are at best cost. We have qualifications and approvals are majorly done, right? So it's only the capacity issue right now. So that's what we are trying to say. If the capacity should we get this factory ASAP up, that's the whole intention to take the wallet share which is available and they've already started turning out. These large contracts coming is nothing but our capacity increment, correct?

Okay, sir. Okay. And sir, my second question is that whatever the contracts or the agreements we are signing or we are getting the value of all the things, let's say, if a contract is for 5 years, then in 5 years, it will get completed and all the revenue will be realized. Is my understanding right?

Of course. Of course. And this is not an end, right? This is just a start.

The next question is from the line of Partha from Eastern Financier Limited.

Sir, I have just one question with regards to this Mitsubishi order. I think it's a repeat order?

Yes, it's an incremental, correct. It's just the capacity, yes, the higher what we are doing.

And sir, there are no competitors in India?

No. No. A few of the -- just to give you one more good thing, which we all should feel proud is -- it's not just India, a few of their components, we are the only outside Japan. In the whole world, there's no one else, either it's manufactured in Japan or made in India.

Okay. That's great, sir. So before others step in, so were there any other companies which are actually doing it and another actually over from?

Yes, of course. See, this is where Azad competes? Azad competes China, Europe, Korea, Japan and U.S.A., right? And the wallet share, which is coming in from, of course, in the competition.

The next question is from the line of Mr. Amit Dixit from ICICI Securities.

Congratulations for actually continuation of a very good set of numbers. I have a few questions. The first one is on commercial aerospace. So we are seeing that things are now improving. All the companies, particularly after Boeing's crisis got over, the optimistic commentary from all the global majors, I just wanted to understand that whether we have anything on anvil for LEAP engines, are we engaged in some of the parts? Or are we buying for that particular engine, which is basically as you know it will be fastest growing engine in the history of aviation.

Yes, yes. Dixit, definitely, when we are in this industry of engines for us, it doesn't matter it's defense -- or it's military engine or commercial airline, right? For us it will not matter. The customer base is the same. The only thing is we are not taking much orders because we want to get ready. We want to get ready because these are some master requirements. And so that engine components, especially on the rotating components, it's not easy to get into that. But Azad has already put its foot in the door, right? So very soon, you will listen a lot about these things.

Yes, because the question was more in light of the fact that both GE Aerospace and Safran who have got collaboration, they are our clients. So I was just wondering that we should also have a foot in the door at least?

Yes, we are. GE Aviation we are already approved suppliers. Safran we are already approved supplier. Rolls Royce we are already approved suppliers. So that's not a problem. It's just we are getting ready to take that big chunk as I told, the capacity is the major issues, right? So that is all talks are going on. And we can share more details once it comes to close up when we are able to close deals with them.

Okay. The second one is on the order that we won earlier. That is for Rolls-Royce, when we can the execution of this order to begin?

Yes. Yes, the qualification is one Mr. Amit. So as per the contract by calendar year '25, we should be in the middle of the qualification. And as the qualification is done, then that's done with that and the ramp up comes up from there.

Okay. So some of the earnings that we get split incremental earnings from FY '26, maybe you can...

Yes, that's -- so we also have a lot of hopes on FY '26, which will open. Of course, it will at least give a kick start. At least if you give some small, small, small steps for the future years, right? If you start taking baby steps from FY '26 with what we're doing currently, it will add baby steps on FY '26 and then we can leap and bound and crawl, walk and run.

Okay. The second one is on Saudi Arabia interesting collaboration. Now does it give us any preference that whatever Baker Hughes for our -- of course, for our market, whatever it does, we will be getting the first opportunity in Saudi Arabia for Baker Hughes. Is this a general way or how does it work? And if it is possible, can you give the broad contours of the facility size that we are looking at?

It's an interesting question, Mr. Amit. I'll tell you, this is very massive. It's not something in -- it's all in millions and it can convert into a lot. So when we met the Ministry of Energy, we met their clients, Baker Hughes took us to their clients, which is Saudi Aramco and many more companies and they presented Azad there, okay. This is a company which will come and set up a shop. So it's their approval who has accepted that Baker Hughes has got suppliers to put in a shop there because of the capabilities, right? And they have -- it's not just Baker Hughes it's in connection with the Ministry of Energy as well as their customers where these products are going to use, who's going to use these products, right? So they also need to give a consent. So they also approved us. Okay, Azad is the best fit, you can go ahead with that. So Baker Hughes has taken in principle approval from the industry, in principle with their customers and then put us out there in the front. So it was not just 1 day story. We had gone on, where we have presented there. They had to really come to the -- we have to match, and we definitely matched all the requirements. And we were welcomed and we felt happy that they selected us.

Okay. So when can we expect the production or the setting up of this facility?

This is at a very early stage. We just agreed. Now we are having discussions, they sent us some package. We are evaluating. We are doing the core basis that we need to select the equipment. And we need to -- we are also thinking to have a local partner there because the administration work and all that thing we would like to take a local -- set up a JV with a local partner there. We are talking to a few of the major companies there we can have a JV with them and we can start this activity so that we focus on our business here and also give support to that JV. So we are making it a smart workout. We are trying to make sure that we don't put much investments. We don't put much things and we keep measure of the things in our control and things will go very smooth.

Okay. The last question from my end that last time you mentioned in the call that Q2 FY '25 would be better in terms of margins and indeed is, now is it interesting that despite slight lower Q-o-Q share of aerospace, you still have margin improvement. Now is it due to the order execution sequence or the impact of value addition pursuant to new acquisitions? Or how should we read into this?

I'm sorry, Mr. Amit. I'm not really -- can you please repeat the question here.

Yes. So the question is that last time in the con call, you mentioned that Q2 FY '25 would be better in terms of margin and your margins have come out better, to be honest, Q-o-Q. Now -- and this is despite -- if I look at Q-o-Q split in the revenue, the energy contribution is higher compared to -- I mean, aerospace if I look on a Q-o-Q basis. Now is the improvement in margins, basically because of the orders we are executing the nature of others that might carry higher margins? Or is it that we have acquired the 2 acquisitions that we have made, is it the impact of these?

Yes, Amit, this is a function of profit improvement and the lower employee costs because we are not adding employees and our sales are growing at 13% quarter-on-quarter. So this is a function of operating leverage and the process improvement what we have done, it is not because of the subsidiaries that we have applied.

Okay. So that is to follow that advantage.

Yes, yes.

The next question comes from the line of Chirag from Neo Asset Management.

So just wanted to understand that -- from your commentary, if I can understand that if a new entrant wants to enter into the business, it will not be very easy for that player to build up the kind of capacity that you build up and there will be lots of entry barriers. But at the same time, when we are looking to increase your wallet share amongst OEMs, then effectively you will be grabbing the market share from other suppliers based in China, Japan, U.S. and all. So what different will you be providing to these OEMs that they will be encouraged to come to you and not to go to the other suppliers who are also there in the business?

Actually, see, first thing in our business is first is to break entry barriers. First you need to prove that you can manufacture these rotating components. We now won a nuclear order, we are now making rotating components for the aircraft. And you can imagine the life critical components. You're not talking about some armrest, you're not talking about some component. It doesn't -- it's not really directly affecting a life critical component, correct? In a seat, it's an armrest manufacturing you go and get approval having the same CNC machines you can manufacture armrest. But manufacturing rotating component of a engine, you can imagine how much values are there to break to come to that level of the OEM accepting the rotating component manufactured in wherever the facility is and setting up and utilizing it, correct? So definitely, it's not easy. First, the barriers are there to break, qualifications are there and then come the price level, right? Whoever has broken the barriers, they must be a great company, China, Japan or U.S. or Korea. They must have done it in their past whenever they have started 30, 40, 50 years ago. And Azad being new entrant, it's very, very evident that it's not easy just to put technology, we can get these orders, right? We have to break the barriers also. So in this regard, in this context, what we can tell you is the orders what we have is definitely we're competing the world. We have the best cost. I don't use the word low cost. I say it's the best cost and give a solution to the customers, right? And anything which a qualification takes for any OEM to approve any supplier is the cost to the customer also. So definitely, if the cost is not beneficial to them, they will not switch. It's a very serious work and it's a long journey to do the qualification. They have to spend so much money other than we invest money, they also invest a lot of money in qualification, right, for years. So that benefit, if you don't pass on, why will order come to us. That will stay in China or Japan, wherever they have done it already. So definitely, there is a cost advantage as well. First it's technical capability throughout and then comes the cost.

Ladies and gentlemen, due to time constraint that was the last question. I now hand the conference over to management for closing comment. Please go ahead, sir.

Thank you so much. Thank you, everyone, for your time and patience for coming in this call and asking good questions. I hope we could answer all the questions. If anything is there, do write an e-mail to us, we can answer all the questions basis the time constraints. And that's it from my side. Thank you so much everyone.

Thank you from Azad's side. We're very happy to get on a call and address the questions that anybody had and it's always a pleasure to talk about our business and to get more clarity into the questions. And these are some very interesting set of questions, and I hope we've been able to bring some more clarity into how we're planning to ramp up our business very, very soon. So thank you so much for joining us today.

Thanks a lot for taking time for the call, and it was great session where you have asked a lot of insightful questions and hope we are able to give you the color on that. Thank you.

On behalf of ICICI Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.