Azad Engineering Limited (AZAD) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Azad Engineering Limited Q1 FY '27 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, Azad Engineering Limited. Thank you, and over to you, sir.

Thank you. Thank you, [indiscernible]. Good morning, everyone, and a warm welcome to our first quarter earnings conference call for fiscal year 2027. Joining me today is Mr. Vishnu Malpani, our Whole-time Director; Mr. Ronak Jajoo, our CFO; and our Investor Relations Advisers from [indiscernible]. Our stand-alone and consolidated financial results, along with our latest investor presentation have been uploaded to the stock exchanges and our website for your reference. To start with capitalization on global industry megatrends. Before we review our specific operational milestones, it is critical to look at the [indiscernible] macroeconomic tailwinds driving our businesses. We are currently witnessing an unprecedented synchronized high-growth cycle across all sectors. In the energy domain, the global footage for energy security and the transition towards advanced gas turbines have triggered massive multimillion dollar global equipment upgrade cycles. Concurrently, the aerospace and defense sector is experienced structural supply chain shifts, driven by a global surge aircraft demand and an intense domestic focus on defense self-lines. These are not short-term spikes. They represent structural [indiscernible] shifts. Because Azad has spent years securing strict OEM qualifications and build specialized heavy infrastructure, we are uniquely positioned at the epicenter of these dual megatrends. These powerful industry tailing mix provides a strong compounding foundation that will fuel Azad's long-term scale and order book expansion for the years to come. Now a very historical nation milestone, India's first indigenous double jet engine. I will begin today's call with an announcement that it fills me and our entire team at Azad with immense national pride and I'm thrilled to share that Azad Engineering has successfully manufactured, assembled and delivered India's first [indiscernible] expandable turbojet engine to the gasoline establishment DRDO. And administrative. As highlighted in the official press release from their MoD, Jet engine technology represents one of the final frontiers of sophisticated engineering demands a level of extreme decisions, advanced metallurgical expertise and uncompromising manufacturing quality that is mastered by only a select handful nations globally. For Azad, this milestone is a profound architecture shift. We have successfully evolved from being a position component manufacturers into a fully integrated propulsion system player. By taking up the end-to-end manufacturing, assembling and integration of this compute engine assembly, we have moved right up the value chain. This significantly expands our total addressable market and firmly seals our position as an indispensable trusted partner in the India's long-term aerospace and defense [indiscernible]. Thus has also been advised to prepare for a significant scale-up in production volumes once the ongoing sequence of testing is completed, which will, in turn, accelerate development across all of India's past and future critical indigenous engine programs. On the [indiscernible] expansion, another added the new bacon facility. Our physical infrastructure footprint is scaling up right alongside our technical capabilities. I'm proud to report that our massive multi-facility expansion road map at our Tunki Bollaram Industrial Park is progressing exactly as planned. Following the successful commissioning of our dedicated lines from Mitsubishi, GE Power System and CS Energy, we hit our next major milestone recently. In April 2026, we officially inaugurated our fourth dedicated lean manufacturing facility, a state-of-the-art 7,600 square meter facility, custom-built for baker use Operating dedicated plants represent the deepest possible level of customer integration in our industry. It creates immense operational sticks and provides long-term multiyear supply chain agility with global marquee OEMs. Civil construction across the remaining units at Center of Excellence, the track to wrap up within this fiscal year. While we are undertaking a major calibrated ramp up across these new lines to satisfy stringent customer qualification schedules, we expect the more substantive contributions to begin crystallizing in the second half of this financial year. Now on the Q1 FY '27 financial performance [indiscernible]. Our unwavering first on operational discipline, operating efficiencies and optimized product sector mixes, has enabled us to kick off the new financial year on the strongest not ever. Looking at our stand-alone financial performance for Q1 FY '27. And happy to mention that we have met our guidance. Revenue from operations grew by 26.8% year-on-year, reaching to INR 170.5 crores, up from INR 134.5 crores in Q1 FY '26. Reported EBITDA expanded at a faster pace of 32.1% year-on-year to arrive at INR 64 crores reflecting the molding efforts of our operating leverage. EBITDA margins expanded to robust 37.6% up from 36.1% in the same quarter last fiscal. Profit after tax registered a healthy growth of 21.2% year-on-year to stand at 36.4%, maintaining an exceptional PAT margin of 21.3%. On a consolidated level, our revenues came in at [ INR 172.6 ] crores with an EBITDA of INR 64.4 crores and PAT of INR 352 crores. Our business segment across energy, oil and gas and aerospace and defense continues to grow symmetrically and strictly in tandem with our long-term structural targets. On the closing outlook, very important for me to give this message. As I have mentioned this earlier, FY '26 was a year of expansion during which we undertook a wide range of foundational activities to position Azar for its next level of revenues performance and growth. I'm pleased to report that we have already stabilized 80% of these initiatives in Q1, with the remaining major activities on track, for completion by mid-Q2 and field closure by Q3. Our manufacturing infrastructure is now running at full throttle, and we expect please to propel Azad into its next phase of accelerated growth from Q3 and Q4 onwards. At Azad, we have never changed rates scale at the expense of our margins. our growth is entirely against firm long-cycle contracts, multiyear order book visibility. We do not engage in speculative expansions. Backed by an incredibly strong growing pipeline and world-class manufacturing infrastructure that is the rapid maturing, we enter the rest of FY '27 with absolute clarity and completion -- complete execution confidence. We proudly reiterate our long-term annual revenue growth guidance of over while maintaining our stellar industry-leading profitability profile. We remain dedicated to building a high moat, high resilient global precision engineering platform. I want to thank our customers, partners and our exceptional team at Azad, for the relentless execution and our shareholders for their continued confidence in our journey. I now hand over to our CFO, Mr. Ronak Jajoo. Thank you, everyone.

Thank you, sir, and good morning to everyone. Now I will take you through a comprehensive review of our financial performance, capital structure and operating efficiency metrics for the first quarter ended June 30, '26. As agreement summarized, this quarter was marked a highly successful phase of education, the financial data demonstrate that our front-end capacity investments are successfully translating into scalable, highly predictable revenue. Most importantly, we are beginning to see the true power of structural operating leverage as our asset base move through its planned stabilization curve. Let me take you through the financial highlights and operating leverage. Our stand-alone financial performance for quarter 1 FY '27 underscore our robust business momentum across both sequential and year-on-year portion. Top line expansion, our stand-alone revenue from operations reached to INR 170.5 crores, reflecting a stellar growth of 26.8% year-on-year basis of [ INR 24.5 ] crores in quarter 1 FY '26. On a sequential basis, our revenue grew by 8.3% over INR 157.4 crores reported in quarter 4 FY '26. The sequential growth highlight our steady acceleration in customer [indiscernible] and manufacturing deliveries right at the start of the fiscal year. Operating leverage in EBITDA growth. Our reported EBITDA grew at interest pace INR 1,864 crores, presenting a growth of 32.1% year-on-year basis from INR 48.5 crores in quarter 1 FY '26 and strong sequential jump of 10.9% from INR 57.8 crores in quarter 4 FY '26. Operating margin excellence, this outpaced growth directly expanded our stand-alone reported EBITDA margin to 37.6%. [indiscernible] expansion of 150 basis points over the [indiscernible]accounted in quarter 1 FY '26 and solid 90 bps points that up from 36.7% achieving quarter 4 FY '26. This margin progress grew that our pure plain manufacturing abstains are observing fixed copper efficiently production team pride, and we are confident to maintain the same becoming [indiscernible]. For material margin so efficiency. This expansion was heavily supported by our call Indigenization program. This reduction reflects our long-term effort to lower core manufacturing costs by onboarding domestic suppliers and engaging [indiscernible]. Let me take you through the analysis and variance on other income and net profitability. To evaluate our core performance accurately is essential to analyze the structural change within our nonoperating income segment occurring on account of valid foreign currency momentum which we saw in quarter 4 FY '26 because of macroeconomic environment, which is not in control of the company. The foreign currency element in other income. Other income came to INR 4 crores in this quarter. This line show a sharp moderation from INR 9.1 crore in quarter 1 FY '26 and substantial decrease from elevated INR 17 crores recorded in quarter 4 FY '26. I must [indiscernible] that this sequential drop is generally a portion of foreign currency dynamics in quarter 4 FY '26, Other income was heavily bloated by major nonoperating foreign currency gain due to macro region, as I mentioned, beyond the control of the company. In contrast, quarter 1 FY '27 business currency [indiscernible] normalize the nonoperational talent. Furthermore, our trading income is expected to moderate, as I mentioned in the last call also, as we steadily deploy our cash results into our active factory infrastructure and machines. Net profit metrics our stand-alone PAT grew at 21.2% year-on-year to INR 36.4 crores, up from INR 30 crores in quarter 1 FY '26. Sequentially, net profit grew at 3.5% against 35.1% reported in quarter 4 FY '26. This yield an exceptional stand-alone tax margin of 21.3%, [indiscernible] per share. On a consolidated metrics, our metrics remain equally strong. Consolidated revenue from operations grew at 25.9% year-on-year basis to close at INR 122.6 crores. Consolidated EBITDA at INR 64.4 crores, yielding an operating margin of 37.3%, while consolidated debt reached [ 35.2 ] our key subsidiaries are performing precisely on with our turnaround target which we have set for our success. Now I'd like to hand over to Mr. Vishnu Malani, who is our Whole-time Director, to take you through the studies.

Thank you, Ronak, and good morning, everyone. Our Chairman Mr. Chopdar spoke about what 22nd of July meant to the nation. Our CFO, Mr. Jajoo, has given you the critical number that drove this quarter. Let me give you the corporate view because from where we said that delivery of an engine was much more than a successful engineering milestone. In terms of a permanent upgrade in Azad's market position. Three things that changed on 22nd of July. First, we moved up the value chain, global chain by managing and to an integration and balance from fleet propulsion system, we have broken out of the traditional component supplier tier. We have proven that Azad can act as a primary technology integration partner for any of the global OEMs or defense needs of the country. Second, the [indiscernible] or deeper. Azad was placed within a highly exclusive tier of global manufacturers capable of executing complete defense assemblies. The regulatory qualification and technical barriers to any here are immense and they protect our business from a standard competitive pressures. So thing that changed was an addressable market expanded. This successful execution opens long-cycle monetization opportunities across domestic defense programs and the international aerospace supply chains as well. In effect, an entirely new structural growth engine for Azad happened on that day. Now let me connect that to what we build. Our physical expansion at Tunki Bollaram Industrial Park, is governed by a strict price mitigated asset model. We do not build speculative capacity, speculator capacity capacity. We build dedicated customer-aligned infrastructure. This quarter, our new 7,600 square meter facility Baker Hughes commenced operations following the same deployment model, we have proven with each of the customers, namely Mitsubishi, GE Power and Siemens Energy. Why does this matter so much to us because once a global marquee OEM integrates a dedicated, qualified facility into their primary supply chain, shifting that business carries a huge switching cost. This is what operational stickiness means in our industry, and this is what gives us exceptional multiyear revenue and volume visibility. And we are facing this expansion with discipline. Civil construction for the remaining units at the new plant Azad Center of Excellence is on track to wrap by the end of this financial year. Machine installations are being executed in modular back-to-back phases, aligned strictly with the road map of our customers. You see -- you also see the strategy coming live in the numbers that we delivered this quarter. On a consolidated basis, our revenue from operations grew by 25.9% year-on-year, to about INR 172.6 crores, driven by steady delivery schedules and strong operational execution across all our facilities. Aerospace and defense also registered one of the highest growth acceleration, up approximately about 38.4% year-on-year, reflecting our increased share of volume with some global aviation measures and initial tailwinds from our advanced propulsion and defense system deliveries. And our energy and oil and gas vertical also grew by 21.6% driven healthy demand across gas turbine components and operational launch of a new customer dedicated production lines. Acceleration, where we are investing in resilience where we are established. This is what we are shaping. Let me close by a section with a long view because Azad's operating engine is designed to compound value over long cycles by scaling multiple customer dedicated plants within a single job -- within a single centralized geography, we are capturing significant operational synergies. This structure lets us expand operating leverage rapidly. We have built an infrastructure that is incredibly difficult to replicate, our technological moats across sectors are widening and getting deeper. Our customer relationships are structurally locked in, and our execution framework is fully geared to deliver steady, high-margin growth for years and to stay firm on the guidance that we've communicated in the long term. With that, I would like to end our speech, and we will be happy to take questions from everybody. Thank you.

[Operator Instructions] Our first question comes from the line of Vikash Singh with ICICI Securities.

Sir, my question related to the budget engines only. So how is the road map now once you have delivered the first I believe that you need to deliver 4, 5 different prototypes and then it will go to testing, et cetera. So could you give us some time line that how many years down the line or months down the line, this would actually turn asset into the orders to us?

Okay. This is Rakesh. So finally, yes, we have delivered need of the company of the hour of the country. We have delivered this engine, which have been currently being imported by other OEMs, India is importing, MODs importing these engines for platforms, anti-platform are using. So it was very indeed a very proud moment while we delivered this engine and the GTR especially the -- these was here to receive this engine. And it was a very, very pride moment for us for this. So on the note, what we know is inmate what we know as being a program, they don't share much of an open things. But what they have been told us now [indiscernible] is under testing. The next phase of this is going to go on the [indiscernible]. I think in the next 4 to 6 weeks is what we know. Okay -- these are just a time line, which we were really heard about it. We have no base for it or we have nothing in written or something. So this is the next step we'll go on the testing on the weapon, which is 4 to 6 weeks ago. And probably with that, there are [indiscernible] certification will happen, and it's good to go for production. So this is not a year story. These are a few months story. So this is what we have told. And we have been guided to prepare for massive production on the engines.

Noted, sir. Sir, now that in newer plant location, we would have only 3 sheds left in terms of either sell it for a dedicated player or utilize for the other customers. How should we look at it this [indiscernible] you would dedicate Indian or it would get it done by the existing segment? And my second part of the question largely related to for your growth during FY '29, you need to plan the next phase of CapEx now. So if you could give us some highlight that how is our planning because market size is still pretty large. And now the domestic Indian manufacturing is also getting added in your [indiscernible]

Vikash, this engine is the big one. The volumes where we have heard and what we have seen, this is [indiscernible], if it is a 2-digit volume, definitely, yes, we can manage the existing capacity. We have got so many buildings shops ready for different customers as -- the best part is all the capacity of what we have are fungible and can manufacture these new components also. So we don't need to really add some great capacity for a 2-digit volume which is there. But what we would see is not to the volumes [indiscernible]. So basis that, we have to do a planning. So I think in the next few weeks, we will know what exactly the volumes are, but we are prepared. We are prepared its 2-digit, 3-digit or 4-digits. And however, this engine, what we have predicted is definitely what we see in the coming time. But we have other commitments, we have other businesses which which are bearing [indiscernible] -- and we are also having the priority to finish what are the commitments are being given. So our main focus is to speed up the infrastructure, which is about to finish. As I mentioned, 80% of the infrastructure is now ready FY '26 was our stabilization year. Q1 is where we started the production step-by-step building by building. we are right now talking to machines, all those fingers are fully running on full portal. And the expectations, as again, I mentioned earlier, you see that Q2, everything will be settled down and the production starts coming out there.

Noted. And on the capacity buildup road map?

Yes. So that is all can. If you talk about the coming years, I'll ask Vishnu to jump in this question. And what we see is a major plan is from FY '29 is what we have to start catching -- already stretched, but we have to really be on it. I pass on this remaining answer to this question.

So thank you, Mr Chopdar. Vikash, the idea for us is these capacity based the contracts that we have to deliver every year. Now for us, we have been working on quite a few opportunities that are there right now at Azad and we are evaluating what is the total lead that we would need over the next 5 to 6 years, and we are doing that planning. But as for the next couple of years, Azad has built and deployed and build capacity to cater to the next couple of years in terms of where we want to grow in terms of revenue. However, you are absolutely right in supporting the fact that there are opportunities that we are working on. So we're doing our back internally to figure out what is the cap how much is the quantum of capital do we need and when do we actually need that. So once once that internal discussion gets closed and that woes closed, I think we should be able to maybe address this in the next [indiscernible] with far more accuracy in my view.

And sir, if I can take in one last question. Our mostly sales in export markets, so I assume it's dollar-denominated. So the rupee depreciation benefits is built in above EBITDA and the margins or below [indiscernible]?

We see below the EBITDA margin, it is not building the [indiscernible].

Our next question comes from the line of Amit Dixit with Goldman Sachs.

First of all, consideration for delivering the APG engine. I think it's a great achievement for the company. The two questions I have is the first one is actually on the MHI contract that we got for hot picture. Now we already have given in the presentation, we can that is for the coal section. Now how section typically, in my view, should have much higher TAM. So I wanted to understand if you are in discussions with some of your vendors for getting more such contracts extending the adjacent fees across. So I just wanted to get your thoughts on this. And given the fact that some of your global peers are [indiscernible] and all have reported very excellent numbers I mean very significant growth. So yes, as you said in your opening remarks the market looks very, very promising. So how do you see from a growth perspective that technically, we are at a low base essentially. We have just started the [indiscernible] part. So how do you see the growth curve for Azad growing? I mean we have -- you mentioned that H2 onwards, the growth would go to the next level. But I just wanted to understand your broad on that.

Okay. Amit, I'll try to recollect the first question you have put. So the first question, what you asked is on the stabilization of the hot section, the market. Now as you are aware, how critical these components are. Of course, the coal section itself is so tough to come when we are Azad is playing around with that. But in the hot section, definitely, other OEMs have shown super interested in asking when is your facility ready. The beauty, the best point is the facility, what we are going to setting up what we are setting up for Mitsubishi, can -- is exactly a model which will be utilized for other OEMs as well. And another good news I'll tell you, it's not just probably will cater with hot section of the for the aviation engines as well. So the first point is to establish this, which is around 7 to 8 months away from now. And then we do the qualification. While we do the qualification, we will invite other OEMs. And to be honest, we don't need to invite, they're already here. So that answers the thing. Any other questions you have on this Amit ji?

No, no. I mean, that's fine. I just wanted to get the broad time in that time yes. Yes. And the B part was actually the growth that we are seeing in this market, you mentioned in your prepared remarks that the -- both the vectors are seeing excellent tailwinds. Now as I mentioned that some of the peers, how much and all they have -- despite being a much higher base, we have reported like [indiscernible]EBITDA margin, 15% EBITDA growth. So what is the growth trajectory for Azad? And are there any constraints that you see at your engines to grow by that number?

No, no, no. Actually, it's a very valid and very nice question. I say. People who know about this subject, they will also obviously now, this is not a million story. This is all a billion story. And we also know, as you could name only 2 or 3 in our name. There are only 2 or 3 players in the world who have cracked this. Azad will be the next to practice. Once this is cracked, the league itself will change. So if you talk about engines, that is a different unique. Now when we talk about these at section is itself is a big lead. So definitely, the market is massive and there is a long queue of the products, what are required in the field and Azad is preparing for that. So it's a very, very good situation now. On the margins, you can imagine these high-cost countries like U.S. and Europe are making that healthy EBITDA margins. So definitely, what does that make? It's -- it's a good thing to understand. And guess.

Great. Great. That's reassuring. The second question is essentially on the working capital side. Now in Q1 '27, we saw that there was a bit of increase in finance costs possibly due to the working capital [indiscernible]. Now since we are in expandition mode, so I'm not asking for a time line, but just wanted to understand that this working capital in terms of days, when we can expect it to plateau?

Yes. This is Ronak. So from the finance cost side, if you see that I have already told FY '26 presentation, I have told that finance cost will go in to continue because you have a builder [indiscernible], which will go into the cement for only. So the betterment of the cash flow, operating cash flow, not on the financial cost side. And coming to the specific question of when it get [indiscernible], we are targeting one around 200 bps. And by H2, we are targeting a range of 160 to 180 type of days. this is largely back on the build incoming facility where our current data stats, which are around 170, 180 days will go down to 90 days, where you look to sell type situation to be informed.

Our next question comes from the line of Gaurav with Avendus.

I have two questions. First one, again, on the APT engine. And the question is that as you mentioned in your opening remarks that this engine required you to do -- have done the metallurgy machining very for the processes. I understand, obviously, that right now has machining now with the joint ventures in place to have the purpose [indiscernible] for other capabilities, I'm assuming that those were outsourced or what outside Azad, is it possible to quantify in this engine, how much of the value add was by Azad and how much was outside Azad?

No, but we have done everything in-house. There's nothing that we have outsourced any of the parts or something. There may be some small washer so we have gone for some specific requirement, which as our stability is not well, we have gone to GTREs and they have either done it in-house or they have got it done by their approvals. So it's not that we have gone out somewhere, except from small washers or some kind of small machining or some kind of grading operation. So that's all.

All right. Okay. And the second question was on the art last 2 years, we're consistently doing about 37% EBITDA margin, which used to be about 30% to 35% before for a -- now you continue to guide your margins around 35% level. What I'm trying to understand is that you are doing [indiscernible] margins when you are yet to utilize the facility. So why the conservative guidance on the margins bit then there will be a little bit operating leverage would come back from the growth facilities there?

Yes. But as you can see, we are consistent in 35 plus. But the guidance what we are always [indiscernible] the calculation purpose, someday it's nice to use the [indiscernible] of course, you can see that we've been delivering precisely going above 35%. But for calculation and for the guidance purpose, I think 32%, 35% is a good number which we for for us since long.

Is it possible to kind of explain what has led to this margin range shifting from 35% to 25%, 30% in the last 1.5 years?

Yes, still set what we we are obtained on the shop floor. And this continuous improvement, it's not only the last 3 years, we've used [indiscernible] where I remember the days we were operating at [indiscernible] EBITDA, the same product line, we are now petites EBITDA level. So definitely, there's some magic happening on the floor.

In the process [indiscernible]

Yes. It's not so process. There are many factors which we should be, if at all, I would love to take it on the floor and I would like to demonstrate what exactly lines between these margins and where all is lying from [ 18 to 35 to 36 ]. I don't we didn't see other also. So we are trying to find where we find will be it up.

Our next question comes from the line of Sobi Gupta with Trinetra Asset Managers.

So my first question is that since you'll be looking at double-digit growth in these kind of projects moving ahead, as you just mentioned, what are the margins that we're looking at for similar projects? And second question is that when you sign the deal with [indiscernible] a similar aircraft engine, what is a time period for that? If you could just tell me.

Could you repeat the question number one, please?

Yes. Since you've been looking at double-digit growth in similar kind of projects moving forward. So what is the margin that we are looking at for these kind of projects?

Okay. Thank you so much. We have just finished. We have just made the first engine, okay? -- we can never come to a costing out on the first engine. As it takes a lot of time to stabilized in the production. So we have been producing the first 20 will be appropriate for me to answer this question once we have done at least 5, 6 engines in a row and then we can come to a level what we hold and how do we fare in this.

And if you could tell you what would be the time line for these 4, 5 engines?

I think it's just not so far away to 12 weeks, you can say, 3 to 4 months. And it is a continuous process which we are going to see. So maybe by next call, when we see our [indiscernible] free to most welcome to visit us, and we can share more details with you there.

Okay, okay. And the sir, [indiscernible] for that?