Azad Engineering Ltd. (Subscribe)

Highlights

Azad Engineering Limited (AEL) incorporated in 1983, is one of the key manufacturers of qualified product lines supplying to global original equipment manufacturers (OEMs) in the energy, aerospace & defence and oil & gas industries. AEL manufacture complex and highly engineered precision forged and machined components that are mission and life-critical and hence, some of their products have a zero parts per million defects requirement.

In the energy industry, AEL produces high-precision rotating and stationary 3D airfoils/ blades, special machined parts and combustion component assemblies for land-based turbines with applications in industrial and energy plants using different fuel types such as nuclear, hydrogen, natural gas and thermal.

In aerospace and defence the company’s products include airfoils/ blades and components for engines, auxiliary power units (APUs), hydraulics, actuating systems, flight controls, fuel and inerting sections of commercial and defence aircrafts and spacecrafts, among other defence systems and various critical components for missiles.

The company’s customers include global OEMs across the energy, aerospace and defence, and oil and gas industries such as General Electric, Honeywell International Inc., Mitsubishi Heavy Industries, Ltd., Siemens Energy, Eaton Aerospace and MAN Energy Solutions SE. Since inception the company has supplied their components to countries such as USA, China, Europe, Middle East, and Japan.

The company has 4 advanced manufacturing facilities in Hyderabad, Telangana, India, capable of producing high precision forged and machined components with a total manufacturing area of approximately 20,000 square metres and have a combined annual installed capacity of 642,310 hours per annum, annual actual production of 578,316 hours per annum and capacity utilization of 90 pct per annum.

Out of the total proceeds of Rs. 7,400 mn, Rs. 603.95 mn would go funding capital expenditure of the company, Rs. 1381.88 would go towards repayment/ prepayment, in part or full of certain borrowings availed by the company Company and Rs. 5,000 mn would go towards existing selling shareholders of the company.

Key Highlights

• Among the addressable markets for the company, there is a high variation in expected CAGR between gas, nuclear and coal turbines with highest CAGR expected for components of nuclear turbines (+8 pct CAGR by 2027) followed by gas turbine (+1 pct CAGR by 2027). The market for aerospace and defence components is the largest at Rs 990 bn in 2022 and estimated to have the highest CAGR of +9 pct by 2027. The overall addressable market across energy turbine, aerospace and defence components for the company is expected to grow at +7 pct CAGR from Rs 1,280 bn in 2022 to Rs. 1,810 bn in 2027.
• As a strategic and growth partner to customers across highly regulated industries, AEL enjoy long-term relationships with high customer stickiness and a high percentage of repeat business, which allows them to have long-term contracts, a stable customer base and strong visibility on long term revenue.
• The company’s strategies includes (i) Leverage their industry-leading capabilities by continuing to diversify their customer base and increase penetration and wallet share with existing customers by entering into new component lines (ii) Augment manufacturing capabilities, including by way of inorganic acquisitions, to better serve their customers and to build scale, while delivering state of the art execution (iii) Strengthening their core capabilities across focus industries and (iv) To reduce operating costs, improve operating efficiencies and deploy new technologies.
• Apart from the existing manufacturing facilities the company has 2 manufacturing facilities in the pipeline at (a) Tuniki Bollaram village, Telangana and (b) Mangampet village, Telangana, with a total manufacturing area of 94,898.78 square metres and 74,866.84 square metres, respectively.
• The company has supplied critical components to major commercial aircraft manufacturers such as B737, B737 Max, B747, B777, B777X, A320, A350, A355, A350 XWB, Gulfstream G550 and are currently in discussions for supply of components for new engine platforms to various kinds of aircraft manufacturers.
• Out of the total sales of the company the energy segment contributes ~90 pct of sales and Aerospace and defence contributes ~10 pct of sales. Also, the ~80 pct of the sales of the company is in the form of exports. The company reliance is 5 pct on PSUs and 95 pct is on private players.
• Sales of the company has grown by 43.2 pct CAGR during the period FY21-23 while EBITDA grew 60.29 pct CAGR over the same period respectively. During FY23, company reported sales of Rs. 1,944 mn which increased by 29.4 pct YoY while EBITDA rise by 16 pct YoY to Rs. 722 mn as EBITDA margin declined from 32.02 pct in FY22 to 28.72 pct in FY23. Profit in the FY23 stood at Rs. 84.7 mn, which declined by 71 pct YoY due to one-time redemption cost paid by the company. While sales/EBITDA/profit of the company in H1FY24 is stood at Rs. 1587 mn/Rs. 525 mn/Rs. 268 mn pct YoY.

Key Risk

• The company gets ~60 pct of revenues from top 5 customers. Any loss of these customers can impact company’s topline and profitability.
• AEL is subject to strict compliance of quality requirements which results in incurring significant expenses to maintain their product quality. Any failure to maintain quality, can affect company’s brand and business operations.

Valuation

Azad engineering Ltd (AEL) is a global manufacturer across the energy, aerospace and defence, and oil and gas sectors, specializing in highly engineered, mission-critical components. AEL is one of the fastest growing manufacturers with one of the highest EBITDA margins among the key players, backed by marquee investors, unique business model and has a consistent financial performance. At the upper end of the price band, the issue is quoting at PE of 57.6x its FY24E earnings. One may Subscribe from a longer-term perspective.

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Disclaimer: The views expressed in the blog are purely based on our research and personal opinion. Although we do not condone misinformation, we do not intend to be regarded as a source of advice or guarantee. Kindly consult an expert before making any decision based on the insights we have provided.