Company Overview
Incorporated in 1983, Azad Engineering Ltd. is one of the key manufacturers of highly engineered, complex, and mission and life-critical components. The company supplies products to global original equipment manufacturers (OEMs) in the energy, aerospace, defense, and oil and gas industries. The company’s expertise is in the manufacturing of complex and highly engineered precision forged and machined components that are mission and life-critical. Hence, some of its products have a “zero parts per million” defects requirement. Azad’s customers include General Electric, Honeywell International Inc., Mitsubishi Heavy Industries, Ltd., Siemens Energy, Eaton Aerospace, and MAN Energy Solutions SE. Their products include 3D rotating airfoil/ blade portions of turbine engines and other critical components for (a) gas, nuclear, and thermal turbines used in industrial applications or energy generation, and (b) defense and civil aircraft and spaceships. The demand for such precision forged and machined components is driven by requirements relating to energy turbines (industrial, gas, nuclear, and coal), and aircraft (commercial and military), amongst others. Azad has four advanced manufacturing facilities in Hyderabad, India, capable of producing high-precision forged and machined components with a total manufacturing area of approximately 20,000 square meters. Further, it has two manufacturing facilities in the pipeline at (a) Tuniki Bollaram village in Siddipet district, Telangana, and (b) Mangampet village, Sangareddy district, Telangana, with a total manufacturing area of 94,898.8 square meters and 74,866.8 square meters, respectively.
Objects of the issue:
The net proceeds from the fresh issue will be used towards the following purposes:
- Funding capital expenditure of the company;
- Repayment/prepayment, in part or full, of certain of its borrowings availed by the company; and
- General corporate purposes.
Investment Rationale:
Preferred name in the manufacturing of highly engineered, complex, and mission and life-critical high-precision components for global OEMs
Azad Engineering is one of the key manufacturers of highly engineered, complex, and mission and life-critical components and supplies to global OEMs primarily engaged in highly regulated industries, including energy, aerospace and defense, and oil and gas industries. Despite growing competition from China, Europe, the USA, and Japan, Azad is a preferred name in the manufacturing of highly engineered, complex, and mission and life-critical high-precision components for global OEMs. Despite the significant expenses associated with qualifying manufacturing partners, it has demonstrated efficiency pursuant to machining time reduction, which it believes to be a competitive strength against manufacturers from China, Europe, the USA, and Japan. Further, the company has been successful in obtaining stringent and highly sought qualifications for products from global customers in a lesser time period than the industry standard. Further, the attractiveness of China has reduced due to the growing geopolitical tensions and also rising labour costs. The energy, aerospace and defence and oil and gas industries have significant entry barriers due to a lengthy qualification process for components driven by the criticality of their usage. Thus, it ensures repeat orders and customer stickiness for the company.
Advance manufacturing facilities with a diverse range of products and solutions
Azad has four manufacturing facilities in Hyderabad, India which are spread across approximately 20,000 square meters 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% per annum. Leveraging on its advance machines and technologies, the company is a prominent player in the industries in which it operates, with intricate engineering capabilities and the production of high-quality components that meet the stringent demand of modern applications. Azad constantly strives to introduce innovation in its manufacturing processes, expand in-house capabilities to undertake forging and special processes, and improve efficiencies to reduce costs to lower lead times to manufacture a product. Consequently, this helps in increasing the company’s revenues, margins, and profitability. Additionally, their manufacturing facilities are equipped with sophisticated equipment and machinery including robotics equipment that enables them to produce high-quality products and helps minimize the number of employees required to operate them, thereby reducing costs.
Valuation and Outlook:
Among the addressable markets for the company, there is a high variation in the expected CAGR between gas, nuclear, and coal turbines with the highest CAGR expected for components of nuclear turbines (+8% CAGR by 2027) followed by gas turbines (+1% CAGR by 2027). The market for aerospace and defense components is the largest at Rs. 99,000 crores in 2022 and is also expected to have the highest CAGR of +9% by 2027. The overall addressable market across energy turbine, aerospace, and defense components for the company is expected to grow at +7% CAGR from Rs. 1,28,000 crores in 2022 to Rs. 1,81,000 crores in 2027. Additionally, there is an addressable market for oilfield drilling components which is expected to grow at +4% CAGR by 2027. The energy turbine, aerospace & defense industries have a significant entry barrier due to a lengthy qualification process for the components driven by the criticality of their usage. Some of these components are life-critical and mission-critical and hence, have zero parts per million defect requirements. Superior manufacturing demands a unique blend of expertise, innovation, quality, and advanced safety controls in the industry which cannot be obtained by only installing CNC machines. Azad Engineering Ltd. increased its revenue from Rs. 124 crores in FY20 to Rs. 262 crores in FY23 (CAGR of 28.4% between FY20-23), with an EBITDA margin of 31.4% in FY23. The company is one of the fastest growing manufacturers (in terms of revenue growth for the period between FY20-23) with one of the highest EBITDA margins among key players for machined components for the key industries serviced by the company. As a strategic and growth partner to customers across highly regulated industries, the company enjoys long-term relationships along with high customer stickiness and a high percentage of repeat business. This allows them to have long-term contracts, a stable customer base, and strong visibility on long-term revenue. The company is one of the fastest-growing manufacturers (in terms of revenue growth for the period between FY20-23) with one of the highest EBITDA margins among key players for machined components for the key industries serviced by the company. With Azad Engineering being in the niche industry and promising growth seen in the industry, we give a “Subscribe” rating to the issue. On the upper price band, the issue is valued at a P/E of 48.3x based on FY24 annualized earnings which we feel is fairly valued in comparison to its peers.
