Azad Engineering Limited analyst Q&A

Thank you very much. We'll now begin the question and answer session. The first question is from the line of Veenit from Investec. Please go ahead.

Hi, good afternoon, Rakesh, Vishnu, and Ronak, this is Aditya from Investec. Once again, heartiest congratulations on a great IPO. Just a couple of questions, obviously very, very encouraging set of results. I want to understand that we had pretty decent gross margins this quarter, higher than what we usually used to report. So what are all the factors that have contributed to it? And would you be expecting gross margins to be sustaining at these levels or reverting back to slightly lower levels? That's the first question.

Hello Aditya, Vishnu here. Aditya thanks for your question. You see our EBITDA has gone up this year. This is because of efficiencies that we've bought in two of our expense lines. So, in terms of job work and tooling, you see there is a margin expansion. We have saved our EBITDA there. We've been able to save about 2% -3% EBITDA between our tools, job work and power. That was a result of one backward integration that we've done in our business and the other one was lower power charges due to installing a direct line of power in our business. So we were able to save about 3% and that's why you see there is a margin expansion that has happened in our business this quarter. And this is a sustainable impact. This should continue.

Aditya, this is Rakesh. As again, I would like to give a note to everyone that these products are not standard, right? There is a continuous innovation. There is a continuous process improvement, which is not only today, it is visible for tomorrow as well. So these are the improvement points. This is always will be available and which we are just exploring in every corner.

Sure, understood. On the backward integration side that we refer to, it would be great if you could share some more details?

So, Aditya, I think it's a longish discussion. But I can tell you that we were sending out our product for a special process outside. Now what Azad has done is, we have decided to make an investment on this special process about a year and a half ago. We invested capex on it to develop capability, we've built capability on it, got that special process qualified with our customers. Now we are able to see an impact of this in our business because we've started producing parts on that special p rocess. And that's why you see an upliftment in the operating margins that we have for them. This will continue.

Yes, this is a sustainable number. This will continue.

Perfect, that's great. My second question is on the Rolls-Royce contract that we've won for almost seven years. Any further details that you can share on it? What could be the revenue potential? How large could it be? And how exactly the ramp-up is likely to be taking place?

Yes, Aditya, this is -- please note, Rolls-Royce has got two divisions. One is a commercial and one is a defense military. So we have license, we got approval, we have a U.S. license to produce this part. Azad got the license to produce this part. And these a re very highly confidential. And we can't give you much statement as because this is a military program. This is from Rolls-Royce defense, this is not from the Rolls-Royce commercial. Of course, it falls under one group only, but we cannot reveal much detail because of the military protocols and we have a license from the U.S. government. So we have to keep a bit of things confidential, but you're most welcome to visit the facility wher e we can give you idea or we can give you some kind of guidance what exactly these parts are.

Perfect. That's great. And for something like this also, Rakesh, would we be required or do we intend to be setting up a dedicated facility given that there's going to be confidential to them and could possibly be a pretty large opportunity?

Not really. For the confidentiality, it's a standard NDA and we are right from inception as I mentioned you, we work in a very niche segment so that's a culture already built in Azad, having these confidential information. And talking about the facility, a s Vishnu also mentioned, this is just the start of a big ocean, right, and getting our foot in the door is the biggest thing it took us years of dedication and qualifications and approvals what we have got, and this is where the opportunity started. And this is something that beyond -- it's a beyond numbers what we can imagine what the numbers are. So definitely, we would love to set up a separate factory for Rolls-Royce within the new facility.

Thank you. Next question is from the line of Kamlesh Jain from Lotus Asset Managers. Please go ahead.

Thanks, Rakesh and Vishnu for explanation of your business. So it's a strong set of numbers and I believe a strong future ahead.

Kamlesh, sorry, but can you speak a little louder please?

Am I audible now?

A little better.

Yes. So Rakesh and Vishnu for elaborate explanation of the company. And just one question on the expansion side. Like you mentioned about 1,70,000 -odd square meters, which we have recently acquired. But how the capacity would pan out over the years at those locations?

Yes, see, Kamlesh, thanks for the question. As mentioned, we were aware what's coming, right? When we were finishing our gestation period of 15, 16 years. And as I mentioned earlier as well, we just put our foot in the door. And we know what is exactly coming, right? And we have to prepare well for this. And this is not something a normal general engineering of automobile or something that we can go -- we can plan for one year or two years. But this is something that we have to plan big. As mentioned, the customer of ours, if we talk about our product line , it's so, so critical, right? It's a life critical product. It takes ages for us and it takes ages for the customers. Both involvement takes a lot of time to qualify and get the approvals. That is what we finished recently. And now is the time to increase the wallet share of the capacity. So this capacity, what is a very big plan, which is we have to show -- we have to demonstrate to the customer, look, now we're ready to take all your requirements, whatever the planning is exactly what we're trying to show that the wallet share increment. So this is where the wallet share increment comes in, is we have a capacity, we have the manpower, we have the capex, we have got -- we are ready to take the bits and pieces of things and we are opening up a factory for you guys. And then this is where the planning comes in, like the space management is well accordance to the coming business what we can see on the rules of the customers. So it's very well planned.

Okay, great. But like current capacity is around 1,58,000 hours per annum, not like say -- and we have bought these land parcels like keeping in view that it would be expanded over a staggered manner. So now like say over five, six years or four, five years, how the capacity or how the increase in revenue will pan out. I know that wallet share will also increase, new customers will also come in. But like say, over three, four or four, five years, how the revenue will pan out from this particular expansion?

So, I think I'll just pass on to Vishnu because on the numbers, what the guidance, what I think we have to be -- I think you can take this, Vishnu.

Yes. So, hi Kamleshji. Thank you for your question. So, first of all, I'd like to say that, we'll be able to give you more clarity on this when we come for our annual results. I think we will talk about our growth. But since you've initiated this question, I would like to give you the comfort. So you mentioned number of 1,58,000 annual hours. I think there was a misprint in that, this is a quarterly capacity. So our annual capacity is way over 6,00,000 hours today as a business. And so, if you see our historical numbers, you will get a sense of how we are planning our capacity. So, just like you'll see, FY'21, we did about INR122 crores, we took it to about INR195 crores, then we took it to INR251crores and this year, we've already done INR247 crores. So as a business, we know that the business is obviously looking at a growth at a customer level and we are constantly investing in capacity. If you look at our energy segment revenue, we would have grown in that largely over our year-on-year number. That is because we deployed capex of about INR16, INR17 crores and that has yielded into revenue. If you look at our aerospace business, year -on-year growth, that has happened, our aerospace year -on-year quarterly growth has tripled up, that is because of the qualification. So our growth is a factor of the capacity that we are creating and from here onwards, today, the IPO proceeds that we were looking at, we have taken out the money that is needed to deploy in plant and machinery that will take us to our FY'26, FY'27 number s without any trouble. These numbers, these capacity numbers have been committed to our customers so we cannot obviously not create capacity. So our only job over the next two years is going to be create infrastructure, deploy machines in a staggered manner that our return on capital employed is also very effective. Our incremental ROC in the business is targeted to be upwards or around 25% is what we are looking at.

Yes, so I would like to add one more thing, Mr. Kamlesh, what you can see in the H1, what we have delivered and we are on a track which is going for this financial year. You can have a number that'll look. As mentioned on the capacity, these numbers, what the capacity, what is being increased is already in, we have a roadmap from our customers. That is how this capacity has been planned. This is how that 170,000 square meters have come out. For next five years or 10 years or, the capacity what we have seen is a roadmap discussed with the customer. It's not just we are just setting up a capacity. It's not just we have purchased the land. There is a calculation behind the procurement of the land. There is a calculation behind for the square meters. Why do we need so much square meters? I hope that clarifies.

Great, great, great. Thanks, Rakesh and Vishnu, and wish you all the best.

Thank you.

Thank you. Next question is from the line of Rajesh Vora from Jainmay Venture. Please go ahead.

Good afternoon, gentlemen. Congrats on very good set of numbers. And thank you especially, Mr. Chopdar, for giving us a very good overview of the company. Your business is quite impressive in what you have done in the last decade and a half. Now, what gave you strength to be patient, passionate for so long in such a hard business? And how did you manage the risk of failure or other risks?

Thanks, Rajeshji. My first thing is when I was 16, when I turned 16, I have seen enough failures, or I've seen enough of, what do you call, struggle. So I think my quota got finished there, just on a light note. And, now it's where, it got in a way where I got in this mode. And the biggest strength is like, what I can feel now after realizing, after talking to people like you and the whole world, right I'm very passionate going, that’s thank you so much for that. But also my team, what I've built over these years and the infrastructure, the culture, and, the willingness to accept challenges and, give results in a very favourable way. So that's helping me to continue this, and I hope I'll take this to great heights.

That's very interesting. I'm sure given the way you kept going, do you have any company as a role model in your mind, like Hy -Ko Corporation of US, or Howmet Aerospace of US? Maybe you're looking to multiply your revenues and market share?

Not required, Mr. Rajesh. See, I'll tell you what usually companies does a joint venture, either for money or for technology, or for the, a market, or for sales or, for a presence. When we have achieved all the three without any support or anything, why do we need to go and, take on something? Yes, usually in our product line, again, there's a very vast, when we say aerospace energy, there's a vast, product line differentiation in the classification of the product what we actually manufacture. As I was repeating, again, I repeat, and I feel ver y proud of saying that, we don't make armrests of a seat, we make a rotating part of an engine. So that classifies what exactly we are doing in the aerospace segment, how you are positioning the aerospace segment. And what it took us to get these parts manufactured here in India, and being utilized globally, I mean, we don't know which parts we are manufacturing is operation in China, or Japan, or Saudi, or we don't know where they're operational. And we feel great about it. And to follow someone, trust me, if we try to follow someone, we exactly do what others do. And that's way, that gives a result that Azad is the only company, I'm very proud of India, that we broke these barriers. As we represent, as we go out of Japan, no one knows us in India, trust me. No one exactly has an idea of what exactly Azad does. But when you go to Japan, you ask Mitsubishi , hey, how is Azad? You go to GE, you go to America, you go and ask GEs, you go and ask Rolls Royce, you go and ask, what does Azad do? And they say, wow, they really like, we are very, very happy with the company. So this is what the problem, what also we are facing is the positioning of Azad. That's where we are facing trouble, but I'm sure over the coming time, we all will realize what exactly we are doing. I'm waiting for that day. And let the numbers speak on it. That's what the best way is.

Thank you. Rajesh, sorry to interrupt you, I'll request you to come back for a follow -up question.

Look forward to meet you and visit your facility.

More than welcome, Rajesh.

Sir, the assets on ground that you have in your balance sheet, which shows let's say last year ended at about INR250 crores, what is the asset turn usually your business operates at?

Yes, hello, so this is Vishnu here. So if you look at our business in a segmental way, you know, energy, aerospace, defense and oil and gas. Energy is a business historically has had an asset turn of around 1.5 per plant or machine. And for the product that we are now doing and building qualifications for, this asset turn will go upwards from 1.5 to 1.7 on the energy sector. Now on the aerospace and defense, you see the products that we are currently making have an asset turn of 2 to 2.5. So at a blended level, when you see our business in FY'26 or FY'27, you see it will get to a point where our asset turn will blend it will be around 1.7.

And we do only machining, right? We get the forging made from out?

No, no, this is totally, this is blended is what I'm saying 1.75. Yes, forging is done in house. Everything is done in house. Yes, everything is done in house.

The entire part, whatever is forged is your final output will be a machine part only.

Yes, Yes, it is a mix. It depends on the customer's requirement. But yes, we do forging, we do machining, we do special processes. So it's an end to end 360 degree ecosystem that Azad is trying to create for our OEMs.

Yes, gentlemen, so this is what we are trying to say. It's not just product, we also give solution with the product.

Okay, my second question is, sir, on the working capital, it's, you know, in the last three years number, it's all over the place. But usually, incrementally, what working capital cycle will you operate at?

So if you look at a business, and again, I think, see, the idea is to look at it from an energy perspective, because energy business, we've done it for 15 years. And in 15 years, you know, we've gotten it to a point where our cash to cash conversion cycle is about 130 to 140 days. And this business, working capital cycle for this segment will only progressively come down slowly, because we are indigenizing our raw material purchase. Now, as soon as that happens, the working capital burden on the business will become lower. Our aerospace and defense, and oil and gas business are under qualification. So while you are qualifying these parts by part, what happens is you have an inventory buildup, and also there is an impact on this. So that's why the working capital cycle seems elongated at that point. But if you see for this quarter, you will see there is a dip in our working capital cycle even on the aerospace side. And then this will progressively come down. And in FY '26, FY '27, the entire business will be at a blended asset on, sorry, working capital cycle or a cash conversion cycle of 130 to 140 days.

Okay, so your blended cycle incrementally should move towards 130, 140 days.

Today, blended will get to 130, 140 days. Increase, see, what happens is energy, we are, our quantum of revenue versus our quantum of qualification is very different than compared to aerospace. Aerospace, last quarter has done about INR15 odd crores, but the quantum of qualification is there. That's why you see this impact there. But at a blended level, our business will become 130 to 140 days of cash-to-cash conversion cycle in FY25, Yes, progressively it will come down with every quarter and every year passing by.

Just follow on, what is your, what is the realizations per kg that you work on?

So we don't track…

of the machine part?

No, it doesn't go that way. It goes as product per piece. It doesn't go by per kg.

Okay, so Yes, I'll come back. Thank you very much.

Thanks.

Thank you. Next question is from Bala Murali Krishna from Oman Investment Advisors. Please go ahead.

Yes, good afternoon. And congratulations on great set of numbers. I would like to know that, in the defense and aerospace sector, what could be the percentage of contribution or the down the line, three, four years, what are you expecting from that sector?

Yes, thank you so much for the question. Again, we would like to start. Azad started from 2008, right? And it took a footprint in the energy sector first. And as it took longer and longer time to cover all the parts, part by part qualification approvals and all, it took a lot of time. Only 1920 is where we stepped in aerospace. But the beauty of Azad is, we are not a startup in aerospace. Only the center of excellence for manufacturing airfoils. So everyone has to understand what airfoil is. It's a three dimensional product, right? And this three dimensional product, it is very highly regulated product. So having that experience, when we went entered in the aerospace sector, though it looks, the number looks smaller, but that's going to scale up drastically in the coming time. And that's evident, you know, you can see the Rolls Royce contract, which has come for seven years. And we're bound to supply these parts and many more in pipeline, right? So in these sectors, the growth is very massive in next coming three to five years.

Okay, that's understood. And just a follow up on that. So the incremental revenue in this sector will be like, suppose it is aerospace sector. So that depends on the additional products you develop or depends on the OEMs for the additional aircrafts the OEMs are producing.

Yes. So, sir, what numbers we are talking are very large, right? They are very, very massive. What has been taken in consideration, the next three to five years, we already have it in hand. And you know, this is all is going to be add ons. And this is what we are trying to, you know, make sure that the growth which is lined up for the coming years is already secured.

Okay, good sir. And lastly on this, any other new product development which is already developed and which is under evolution by the OEMs?

The example I give you, one example, what contract we have signed, like, you know, any X company, any one of the engine manufacturers. Okay, one of the engine manufacturers got say, 10 different models of the engines, right? One may go in A320, one may go in A350 aircraft, one may go in 777, one may go in 380. You know, there are many crafts, many varieties of commercial and defense aircrafts. And every engine is designed as per the aircraft design. Right? So we started with just a few of the engines, maybe one or two. But they've got 10 more engines. To cover this one or two, you know, that itself is massive. Just imagine by one OEM, if we look at those 10 different engines, then 10 different, you know, requirements coming in. So that's what Vishnu was mentioning you, that the TAM which Azad is connected is more than 28 million, 30 million. When the team is talking about the TAM, what the market size is only related to Azad. It's not that we have picked up the entire, the world's TAM and been presenting. No, the time what we have been showing or what we have been, what has been shown is only related to us. Only related to the product line where Azad is playing.

That's good, sir. That's a great idea. Thank you. I'd like to visit your facility also.

Sure, sir, more than welcome. You'll love it. I can tell you, you'll love it

. Thank you. Thanks a lot and all the best.

Thank you. The next question is from Neel Mehta from ICICI Securities. Please go ahead.

Hi. Very hearty congratulations on the numbers.

Thank you.

My main question is only one because most of them are already answered. While we see most of the top line coming from exports, that is Japan number one and US number two and then Europe, do we see any major impact from the Red Sea crisis going ahead or etcetera?

Sorry, can you be a little louder, please? Prices are increasing, what, sorry?

So sorry. I'm asking that the major exports from the top line are going to Japan, Europe and US. Do we see any impact from the Red Sea crisis or the logistical supply chain breakup?

No, there will be not. Again, very, very good question, but I could answer in a very generic way. Azad all the products during COVID also, we fell under essentials. These parts what we manufacture are majorly used in power generation and wherever there are things like that, it doesn't affect anywhere because this business what exactly is in the aviation or it is in the energy business, they all are majorly in the essential areas. So we will not have any impact of any kind of thing which is going to affect the business.

Okay, thank you so much, sir.

Thank you. The next question is from the line of Amit Dixit from ICICI Securities. Please go ahead.

Yes, hi, and thanks for the opportunity. I have just one question. While we are deepening our presence in a defense space, in domestic arena as well, we have a formidable defense ecosystem coming up, particularly in aerospace with the joint venture between GE and HAL being talked about later on maybe for Safran and HAL. And incidentally, one of them is our customer already and the other one we are working with. So just wanted to understand on a very, very broad framework that what kind of opportunity do we see here? Because the numbers that are being talked about at least on the aircraft side, these are quite formidable and this opportunity extends maybe up to a FY40. So just wanted, if you could give a little bit of color on this that would be helpful.

Good question, Mr. Amit. You know, you have helped me make understand better about Azad now. Now, what engine has come to India? It's F404 and 414. From GE, which is coming to HAL. This engine is utilized not only in our LCA, it is utilized in various other aircrafts being manufactured by other nations, like Sweden or let's talk about any European countries or where the same engine is utilized in the various other countries for their different indigenous manufactured fighter jets. Now, when Azad is positioned as a global supplier, what does a global supplier mean? Since the parts which are being supplied by GE to entire world, they are global supply chain system where Azad is well -positioned. So the parts what we manufacture will go in an engine of 404 or a 414. That may go to India or that may go to Sweden or that may go to whichever country they want to sell these engines to. We may not know. Best part is having this control of these approvals and things where Azad is, again, very well-positioned. So we definitely have a very significant role to be played in this kind of programs. Example, I'll give you one thing which has happened to three years back or four years back. We got an order from General Electrics. And we got an RFQ. We know we bid for a project. And when we bid for the project, and it was for 800 megawatt into three units. So 2,400 megawatt, and we won the order, competing China and Poland in Europe. So we won the order. When the purchase order got printed and when we received the purchase order, you know what to my surprise was? Azad is in Telangana, Azad is in India. To our surprise, those projects were of NTPC Telangana, placed order on GE, which was manufactured in Poland. So our airfoils went all the way to Poland, got assembled, came back to Telangana. So such examples, that's the beauty of our great positioning, what I was talking about. We are positioning globally. Our parts, what we manufacture and supply goes to which part of the world, we will not know.

So just to follow up on this, while we are at it, the government's endeavor is to push up Atmanirbharta in different space. Also, there is an increased level of digitalization. And we are already, as you mentioned, 404, 414 and Safran will be co -produced, co-developed in India. So I think we have an excellent opportunity over here to kind of emphasize our position.

So I would say this is an add -on to us. This will be a great bonus to us. And we'll be happy to serve this. And best part is we have immense experience already. So I think we can handle it. But one thing, Azad would like to maintain the legacy of the compl ex parts. And we would like to continue that. And it is a great opportunity till very long run. It's not just today, tomorrow, one year, two years. So it is a very, as you rightly said, this may go up to 2030, '40, '50.

Great. And the last one, if I can squeeze, is that after Russia -Ukraine war, and with Palestine-Israel conflict also flaring, and now there are reports of US also attacking Syria, or whatever. So in this arms race, do you see any traction in ordering for us going ahead?

No, no, Mr. Amit. It doesn't come at all in our cases or some. Only, you know, when Ukraine- Russia war came in, you know where we faced the problem the most? When we were raising funds. All the investors were, they went away here and there, but our customers were still there. On a lighter note, you know, I'm just saying to you that that was the time we were raising money on the, we were on the verge of raising money. So what we found diffe rence is in the financial fraternity, not in our customer fraternity. It was on a lighter note, guys.

Okay, sure. That's it from my side. Thank you, and all the best.

Thank you very much. I now hand the conference over to the management for closing comments.

So I would like to request Mr. Chopdar to go ahead and give the closing comments.

Okay, thank you so much, everyone, for your time and spending time with us during this call. It was quite informative, and being the first call of ours, and we will get more trained, you know, what to speak, what not to speak. We were a bit confused, and, you know, maybe we could give all the appropriate answers, but if not, apologies for that, and any other things are there, guys, are most welcome to visit us. With this, I conclude the call, and if you have any further queries, please contact SGA our investor relation advisors. Thank you all for joining us today. Take care. Thanks, everyone.

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