Azad Engineering Ltd Q1 FY27 Earnings Call Summary

Event Participants

Executives

3 Rakesh Chopdar, Ronak Jajoo, Vishnu Malpani

Analysts

7 Aditya Bhatia, Amit Dixit, Basant Bansal, Gaurav Deepak, Kamlesh Bagmar, Shubhi Gupta, Vikas Singh

Financials & KPIs

Geographic & Segment Commentary

• Aerospace & Defense: Registered highest growth acceleration at ~38.4% YoY, reflecting increased share of wallet with global aviation majors and initial tailwinds from advanced propulsion and defense system deliveries. The company's successful delivery of India's first indigenous turbojet engine to DRDO's GTRE positions it as a fully integrated propulsion system player, expanding its TAM significantly.

• Energy & Oil & Gas: Grew 21.6% YoY, driven by healthy demand across gas turbine components and operational launch of new customer-dedicated production lines (Baker Hughes facility, plus Mitsubishi, GE Steam Power, and Siemens Energy lines). Global energy security push and transition to advanced gas turbines are creating multi-billion-dollar equipment upgrade cycles.

• Export Markets: Predominantly dollar-denominated sales with natural hedging via foreign currency loans and bill discounting. Rupee depreciation benefit estimated at 5-6% annually but not a primary planning factor; CFO notes it sits below EBITDA line.

Company-Specific & Strategic Commentary

• Indigenous Turbojet Engine Milestone: Delivered India's first indigenous expendable turbojet engine to GTRE, DRDO, and Ministry of Defense on July 22. Engine is now under testing, with weapon integration expected in 4-6 weeks, followed by certification and production scale-up. Management guided to prepare for "massive production" volumes. This elevates Azad from component manufacturer to primary technology integration partner.

• Customer-Dedicated Facility Model: Inaugurated fourth dedicated lean manufacturing facility (7,600 sqm for Baker Hughes) at Tumki Polaram Industrial Park. Model follows proven template with Mitsubishi, GE Steam Power, and Siemens Energy. Each plant creates operational stickiness via high switching costs and provides multi-year supply chain visibility. Eight plants planned; each capable of generating ₹150-180 crores at full utilization.

• Capacity Stabilization: FY26 was expansion/stabilization year; 80% of initiatives stabilized in Q1 FY27, with remaining major activities on track for completion by mid-Q2 and full closure by Q3. Civil construction for remaining units at Azad Center of Excellence to wrap by end of FY27.

• Cost Indigenization Program: Raw material cost to sales dropped from ~12% to 5%, driven by onboarding qualified domestic suppliers for critical raw materials with price and transportation benefits (4-5% savings vs. imports). CFO confident this is sustainable.

• Talent Development Engine: Hiring ~150-200 people monthly with a 90-day training program; building bench strength for future capacity. Employee cost elevated at ₹42 cr (from ₹29 cr) as WIP inventory built-up ahead of Q3/Q4 ramp-up.

Guidance & Outlook

Risks & Constraints

Q&A Highlights

Turbojet Engine Roadmap & Commercialization

• Question: What's the timeline for turbojet engine orders after first delivery? (Vikas Singh, ICICI Securities)

• Answer: Engine is under testing; weapon integration expected in 4-6 weeks, followed by certification. "This is not some years' story, these are few months' story." Management guided to prepare for massive production. For 2-digit volumes, existing fungible capacity suffices; no major new capex needed. (Rakesh Chopdar)

• Question: Can you quantify Azad's in-house value-add on the turbojet engine? (Gaurav Deepak, Avendus)

• Answer: Everything was done in-house except minor items like small washers; GTRM provided some specific components from approved sources. No major outsourcing. (Rakesh Chopdar)

• Question: What margins should we expect on turbojet engine and similar defense programs? (Shubhi Gupta, Trinetra Asset Managers)

• Answer: Cannot provide costing on first engine; needs 5-6 engines for stable cost basis. Timeline of 8-12 weeks (3-4 months) for meaningful margin data. (Rakesh Chopdar)

Capacity, Growth & Revenue Potential

• Question: What is the peak revenue potential from the current asset base? (Aditya Bhatia, Investec)

• Answer: Each of the 8 dedicated plants at Tumki Polaram can generate ₹150-180 crores at full utilization, implying ~₹1,200 crores from newer plants alone. Civil construction complete by FY27 year-end. Capacity sufficient for next 2 years of contracts. (Vishnu Malpani)

• Question: Should we model 35% annual growth instead of 25% given capacity and certifications? (Aditya Bhatia, Investec)

• Answer: "Right now the reason we are guiding 25% plus because we know what situation we are in. As we shift to the next level, we'll change this guidance." (Rakesh Chopdar)

• Question: Why does growth look lower than global peers like Howmet given rupee depreciation tailwinds? (Kamlesh Bagmar, Lotus Asset Managers)

• Answer: Not a fair comparison—peers have decades of capacity and qualifications built, operating at $2B+ per quarter scale. Azad is laying foundation and unlocking growth in coming quarters; no hiccups, just stabilization phase. (Vishnu Malpani)

• Question: What is the next phase of CapEx for FY27-FY29? (Kamlesh Bagmar, Lotus Asset Managers)

• Answer: Current plant capex will bring remaining plants up and ramp existing ones. Larger CapEx for next growth level being planned, with comprehensive update expected in next quarter. Opportunities exist across multiple sectors, not just investment castings. (Vishnu Malpani)

Financials, Margins & Working Capital

• Question: Why is margin guidance conservative (32-35%) when consistently delivering 37-38%? (Gaurav Deepak, Avendus)

• Answer: Guidance band is for calculation purposes; actual delivery has been above 35%+ consistently. Margin improvement from 18-19% historically to current level due to shop-floor process engineering and skill development. (Rakesh Chopdar)

• Question: What explains raw material cost drop from 12% to 5% of sales, and employee cost increase to ₹42 crores? (Basant Bansal, NBG Investment)

• Answer: Raw material benefit from cost indigenization program (domestic suppliers qualified with GE/Siemens, saving 4-5% transportation) and lower process content in WIP. Employee cost elevated to build bench strength and WIP inventory for Q3/Q4 sales; will normalize with higher absorption. (Ronak Jajoo)

• Question: When will working capital days plateau? (Amit Dixit, Goldman Sachs)

• Answer: Targeting ~200 days in H1, 160-180 days in H2. Bill discounting will reduce debtor days from 170-180 to ~90 days. Finance costs will continue as bill discounting charges flow through that line. (Ronak Jajoo)

Strategic Growth Drivers

• Question: How does the MHI hot section contract expand TAM, and what's the timeline? (Amit Dixit, Goldman Sachs)

• Answer: Facility being built for Mitsubishi will be a model for other OEMs, catering to hot sections for both land-based and aviation engines. Other OEMs already showing interest; facility establishment ~7-8 months away, then qualification. "Don't need to invite them—they're already here." (Rakesh Chopdar)

• Question: How are you building the talent pool for high-precision manufacturing? (Pratik Shrivastava, Nivesh Wisdom)

• Answer: Culture of training starts from founder's philosophy; hiring 150-200 people monthly with 90-day training programs, shadowing senior resources before deployment. Building bench strength ahead of revenue ramp. (Rakesh Chopdar)

• Question: What are the challenges that worry management? (Basant Bansal, NBG Investment)

• Answer: Primary challenge is execution complexity—building factories, ramping capacity, hiring, and delivering contracts simultaneously. All elements must work together; management views this as an aggressive focus area rather than a risk, given the company's fundamentals. (Vishnu Malpani)

Key Takeaway

Azad Engineering delivered a strong Q1 FY27 with standalone revenue of ₹170.5 crores (+26.8% YoY), EBITDA of ₹64 crores with 37.6% margin (+150 bps YoY), and PAT of ₹36.4 crores (21.3% margin), meeting guidance. The quarter's defining milestone was delivering India's first indigenous turbojet engine to GTRE/DRDO, marking Azad's transition from component manufacturer to fully integrated propulsion systems player—a structural upgrade expanding TAM across domestic defense and international aerospace chains. Strategically, the company inaugurated its fourth customer-dedicated facility (Baker Hughes, 7,600 sqm) following its proven model with Mitsubishi, GE, and Siemens, with each of the eight planned plants capable of generating ₹150-180 crores at full utilization. Management confirms 80% of FY26-FY27 capacity initiatives are stabilized, with production running at full throttle and substantive revenue inflection expected from Q3 onwards. The company reiterates >25% long-term revenue growth guidance and maintains conservative 32-35% EBITDA margin guidance despite consistent delivery above 37%. Key watch points include turbojet engine production volumes post-certification, working capital normalization to 160-180 days by H2, and the next phase of capex planning for FY29+ growth, with management signaling potential guidance upgrades as the stabilization curve completes.