Hi Shubham.
Azad Engineering operates four advanced manufacturing facilities in Hyderabad, Telangana, India, boasting the capability to produce high precision forged and machined components across approximately 20,000 square meters of total manufacturing space. Additionally, the company has two upcoming manufacturing facilities planned in Telangana, which will be 10x their capacity in the time to come.
The important thing to note here is that these new facilities are intended to be financed through internal accruals. In light of the negative operating cash flow generation, it will surely be a key monitorable as and when capital is to be employed for these expansions.
For the first phase of expansion starting FY25, Azad has already set aside Rs. 120 Crore from the IPO proceeds. The proposed manufacturing facility is expected to feature a dedicated manufacturing / production line catering exclusively to specific customers. This is huge in terms of running efficient operations, while also compressing your working capital cycle.
The important thing to note here is that it is because of the stringent qualification process (might take 3-4 years to get qualified) for each of their highly critical products that their cash flow from operations are negative at this stage. Quality tests and spares leads to high build up of inventory.
Azad also intends to augment their facilities by undertaking inorganic acquisitions to enhance their manufacturing facilities and provide value-added services adjacent to their business.
Azad has already set-up a subsidiary of a recent acquisition which will help in reducing its dependency on 3rd parties as it will cater to captive requirements while also serving other OEMs. This will again help in reducing the inventory built up.
The capacity is optimally being utilized at about 80-85% capacity, Azad has over delivered on its topline growth in FY24. Utilizing the same operating capacity and further optimizing on its efficiency, and with ~Rs. 3200 Crore order book (Rs. 1700 from A&D and Rs. 1500 from Energy/Oil & Gas) sealed, the management is confident of delivering a 25-30% of topline growth and ~30-35% EBITDA growth with ~35% OPM in FY25.
It is evident from the management commentary that the IPO proceeds have helped tremendously in strengthening their balance sheet and its utilization in further capex will result in FY26 to be an inflection point for Azad where they can even outpace their current run-rate of ~30-35% topline growth. Moreover, they plan to further deleverage their balance sheet in FY25.
With product mix shifting towards high value added adjacencies and interest cost coming down, we might see an increase in the EPS of the company from FY26 onwards.
Add into it the matter of working capital normalizing, Azad’s return on capital will gradually increase sequentially in the time to come. However, a company which is bleeding cash flow at operating level and trading at such high valuations can be optically repulsive to investors and understandably so.
But a business which is commanding gross margins of 82-87% and has an unconventional knack of only targeting complex and critical products is surely to be looked at with an interest. More so, when the Total Addressable Market is $28bn and growing. Though Azad currently might have only 1% of the wallet share of this market, any incremental increase of 100-200 bps in market share will be a huge topline turner.
The company in its latest GTRE/DRDO order win said “By entering the production of complete gas turbines, AZAD is set to play a more integral role in India’s defense sector manufacturing capabilities, enhancing self-reliance Prime Minister Shri Narendra Modi Ji’s vision of “Atma Nirbhar Bharat”. Well ,such companies are refreshing, especially as the company and its promoters are young and hungry for nation-building. So there is a bit of sentimentality also attached here, I won’t lie.
The world order is changing and global supply chains are in a flux. Bharat needs to seize the moment. It’s now or never, and companies like Azad are showing courage and confidence. It’s about time we started ‘building and manufacturing’ things and not rely on imports. There are second order effects of this which will help us in the long run but none will be as consequential than what Krishna espouses in Gita.
PS. @protosphinx is a huge proponent of manufacturing in India.
Source: X/ @protosphinx
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