Azad Engineering is a key manufacturer
of qualified product lines supplying to global original equipment manufacturers
(OEMs) in the energy, aerospace and defence, and oil and gas industries. The
products the company manufactures are highly engineered, complex, mission and
life critical high precision forged and machined components.
Products of the company include
3D rotating airfoil and blade portions of turbine engines and other critical
components for gas, nuclear and thermal turbines used in industrial
applications or energy generation; and defence and civil aircrafts and spaceships.
In the energy industry, the
companysupplies precision, forged and machined components for energy turbines
(which are used in industries and power plants with different fuel types such
as gas, nuclear and coal).It produces high-precision rotating and stationary 3D
airfoils and 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.
The company’s aerospace and
defence products include airfoils and 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. It has supplied critical components to major commercial aircraft
manufacturers such as B737, B737 Max, B747, B777, B777X, A320, A350, A355, A350
XWB, and Gulfstream G550 and is currently in discussions for supply of
components for new engine platforms to various kinds of aircraft manufacturers.
For the oil and gas industry, the
company manufactures components of drilling rigs such as drill bits and other
critical components that are used in drilling equipment and are part of
exploration and production phase.
Airfoils and bladesare the major
revenue generator for the company currently. These are the most critical 3D
rotating and stationary parts of a turbine in the compression section. To
sustain the high pressure, airfoils and blades are made up of super alloys and
manufactured with a unique process designed by the company.
In FY2023 and H1FY2024, of the
total revenue, the energy industry contributed 87.03% [airfoils and blades
78.68% andnon-airfoils 8.35%] and 88.75% [airfoils and blades 72% and non-airfoils
16.75%], respectively. The aerospace and defence contributed 8.95% [airgeneration
systems 1.37%,hydraulics 2.99%, and balance others] and 8.62% [airgeneration systems
3.22%,hydraulics 2.21%, and balance others], respectively.
Customers of the company include
global OEMs across the energy, aerospace and defence, and oil and gas
industries such as General Electric, Honeywell International, Mitsubishi Heavy
Industries, Siemens Energy, Eaton Aerospace, and MAN Energy Solutions SE. The company receives purchase orders pursuant
to RFQs and RFPs; LTAs and LTCs (of 3-10 years); and tenders.
Most of its revenues are derived
from exports to global OEMs, backed by long-term contracts. In H1FY2024 and FY2023,
of the total revenue about 89.69% and 80.38% was from contracts with customers
located outside India. Since its inception, the company has been supplying
components to the USA, China, Europe, Middle East, and Japan. Thus, it is a key
link in the global supply chain for OEMs.
The company has four advanced
manufacturing facilities in Hyderabad, Telangana, India, capable of producing
high precision forged and machined components, with a total manufacturing area
of 20,000 square metres. Further, the company has two manufacturing facilities
in the pipeline at TunikiBollaram village in Siddipet district, Telangana, and
Mangampet village, Sangareddy district, Telangana, with a total manufacturing
area of 94,898.78 square metres and 74,866.84 square metres, respectively. The
construction and development of these proposed manufacturing facilities are
intended to be funded from internal accruals. The upcoming manufacturing
facility at Tuniki Bollaram village in Siddipet district, Telangana, is
proposed to have dedicated and exclusive manufacturing setups for its
customers. The company plans to initially introduce this exclusive
manufacturing setup for production of critical and complex components such as
airfoils and blades and other special machined parts for gas and thermal
turbines for Mitsubishi Heavy Industries, one of its long-standing customers.
The company manufactures complex
and highly engineered precision forged and machined components that are mission
and lifecritical. Hence, some of its products have a zero parts per million
defects requirement.
As of September 30, 2023, the company
had approximately 45 qualified manufacturing processes and 1,400 qualified
parts and components.
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) among others.
The Issue
The offer comprises of Fresh
Issue of equity shares aggregating to Rs 240 crore and Offer for Sale (OFS) of
equity shares aggregating to Rs 500 crore.
The OFS component of the issue comprises sale of equity shares worth Rs
204.965 crore by Rakesh Chopdar (Promoter), Rs 260.851 crore worth of shares by
Piramal Structured Credit Opportunities Fund (investor selling shareholder) and
Rs 34.184 crore worth of shares by DMI Finance (the other selling shareholder). Post-issue, both ISS and OSS will have nil or
negligible % of stake in the company at the upper band of the offer price.
Objects of the Issue
Of the net proceeds from the
fresh issue, the company intends to use Rs 60.395 crore towards funding capital
expenditure; Rs 138.188 crore towards repayment and prepaymentin part or full
of certain borrowings; and balance towards general corporate purposes.
As on September 30, 2023, the
aggregate outstanding borrowings (except for the PSCOF CCDs) were Rs 154.228
crore (including bank guarantee amounting to Rs 0.592 crore).
Strength
A diversified product range
across energy, aerospace and defence, and oil and gas industries.
Qualified and established
supplier of highly complex forged and machined products and life critical
components to global OEMs operating in highly regulated industries such as
energy, aerospace and defence. The company has proven manufacturing capability,
having delivered 3.09 million units between Fiscal 2009 to Fiscal 2023 at an
overall level.
Airfoils and blades and other
products are designed to operate at extreme conditions and require a
multi-level safety protocol as such engine products are life critical.
Considering that the costs are very high in the energy and aerospace and
defence industries, given the stringent quality checks and certifications that
are required to qualify as a supplier, there are significant entry barriers,
which makes finding a manufacturing partner a lengthy process of many years for
OEMs.
Supplies to OEMs with high
global market penetration. Moreover, supplies components to five of the key
manufacturers in the turbine manufacturing industry. Its customers together
control approximately 70% of the gas turbine market globally. Similarly, supplies components to six of the
key manufacturers in the aerospace and defence industries and to one of the
global manufacturers in the drilling equipment manufacturing industry.
Enjoys long-term relationships
with high customer stickiness and a high percentage of repeat business.
Advanced manufacturing
facilities, with a diverse range of products and solutions. The focus is on
innovation and cost competitiveness.
Weakness
The Top 5 and 10 customers
accounted for 63.11% and 79.76% and 60.84% and 79.71% of the revenue of the
company for FY2023 and H1FY2024, respectively, reflecting significant client
concentration. Thus, loss of business from any client will have an adverse
impact on the business of the company.
The markets in which its
customers operate are characterized by rapidly changing technology, evolving
industry standards and demands for features, and continual product
innovation. So, any disruptions in the
industry can adversely impact the business of the company.
Statutory auditors of the
company have indicated certain matters in their report on the audited financial
statements of thecompany for FYs 2023, 2022 and 2021 in accordance with the
Companies (Auditor’s Report) Order, 2003.
For the two newpipeline
projects, a request for five acres of land at Mangampet Village is yet to be
allotted by TSIIC. There is no reply for project extension of two years,
without levying any penalties, from the date of allotment of additional land
from TSIIC. While the company has placed
some purchase orders and has incurred infrastructure expenses on theTunikiBollaram
plant (one of two new projects), it is still in the process of placing firm
orders for capex to be incurred at the Mangampet plant.
The energy industry projects
capex, especially thermal capacity, is cyclical in nature and faces strong
challenge with increased investment in renewable such as solar and wind,
globally.
Fluctuation in annual operating
margin.
Valuation
Consolidated revenue for the
fiscal ended March 2023 was up 29% to Rs 251.68 crore. But with 330 bps
contraction in operating profit margin to 28.7%, operating profit was up 16% to
Rs 72.28 crore. However, net profit was down by 71% to Rs 8.47 crore, hit
largely by higher interest and depreciation.
For the half year ended Sep
2023, consolidated revenue was Rs 158.75 crore. With OPM standing at 33.1%, OP
was Rs 52.53 crore. Finally, net profit was Rs 26.89 crore.
Consolidated EPS for FY2023 at the
upper price band stood at Rs 1.4 and that works out to a PE of 366 times. PE on
annualized H1FY2024 EPS of 9.1 worksout to 57.6 times.
In comparison, Triveni Turbines
quotes at a PE of 74.4 times of its FY2023 EPS. MTAR Technologies, Paras
Defence, Dynamatic Technologies and DCX Systems quote at a PE of 68.8 times,
80.8 times, 70.5 times and 48.4 times, respectively.
Azad Engineering: Issue Highlights
|
|
Fresh Issue (in Rs. Crore)
|
240.00
|
Offer for sale (in Rs. Crore)
|
500.00
|
Price band (Rs.)
|
|
Upper
|
524
|
Lower
|
499
|
Post-issue equity (Rs crore)
|
|
in
Upper price band
|
11.82
|
in
Lower Price Band
|
11.87
|
Post-issue promoter (including promoter group)
stake (%)
|
|
in
Upper price band
|
65.90
|
in
Lower Price Band
|
65.32
|
Minimum Bid (in nos.)
|
28
|
Issue Open Date
|
20-12-2023
|
Issue Close Date
|
22-12-2023
|
Listing
|
BSE, NSE
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Rating
|
47/100
|
Azad Engineering: Re-stated Consolidated
Financials
|
|
|
2103 (12)
|
2203 (12)
|
2303 (12)
|
2309 (6)
|
|
Sales
|
122.72
|
194.47
|
251.68
|
158.75
|
|
OPM (%)
|
22.9
|
32.0
|
28.7
|
33.1
|
|
OP
|
28.15
|
62.27
|
72.28
|
52.53
|
|
Other income
|
2.31
|
4.80
|
9.85
|
10.79
|
|
PBIDT
|
30.46
|
67.06
|
82.12
|
63.32
|
|
Interest
|
5.35
|
13.62
|
52.38
|
21.86
|
|
PBDT
|
25.11
|
53.45
|
29.74
|
41.46
|
|
Depreciation
|
8.87
|
13.31
|
16.58
|
9.84
|
|
PBT
|
16.24
|
40.13
|
13.16
|
31.61
|
|
EO Exp
|
0.00
|
0.00
|
0.00
|
0.00
|
|
PBT after EO
|
16.24
|
40.13
|
13.16
|
31.61
|
|
Tax
|
4.74
|
10.68
|
4.69
|
4.73
|
|
PAT
|
11.50
|
29.46
|
8.47
|
26.89
|
|
Share of Profit from Associates
|
0.00
|
0.00
|
0.00
|
0.00
|
|
Minority Interest
|
0.00
|
0.00
|
0.00
|
0.00
|
|
Net profit
|
11.50
|
29.46
|
8.47
|
26.89
|
|
EPS (Rs)*
|
1.9
|
5.0
|
1.4
|
9.1
|
|
* on post IPO equity (on upper price band)
equity of Rs 11.82 crore. Face Value:
Rs 2
|
|
EPS is calculated after excluding EO and
relevant tax
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# EPS can not be annualised due to seasonality
in operations
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Figures in Rs crore
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Source: Capitaline Corporate database
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