Explaining Azad Engineering’s partnership with Rolls-Royce and their position in the aerospace sector

Welcome to our in-depth investigation into Azad Engineering Limited, a leading company in the production of components for energy turbines, aerospace and defense aircraft. The company recently made waves in the financial markets with its IPO with an incredibly high price-to-earnings ratio (PE) of 292x! The stock has risen 23% since the day it was listed on December 29, 2023. As of January 31, 2024, the company’s PE ratio is 646!

Recently, Rolls-Royce, a leading supplier of power and propulsion solutions, announced a partnership with Azad Engineering to manufacture complex defense aero engine components in India. As we delve into the intricate details of Azad Engineering Limited, we will examine whether its seemingly high valuation is consistent with the company’s underlying business prospects.

Azad Engineering Limited

business overview

Azad Engineering Limited started its core business in 2008. The company participates in the energy turbine, aerospace and defense components markets. It is also a manufacturer of oil and gas components.

The company has been in business for 15 years and has significant experience as a tier 1 supplier of high-precision forged and machined components to the energy, aerospace and defense industries, selling to 15 countries. Additionally, we manufactured and delivered 3.09 million units at the aggregate level from fiscal year 2009 to fiscal year 2023.

Azad Engineering Limited: segment

energy industry

Azad Engineering Limited’s major customers are in the power and industrial turbine industries. The company supplies precision forged and machined parts for energy turbines (used in industry and power plants using different fuel types such as gas, nuclear and coal). Moreover, these components are high-precision and mission-critical. Therefore, the company ensures that it meets the “zero parts per million” defect requirements.

Azad Engineering Ltd. supplies components to five turbine manufacturers: General Electric, Siemens Energy AG, Mitsubishi Power Ltd., Ansaldo Energia SPA, Bharat Heavy Electricals Limited (BHEL), Triveni Turbines Ltd, Harbin Turbine Co. Ltd., and Dongfang. supplies. Electric Corporation, Shanghai Electric Power Generation Group, Baker Hughes, solar turbines). In fiscal year 2023, this segment contributed approximately 87.03% to the total revenue.

Aerospace and Defense Industry

The company supplies components such as engine airfoils and other precision, forged and machined parts to the aviation sector. The company’s products are primarily utilized in commercial and defense aircraft, spacecraft and other defense systems to provide propulsion, actuation, hydraulics and flight control functions. It also meets zero defect requirements in parts per million.

The company has supplied critical components to various aircraft platforms such as B737, B737 Max, B747, B777, B777X, A320, A350, A355, A350 XWB and Gulfstream G550. In fiscal year 2023, this segment contributed approximately 8.95% to the total revenue.

oilfield industry

The components the company supplies to the oilfield industry include drill bits and slips used in drilling equipment and as part of the exploration and production stages. The company supplied parts to one of the global drilling equipment manufacturers. In fiscal year 2023, this segment contributed approximately 0.02% to the total revenue.

Current and future manufacturing facilities

The company has four state-of-the-art manufacturing facilities located in Hyderabad, Telangana, India. The facility is capable of producing high-precision forged and machined parts. Additionally, the total manufacturing area is approximately 20,000 square meters.

The company also has two manufacturing facilities in the pipeline at (a) Tuniki Bollaram village in Siddipet district of Telangana and (b) Mangampet village in Sangareddy district of Telangana with a total manufacturing area of ​​94,898.78 m2 and 74,866.84 m2 respectively. . The Company plans to finance the construction and development of these facilities through internal accruals.

Azad Engineering Limited – finance

The majority of the company’s revenue comes from exports to global OEMs on long-term contracts, with 89.69% of its total revenue for the six months ended September 30, 2023 coming from contracts with customers located outside India. In fiscal 2023, exports and domestic sales contributed approximately Rs 2,023.08 billion and Rs 493.67 million, respectively. Total revenue increased at a CAGR of 44.63% from Rs 1,250.3 million in FY 2021 to Rs 2,615.21 million in FY 2023.

In FY22, the company recorded a commendable ROE of 24.3%, which declined significantly to 4.15%, a decline of 83% in FY23. Similarly, ROCE decreased from 16.95% in FY22 to 12.99% in FY23, a decline of 23.5%.

The company’s significant debt load is evident from its debt-to-equity ratio of 0.96. However, the debt-to-equity ratio decreased by 5.8% from 1.02 in FY22 to 0.96 in FY23.

What makes your company stand out in its field?

Because the costs associated with the energy aerospace and defense industry are very high due to the stringent quality checks and certifications required to qualify as a supplier, there are significant barriers to entry for Azad Engineering Limited, which makes finding a manufacturing partner time consuming. For OEM it is several years. The company believes that ideally it will take 15 to 20 years for a new player in the industry to reach the position it currently occupies in the market.

Meanwhile, with significant experience as a tier 1 supplier of highly complex forging and machining projects and life-critical components in the energy, aerospace and defense industries, the company is an established supplier to global OEMs operating in highly regulated industries. It has established itself.

As mentioned earlier, Rolls-Royce has signed a seven-year contract with Hyderabad-based Azad Engineering Limited to manufacture and supply critical engine components for military aircraft engines.

The contract enables Azad Engineering to produce and supply complex components for military aircraft engines and integrates it into Rolls-Royce’s global supply network for complex components essential to advanced aero engines, according to a company announcement.

conclusion

In conclusion, Azad Engineering Limited plays an important role in precision engineering especially in the energy turbine, aerospace and defense sectors. With over 15 years of experience, Azad Engineering is a trusted tier one supplier of high quality forged and machined components worldwide.

Collaborations with industry giants such as Rolls-Royce demonstrate the company’s presence in the global supply chain. However, the effect of this expansion plan on improving the company’s operating profit margin in the future has not yet been confirmed. So what do you think about Azad’s future? Share your thoughts in the comments section below!

A work written by Nalin Surya S.

By leveraging the Stock Screener, Stock Heatmap, Portfolio Backtesting and Stock Comparison tools on the Trade Brains portal, investors have access to comprehensive tools to identify the best stocks, stay updated and informed with stock market news. invest.