Buy Azad Engineering Ltd For Target Rs. 1,900- Choice Broking Ltd
Margin impresses, but revenue growth moderates
We remain constructive on AZAD, given its strong positioning in missioncritical and high-margin components. The Q1FY26 EBITDA margin at 35.9% demonstrates the company’s pricing power & improving operating leverage, even as the full benefits of the INR 450-Cr capex are yet to be realised. The order book, which exceeds INR 6,000 Cr, provides multi-year revenue visibility and reinforces the structural strength of the business.
However, the management’s revenue growth guidance of 25–30% appears to be conservative, particularly in light of the sizeable backlog and expected capacity addition. While we believe this reflects a prudent execution approach, we see potential for upward revision if production scale-up accelerates. AZAD has a cost advantage, that is, 20–45% less than global peers. The company’s strategic transition towards higher-value assemblies gives us confidence in AZAD’s long-term growth potential.
We have revised our estimates and cut EPS by 4.3% for FY26E and by 8.9% for FY27E. Despite having a strong order book, the company's growth outlook remains modest. Accordingly, we lowered our valuation multiple to 50x (from 55x). EPS is expected to expand ~43% CAGR over FY25–28E. PEG ratio will also improve, from 1.49x in FY26E to 0.82x by FY28E. Based on an average EPS for FY27–28E, we revise our target price to INR 1,900 (from INR 1,865) and upgrade our rating to BUY (from REDUCE).
Q1 Delivers across the board; outperformance driven by margin expansion
* Revenue for Q1FY26 up 39.3% YoY & up 8.0% QoQ at INR 1,371 Mn (vs CIE Est. INR 1,314 Mn)
* EBIDTA for Q1FY26 up 49.0% YoY and up 8.0% QoQ at INR 492 Mn (vs CIE Est. INR 444 Mn). The EBITDA margin stood at 35.9%, improved by 233bps YoY (vs CIE Est. of 33.8%)
* PAT for Q1FY26 up 71.9% YoY and up 18.6% QoQ at INR 294 Mn (vs CIE Est. INR 264 Mn). PAT margin improved by 407bps YoY, reaching 21.5% (vs CIE Est. 20.1%)
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