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??Q2FY25 Performance Update: Azad Engineering reported slightly below expectations numbers, Revenue for the quarter grew by 34.6% YoY to Rs. 1,115mn (vs est Rs 1,132mn) Vs last Rs 828mn in Q2FY24. Revenue for the quarter was grew significantly due to robust top-line execution. EBIDTA came at Rs 399mn (+52%/+21% YoY/QoQ) (vs est Rs 362mn), Margin came at 35.7% (+404bps YoY) (vs CEBPL est. of 32.0%), margins improved due to lower staff cost and cost control measures. PAT increased by (+7.5%/+22.0% YoY/QoQ) basis to Rs 209mn (vs our est. Rs 228mn) and PAT margins came +18.7% (-473bps/+132bps YoY/QoQ) vs our est. 20.1%.

* Positioned for Growth with a Robust Order Book and High Barriers to Entry: Azad Engineering is poised for significant growth, highlighted by its impressive order book of INR 4,500 crores, representing approx 13 times of FY24 revenue. This robust order book not only indicates strong future revenue potential but also reflects the company's solid market position and visibility into earnings. Operating within a high-entry-barrier segment, Azad offers a specialized product portfolio backed by top-tier engineering capabilities, creating a formidable competitive moat. The lengthy vendor qualification process spanning 30 to 48 months underscores the mission-critical nature of its products in highly regulated industries, where achieving certifications from OEMs is a notable accomplishment.

* Precision Engineering for Critical Sectors in Energy, Aerospace, Oil & Gas: AEL is a prominent manufacturer of high-performance, critical components for the energy, aerospace, and oil & gas industries. The company is known for its advanced turbine blades used in utility power generation, where precision and reliability are essential to avoid costly downtime and ensure the stability of power transmission grids. AEL’s blades are crafted from high-grade metal alloys, designed to withstand extreme temperatures and pressures with tight tolerances of 4-5 microns. In the aerospace sector, AEL produces life-critical components, including air generation systems, auxiliary power units, and engine systems, supplied to major OEMs like Honeywell, GE Aviation, Rafael, and Hindustan Aeronautics Limited (HAL). AEL has long-term contracts with prominent OEMs in the energy, aerospace, and oil & gas sectors, including GE, Mitsubishi, Siemens, and Toshiba. Its export markets are diverse, covering the US, UK, Europe, Japan, and the Middle East. The global market for turbine blades is valued at multibillion, and AEL stands out as one of the few qualified domestic suppliers with over 1,400 product and 45+ process qualifications. This extensive certification and expertise give AEL a distinct competitive advantage in a highly capital- and time-intensive industry.

* Increasing ~10x capabilities with margins improvement: The company has increased its production capacity from ~20,000 Sq.mts manufacturing area to New Facility of 2,00,000 Sq.mts area in a phased manner to carter robust demand from near future. To equip this area the company is planning to invest ~Rs.300 crore Hi-Tech machines like: 5-Axis CNC milling, Ultra precision turning and grinding machines, Precision forgings with Shot peening using 7-axis Robotic machines, Special processes for metal joining, heat treatment and painting & coating. Also the company focusing on improvement of EBITDA margins ~28.7% in FY23 to 35.0% in FY27, through operational efficiency like: multiple machines allocated to same worker, who is now handling one machine at a time now

View and Valuation: We remains positive on AEL led by 1) Capacity expansion is 10x of current level to carter future demand, 2) Focusing on margin improvement through acquiring Hi-Tech machinery & Operational efficiency, 3) Impressive clientele base like: General Electric, Honeywell International Inc, Mitsubishi Heavy Industries Ltd, Siemens Energy Global GmbH & Co.KG (energy), MAN Energy Solutions SE (energy), Eaton Aerospace, Rolls Royce, Hindustan Aeronautics Ltd, Godrej Aerospace. and 4) Upcoming robust opportunity in Civilian & Defence aircraft . We expect Azad Engineering to registered a healthy revenue/EBIDTA/PAT growth of 45/46/57% CAGR over FY24-27E. We ascribe a multiple of 55x on FY27E EPS to arrive at a TP of Rs.2,120 with a rating of “BUY”.

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