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Preferred manufacturer of Critical High-precision Components:

Azad Engineering Ltd (AEL) is one of the preferred manufacturer of complex & highly engineered precision forged & machined components for OEMs in energy (89% of sales as of 1HFY24), aerospace/defence (A&D; 9%), and oil & gas industries. It has delivered 3.09mn units of 3D rotating airfoil/ blade portions of turbine engines and other critical components over FY09-23 including some with ‘zero parts per million’ defects requirement.

Critical Source Supplier to global OEMs:

AEL caters to highly regulated industries with significant entry barriers. Infact it requires stringent qualification process taking up to 30-48 months for onboarding a new vendor. It derived 90% of its 1HFY24 revenue from exports to global OEMs, backed by long-term contracts. Key customers include General Electric, Honeywell International, Mitsubishi Heavy Industries, Siemens Energy, Eaton Aerospace and MAN Energy Solutions.

Capitalizing on growth opportunities:

AEL supplies to 6 key OEMs in A&D industry and 5 key OEMs in turbine manufacturing industry, who controls ~70% of the gas turbine market share. Addressable market for A&D industry is expected to grow at 9% CAGR led by higher defense spending on modernized/advanced aircrafts and rising demand for commercial aircrafts & next generation engines. Global energy turbine components market is expected at ?283bn by FY27 led by rising demand from industrial application and higher replacement demand. There is also opportunity to increase wallet share by entering into adjacencies.

Financials:

AEL has delivered robust growth with Revenue/PAT CAGR of 43%/33% over FY21-23. It enjoys high margin which improved to 33% in 1HFY24 from 22.9% in FY21. Its RoE (post dilution) is healthy at 15% for 1HFY24. Post repayment, net Debt/Equity will get reduced to 0.1x

Issue Size: ?7.4bn IPO consists of fresh issue of ?2.4bn and ?5bn OFS (by promoter & investors), which would result in promoter stake reducing to 65.9% (78.6% pre-IPO). The market cap post listing would stand at ?31bn.

View: We like AEL given its presence in the high growth niche segment with high entry barriers, diversified product/client portfolio and robust financials. It would benefit from industry tailwinds especially in A&D space which could improve its revenue mix. IPO is priced at 57.6x 1HFY24 P/E (on an annualized & diluted basis). We recommend Subscribe for listing gains, given its unique business model & buoyant primary market.

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SEBI Registration number is INH000000412