Sell Azad Engineering Ltd For Target Rs. 2,150 by Choice Institutional Equities Ltd
From Capacity Build-out to Capability-led Acceleration
We believe AZAD is moving beyond a capacity-led investment phase towards a capability-led growth cycle. Q1 revenue grew 26.8% YoY, with EBITDA growth of 32.1% and margin expanding 150 bps to 37.6%. With ~80% of infrastructure initiatives now stabilised, the management expects a more meaningful revenue contribution from H2FY27. We believe the successful delivery of India’s first indigenous turbojet engine could further strengthen AZAD’s positioning and materially expand its long-term opportunity set, although the commercial opportunity and economics are yet to be established.
We view Q1 as a confirmation of the execution thesis. The management reiterating >25% revenue growth and a 32–35% EBITDA margin framework, which we believe provides a reasonable basis for our FY28E earnings estimate and valuation.
From a valuation perspective, we increase our target P/E multiple from 45x to 50x FY28E EPS, implying a PEG ratio of 1.2x based on FY26– 29E EPS CAGR of 43.2%, and arrive at a revised TP of INR 2,150, reflecting AZAD’s superior growth visibility, strong margins, long qualification cycles, high entry barriers and increasing aerospace/defence exposure. While the turbojet opportunity and faster capacity ramp-up provide further upside optionality, we prefer not to capitalise these until they translate into visible earnings growth. The sustained growth trajectory and improving business mix warrant a modest re-rating, in our view. Following the recent rally, however, the risk-reward remains less favourable, prompting us to downgrade the stock to SELL (from REDUCE), while increasing our TP to INR 2,150
Healthy execution with margin expansion; PAT softness persists
* Revenue for Q1FY27 up 25.9% YoY and up 6.8% QoQ to INR 1,726 Mn (vs CIE est. of INR 1,714 Mn)
* EBITDA up 30.7% YoY and up 5.0% QoQ to INR 644 Mn (vs CIE est. of INR 608 Mn). EBITDA margin stood at 37.3%, improved 138 bps YoY (vs CIE est. of 35.5%)
* PAT up 19.5% YoY and down 4.5% QoQ to INR 352 Mn (vs CIE est. of INR 365 Mn). PAT margin contracted 110 bps YoY and 241 bps QoQ to 20.4% (vs CIE est. of 21.3%)
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SEBI Registration no.: INZ 000160131
