Azad Engineering - A stock picker’s dream!

Analysis based on the latest results shared by the company (source: Chat GPT).

1. Financial Health Analysis

Balance Sheet Strength

  • Assets Growth:
    • Total assets increased from ₹4,043 Mn (FY22) to ₹7,970 Mn (FY24), indicating expansion and investment in growth.
    • Increase in property, plant, and equipment (₹2,545 Mn in FY24 from ₹1,444 Mn in FY22) suggests capital expenditure for capacity expansion.
    • Strong cash balance of ₹281 Mn in FY24, up from ₹44 Mn in FY22.
  • Liabilities & Debt Position:
    • Total liabilities decreased significantly from ₹3,852 Mn (FY23) to ₹1,520 Mn (FY24), reducing financial leverage.
    • Long-term debt reduced from ₹2,208 Mn (FY23) to ₹271 Mn (FY24), suggesting the company has aggressively paid off debt.
    • Net Debt-to-Equity improved from 1.2x (FY23) to near-zero in FY24, a strong positive sign.
  • Equity Growth:
    • Equity increased significantly from ₹1,200 Mn (FY22) to ₹6,450 Mn (FY24) due to new equity infusion.
    • The company raised ₹7,400 Mn from an IPO, strengthening its financial position.

Cash Flow Analysis

  • Operating Cash Flow:
    • The company had negative operating cash flow in FY23 and FY24 (-₹69 Mn in FY24), which is concerning despite high profitability.
    • Large working capital investments (inventory and receivables) contributed to negative cash flows.
  • Investing Activities:
    • Heavy investment in property, plant, and equipment (₹753 Mn in FY24) indicates capacity expansion.
    • Sale of subsidiary (₹118 Mn in FY24) suggests a portfolio adjustment.
  • Financing Activities:
    • Raised ₹2,400 Mn from equity issuance, reducing reliance on debt.
    • Repaid ₹955 Mn in long-term debt, improving balance sheet strength.

Profitability & Margins

  • Revenue Growth:
    • 32% CAGR in revenue (FY22-24), growing from ₹1,945 Mn to ₹3,408 Mn.
    • Exports account for 87%+ of revenue, indicating strong global demand.
  • EBITDA Growth:
    • EBITDA grew 37% CAGR (FY22-24), reaching ₹1,187 Mn in FY24.
    • EBITDA margins ~35%, indicating high profitability.
  • Net Profit Growth:
    • Net profit (PAT) grew 41% CAGR (FY22-24), reaching ₹586 Mn in FY24.
    • PAT margin ~16%, which is strong for a manufacturing company.
  • Return on Capital Employed (RoCE):
    • Improved significantly from 13% (FY22) to 19% (FY24).
    • Adjusted RoCE was 28% in FY24, indicating efficient capital utilization.

2. Growth Prospects

Industry & Market Position

  • Strong presence in Aerospace, Defence, Energy, and Oil & Gas sectors.
  • High entry barriers due to strict qualification processes (30-48 months for onboarding new suppliers).
  • Exclusive supplier relationships with top global OEMs (Boeing, Airbus, GE, Mitsubishi, etc.).
  • Order backlog from global energy and aerospace OEMs indicates future revenue visibility.

Expansion Plans

  • Two new manufacturing facilities in Hyderabad planned to increase capacity.
  • MoU signed for expansion into Saudi Arabia, which could open new markets.
  • Expansion into Advanced Turbo Gas Generator (ATGG) manufacturing suggests higher-value product development.

Challenges

  • High customer concentration risk (major revenue from a few large OEMs).
  • Foreign exchange risk, as 87% of revenue comes from exports.
  • Capital-intensive industry, requiring continuous investment in technology and capacity.

3. Potential Malpractices or Red Flags

:mag: No direct evidence of financial fraud or malpractices was found, but some areas require attention:

  1. Negative Operating Cash Flow:
  • Despite strong profits, negative cash flows raise concerns about working capital management.
  • High trade receivables (₹1,699 Mn in FY24) suggest possible payment collection issues.
  1. High Non-Recurring Adjustments:
  • Frequent adjustments for fire incidents, forex losses, and credit-impaired receivables.
  • Fire-related expenses were ₹63 Mn in FY23, impacting reported EBITDA.
  1. Significant IPO Fund Utilization:
  • Raised ₹7,400 Mn from IPO but unclear how much was deployed for actual growth.
  • Monitoring future use of IPO funds is essential.

4. Conclusion: Should You Invest?

:white_check_mark: Positives:

  • Strong financial health with low debt and increasing equity.
  • Rapid revenue and profit growth with high margins (~35% EBITDA).
  • Deep relationships with global OEMs in high-entry-barrier industries.
  • Expanding manufacturing capacity and entering new markets.

:warning: Concerns:

  • Negative operating cash flow, indicating possible working capital issues.
  • High customer concentration risk.
  • Execution risk in expansion plans.

:mag_right: Verdict:
:chart_with_upwards_trend: Azad Engineering appears to be a fundamentally strong company with high growth potential, but investors should closely monitor cash flows and IPO fund utilization.

4o

5 Likes

Azad Engineering | Rolls Royce PLC (UK)

a. Company has signed a long-term agreement with Rolls-Royce PLC (UK) to manufacture civil aircraft engine components in India.

b. The deal involves supplying “super critical complex machined parts” for the entire lifecycle of the engine program.

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I didnt get the b. Part. Super critical components???

I’ll just read it as ‘engine parts’. Azad frequently uses hyped up words like these.

3 Likes