Azad Engineering Limited (AZAD) Q2 2027 Earnings Call Transcript

Ladies and gentlemen, good day and welcome to the Azad Engineering Ltd. Q2 F527 Earnings Conference Call. Before we begin, a brief disclaimer. This conference call may contain forward-looking statements about the company which are based on beliefs, opinions, and expectations of the company as on date of this call. These statements are not guarantee of future performance and involve risks and opportunities that are difficult to predict. As a reminder, all participants' lines will be in listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Rafesh Jopthar, Chairman and Chief Executive Officer, From Azad Engineering. Thank you, and over to you, sir.

Thank you, Team SGA. Good afternoon, everyone, and a very warm welcome to Azad Engineering's Earning Conference Call for the second quarter and first half of fiscal year 2027. On behalf of the board and the entire Team Azad, my warm wishes to you and your family for Diwali and the festive season. Joining me today are Mr. Vishnu Walpani, our whole-time director, Mr. Ronan Jarju, our CFO, and our investor relationship advisors from Strategic Growth Advisors. Our standalone and consolidated results, along with our latest investor presentation, have been uploaded to the stock exchanges and our website. In August, I began by saying that we are living. Through a synchronized high growth cycle across energy, an oil and gas, aerospace, and defense. And that these are structural multi-decade shifts, not short-term spikes. Three months on, every single we track has strengthened. In our segment, engine makers continues to... Rays output and precision rotating parts remain one of the tightest links in the supply chains. In defense, India's push for self-reliance in engines is moving from intent to programs. And our capability in complete defense assemblies is opening long-cycle domestic and international opportunities. So the backdrop I described in August is intact. and stronger. For Hazard, the question is not demand, it's how quickly we convert capacity into revenue. And that is the key message for this quarter. The foundation is now complete. H1 F527 was another period of steady progress for Hazard. Our capital deployment plans have stayed on schedule. In September, we inaugurated two new dedicated lean manufacturing facilities for GE Vanova. All six customer-dedicated facilities are now commissioned. 44,800 square meters for four global OEMs, namely Mitsubishi Heavy Industries, GE Vanova, Siemens Energy, and Baker Hughes. We are also in discussions with our aerospace customers. About following a similar model as we have done for our energy customers. In August, I told you that 80% of our foundational initiatives have stabilized. Today, I can tell you that the full foundation needed to convert capacity into revenue is in place. Talking on the capital deployed, our treasury funds have now gone into CapEx and the infrastructure and plants that we have commissioned. Teams in place, we have hired the skilled manpower needed to run the installed capacity, which we have installed recently. Production readiness, we have built up enough raw material. Tooling and consumables to keep every facility production ready. Customer qualifications, we are running multiple Delta qualifications at our new facilities with various customers at the same time. This setup phase is mandatory in our business. With it complete, our capacity is now

ready to deliver the throughput.

On the Q2 and H1 F527 financial snapshot, our operation performance remains in line with our guidance. In Q2 F527, we delivered our highest ever quarterly revenue of 187.8 crores, which is up by 31.6% year-on-year and above 10% over the first quarter. EBITDA grew faster by 37.1%. which is to 70.4 crores, and the EBITDA margin expanded to 37.5% from 36% a year ago. Profit tax was 30.8 crores, a margin of 16.4%. For the first half, revenue grew 29.3% to 358 crores. Ahead of our 25% guidance, EBITDA grew 34.7% to 134.5 crores at a 37.5% margin. Profit tax grew 6.6% to 67.2 crores. On a consolidated basis, H1 revenue was 363.5 crores. Avidas stood at 136.6 crores and a part of 66.1 crores. Growth was balanced across segments. Energy, oil and gas grew 28.5% to 290 crores, over 81% of revenue. Aerospace and Defense grew 28.3% to 60.4 crores at a 17% of revenue. Domestic revenues grew more than 2.5 times to 43 crores and is now 12% of our business. Up from 6% helped by our indemnization work with BHG. Let me speak plainly about the profit after tax. Because I know it matters to you all. This quarter spat reflects the expected lag between investment and revenue. Treasury income fell from 12.7 crores to 4.7 crores as our IPO and QIP funds went into the plants. Depreciation doubled to 21.8 crores as the new facilities were capitalized. Finance costs rose to 12.2 crores on the working capital loans that support our growth, and we have hired ahead, so employees' costs are 50.3 crores against 32.5 crores a year ago. All of these costs we carried before the revenue from the new capacity flows through fully. That phase is now largely behind us. Orders and Milestones. BHEL approved as a long-term source with a two-year rate contract worth about 52.68 crores for their gas turbine efforts. This depends on our domestic energy business. Baker Hughes, our supply agreement with No Pinnoni, has extended up to 2030. Oil and gas, the ramp-up of our dedicated oil and gas facility, tied to the customer's delivery plans. Adds a further growth lever from Q4-527. Defense, after delivering India's first indigenous expendable turbojet engine to GTRE, we are now positioned for end-to-end manufacture assembly integration of complete engine assemblies of their demands. The testings are ongoing. Customer Recognition, this year, Begarians presented us its Growth Collaboration Award and Zero Noir for its Delivery Partnership Award. Closing outlook, as we have said on earlier calls, throughput from the new capacity begins in Q3-FI27. We expect revenue to ramp up Q4-FI27 onwards, and all the plants will be fully ramped up by Q2-FI28. Our current installed capacity positions us to reach an annual revenue run rate of over 1,300 crores by the end of FI28. More than double off of our F526 revenue. With the cost based largely in place, rising revenue should translate directly into better profitability. At Azar, we have never changed a regular scale at the expense of our margins. Every facility we have built is anchored to customers' commitment and long-term contract. We do not engage in speculative expansion. We are at infection point, and we reiterate our long-term annual growth guidance of over 25% plus. I want to thank our customers, our partners, and Team Hazard for their relentless execution and our shared holders for their continued confidence in our journey. I now hand over to our CFO, Mr. Ronan Sharjee. Thank you.

Thank you, Chairman, sir, and good afternoon to everyone. I will now take you through a review of our financial performance, capital structure, and operating efficiency for the second quarter and a half year ended September 30, 2026. As the chairman has summarized, this quarter completed our start-up stage. Our front-end investment in capacity. PPL, and production readiness is now in place, and the numbers show our operating performance, tracking our guidance, even while we carry the cost of debt investment. Unless I mention otherwise, the figures are standalone and in crores. Let me take you through the financial highlight and the top-line growth first. For the first half year, Revenue grew at 29.3% to 358.3 crores ahead of our guidance of over 25%. Our standalone revenue from operation reached 187.8 crores in quarter to FY27, our highest ever quarterly revenue. This is a growth of 31.6% year-on-year basis, over 142.7 crore in quarter 2 FI 26. On a sequential basis, revenue grew 10.1% over the 170.5 crore reported in quarter 1 FI 27. Our focus as a company remains on exports. Export contributed 88% of revenue this quarter, and we expect them to remain about 85% of ourselves as we serve the world-leading OEMs in energy, oil and gas, and aerospace segment. Energy and oil and gas grew at 30.02% year-on-year basis to 152 crores, and aerospace and defense grew at 31.6% to 31.7 crores. Both the settlements have witnessed the growth over and above a guidance of 25% given to the market consistently over a few quarters. Let me now take you through the gross margin to EBITDA, how operating leverage is playing a role in our business. Let me explain our margin, the way we track internally, starting from the gross margin. Our gross margin before depreciation, which is a revenue-less material and all direct cost was 84.9 crores in quarter two, or 45.2% of revenue. That is an extension of 150 basis points over the 43.7% of quarter two FI26. This came from operating leverage, local sourcing, backward integration into a special process, to name the few of the initiatives which we have taken in the past. We achieve it while absorbing the running cost of new facilities, which are not yet building at a full grade, and the plants are at different stages of ramp-up. Our indirect costs, the corporate and administrative overheads, were around approximately 14.4 crores, or 7.7% of revenue. The same share as a year ago, even though the business is a third larger. As a result, our reported EBITDA grew 37.1% year-on-year basis to 17.4 crores, and 9.9% over quarter one. The EBITDA margin was 37.5%, an extension of 150 basis points as I explained earlier, over 36% of quarter 2 FY26, in line with the 37.6% in quarter 1. That is the operating leverage at work, and we are confident of meeting our long-term margin guidance in the coming quarter or so. So, for the first time, Gross margin before depreciation was 45.1% against 44.1 in H1 FY26, and indirect cost fell to 7.6% of revenue from 8.1%. Habit grew at 34.7% to 134.5 crore, a margin of 37.5 against 36 in the same period year before. Let me now take you through the bridge from EBITDA to PET and try to explain the PET markings. To evaluate our co-op performance accurately, it is important to look at an item below EBITDA. Other income was 4.7 crores amidst 12.7 crores in quarter to FI 26 and 4 crore in quarter 1. As I mentioned in last call, Treasury income is moderating as we deploy our cash reserves into factory infrastructures and machines. Interest on fixed deposit was 1.7 crore and 6.8 crore and the foreign exchange gain was 2.4 crore and 5.4 crore which is a macro and not in control of the business. The depreciation was 21.8 crore, English 10.9 crore a year ago, and 17.9 crore in quarter 1, as we capitalized 251 crore of new assets during the H1. Quarter 3 and quarter 4 will carry a full quarter of 2 GE Volnova facility inaugurated in September, so depreciation step up once more before it stabilizes. Finance costs were 12.2 crore against 6.4 crore a year ago and 10.1 crore in quarter one, reflecting the term loan for our CAPEX and the working capital loan that support our growth. EBITDA covers finance costs to the 5.8 times, which is a very healthy metric from the risk perspective. Together, these three items moved over PBT margin from 32.8% to 21.9%. 6.4% points from the other income, 4% from depreciation, and 2% from finance cost. None of its operational and the cost structures are now reached for our growth, as chairman has told that FY28 will be at 13.8 crores ARR. And I am quite confident that we will reach to the same margin or same cost structure percentage as it was there in FY24. Together, these three items move over PVT. Yeah, sorry. Net profit metrics. Profit before tax was 41.1 crore, tax was 10.3 crore, an effective rate of 25%. The half-year rate was 17.2 because Q1 include a deferred tax credit of 4.3 crore as a one-time adjustment from moving from old regime to the new regime. Our normal rate is about 25% externalization. Profit after test was 30.8 crore, a bad margin of 16.4. For the first half, profit grew at 6.6% to 67.2 crore, a margin of 18.7%. Our consolidated performance On consolidated basis, revenue from operation grew at 31.1% year-on-year basis to 190 crores. Consolidated EBITDA was 72.3 crores, a margin of 37.9% and consolidated PACT of 30.9 crores. For half year, consolidated revenue was 363.5 crore, EBITDA of 136.6 crore. Let me take you through the capital structures of the company. Our net worth stand at 1619.6 crores. Bank borrowing at the end of September was 536.4 crores, 340.6 crores of term loan and 195.8 crores of working capital facility. With cash and bank deposit of 112.6 crores, net debt stood at 423.8 crores, that is 0.26 times of equity and 1.6 times of annualized EBITDA, which is a quite healthy method to track from the debt risk perspective. Of the 700 crore raised through the QIP, 621.8 crore has been huge and the remaining 78.2 crore is held in fixed deposit for balance of our KPEX. In first half, we spent 139.3 crore on KPEX, funded by 80.8 crore of QIP money and 28.6 crore of term loan and internal funds. Our fixed assets, including capital work in progress, now stand at 1,169 crores. The chairman spoke about an annual revenue run rate of 1,300 crores by end of FY28 on this asset space. Let me now take you through the working capital and the cash flow. Inventory rose by 98 crores in half-year to 425 crores. 72 crores of debt increase is work in progress. On the new line, including part in data qualification or ramp-up stage that we can invoice only after customer approval. This is a production readiness the chairman described, and 72% of our ageable inventory is less than 6 months old. K-increasible growth by 92 crores to 402 crores in line with higher revenue. 69% of regular receivables are not yet due, and those more than a year old are only 7 crores. Operating profit before working capital change grew at 29% to 130.6. Working capital after 157.5 crores, almost the same as 153 crores of last year per staff, on a business of 29% larger. After tax, operating cash flow was negative at 45.8 crore, a clear improvement of negative 76.5 crore in H1 FY26. As throughput converted into revenue from quarter-four, the inventory turned into receivable and then into the cash, and that's where we are expecting our working labor cycle to be stabilized. Right. An important update for you that we started. A conversation with a few of our OEMs to give the advanced engaged PO so that it will help us to stabilize our working capital requirements. And we are fortunate that one of the OEMs has agreed to give 50% advanced engaged PO, and we are expecting 4.5 million USD from that particular update. And now, based on this template, we are trying to talk with all other OEMs and try to see what rest we can do on this particular front. To summarize, revenue grew ahead of guidance led by export. Gross margin expanded while overhead held steady, which lifted EBITDA margin by 150 basis points. The costs below EBITDA reflect the investment page and they are now largely in our base. Our balance sheet remained conservative from Q4. From Q4, rising revenue on base should flow through to profit and cash. I now hand over the call to Mr. Vishnu Malpani, our full-time director, to take us through the operating metrics from here. Thank you, and wish you a very healthy one.

Thank you, Ronak, and good afternoon, everyone. The chairman has spoken about the macro tailwinds and the foundation that we have completed, and our CFO has taken you through the numbers. Let me give you an operational and strategic build, where our build-out stands, how the capacity is turning into revenue and cash, and where Azad goes next. The ramp-up that we started at the time of IPO is now at its final stage. With two additional GE Varnava gas facilities that we inaugurated in September, six customer-dedicated facilities in Tunki-Bolarama now commissioned, 44,800 square meters in total for Mitsubishi Heavy Industries, GE Varnava, Seamless Energy, and Baker Uge. GE Varnava now has three dedicated facilities with us. The capital has been deployed, the teams are hired and trained, and the lines are production ready. Each facility follows the same model. A customer commits to the volume. We build to their specification and build capacity ahead of the schedule. We qualify the line to their standard. And it is important to understand that no capacity that is either deployed or commissioned is built speculatively. We build it on the basis of the guidance that we receive from the customers in the form of contracts. Let me explain why revenue follows the commissioning. By a few quarters. When a part that is already qualified moves to a newer facility or a newer machine, the customer requires us to do a delta qualification. This qualification process is shorter than qualifying a newer part. A new part can take anywhere up to 30 to 48 months, but a delta qualification is still not as lengthy, but is a rigorous process. It goes through inspection, process validation, customer's own audit, and we are running several of these delta qualifications at the same time across all our customer lines. The throughput for the business begins improving in H2, FY27. Revenue starts ramping up from Q4 as parts that we are qualifying clear customer acceptance, and we expect all plans to be fully ramped up in the H1 of FY28. Each facility that we are building dedicatedly for our clients is in line with the customer's delivery plans. Once a global OEM has qualified a dedicated facility into its primary supply chain, moving that business carries a very high switching cost. And this is what gives us a multi-year visibility with all of our customers across each of our segments. I know that working capital has been on our, on your minds. And so let me tell you that what is already in motion, Mr. Chobdar and Mr. Jaju also covered briefly how the attempts that we've done and the results and the outcome of some of them. Let me take you through the three aspects from a macro perspective. Inventory is moving through the pipeline. It is worth noting that the raw material that we built earlier in the quarters has moved up into work in progress on the new alliance. As the ramp-up continues to progress, this work in progress converts into finished products and then receivables and then into cash. So that is point number one. The second one, which Mr. Jaju briefly touched upon, our attempts to reach out to our customer has now given a positive result. One of our OEMs have agreed to give us a 50% advance against purchase orders and we expect to receive close to about a $4.5 million. Under this arrangement, this reflects the strength of our customer relationships and directly funds our ramp-up. $4.5 million on a customer account is a good start for our business and is in line with the commitment that we had given to all our shareholders that we will bring working capital in check through various things. The third point that we're now doing is the bill discounting line, which are in reserve. So far, as a business, we have not used bill discounting aggressively because we had surplus treasury funds, and drawing on those lines would have added finance cost further. We now have these lines in place with ICICI Bank and DB World, which can be used from Q4 FY27 onwards. This will reduce our debtor days directly with a modest addition to our finance cost, which the business can take. Our business model remains export-led, with more than 85% of our revenue coming out of exports. For the first half, energy and oil and gas grew significantly to 28.5% and 290.5 crores. This was supported by a strong global demand for power generation and our dedicated facilities moving through qualification. Our dedicated oil and gas facility for Baker's huge also added a growth level. We'll also add a growth level from QCode FI27. Our agreement with pay-per-views company has been extended to 2030. Aerospace and defense grew at 28.3% and delivered 60.4 crores. This vertical now contributes to about 16.8% of our revenue. In India, We also received a long-term source contract with BHEL for gas turbine-based under a two-year rate contract, which was close to about 52.68 crores, a strong start for indigenization in the power sector and the country. With the IPO build-out now complete, it is now time to move to the next stage of growth for Azad. Azad has already started working on the programs that will drive our growth beyond Fi30. To name a few, we've started working on hot section parts. Nozzle vane segments from Mitsubishi Heavy Industries under our eight-year single contract. This is the next step in our complexity and our value change that we're moving up for Azad. Aero engine airfoils with Rolls-Royce and Pratt & Whitney and Safran, extending our airfoil expertise from power turbines and aircraft engines. We are now going to be starting to delivering this from the next fiscal onwards. The developments that we did on aero engines for GTRE building on a delivery for India's first indigenous expendable turbojet engine with end-to-end manufacturing assembly and integration complete, Azad has demonstrated that we have the capability to manufacture engines in India and to help India's objective on indigenizing most of our defense systems. The capability that we built for aero engines and for GTRE around aero engines is also... Being discussed in advance discussion with other OEMs who want to use Hazard for the capability building in this front. Along these programs, we will keep getting wallet shared with our existing customers on our proven capabilities to serve new or global OEMs, look at selective acquisitions for large components, full stack production, and co-locate with key OEMs. The first stage of Hazard's growth as a listed company, the build-out that we started, It's now in its final stage. Our capacity is now ready, and the next six quarters are about to convert this revenue into cash. We've already built, we've already begun building the growth engines for the decade and beyond. With that, we are happy to take your questions. Thank you very much, and happy Diwali to everyone.

Thank you very much. We will now begin with the question and answer question. If you wish to ask a question, you may press star and 1 on your touch screen telephone. If you wish to remove yourself from the question key, you may press star and 2. Participants are requested to use answers while asking a question. Ladies and gentlemen, we will wait for a moment while the questions are assembled. The first question is from the line of Amit Diksh. From Goldman Sachs, please proceed with your question.

Yeah. Hi. Congratulations for the great performance and for a good set of numbers. I have a couple of questions. The first one is essentially on the building blocks that are ready now. We have now six facilities in the new facility. So I just wanted to understand the next phase of development more. I mean, how are these contracts, particularly in a row phase, going to move from development to production stage? And I wanted to understand that part. The kind of revenue growth that will accelerate from here. That is the first question.

Okay, thanks for the question. Last quarter, also, I had a similar question, and we were telling that we are setting up things, we are, you know, the buildings were almost done, the machines movement was ongoing last quarter, and, you know, this is the... The main thing which we were trying to give a message, but now, as mentioned, we are ready with that. The buildings are ready. The CapEx is deployed. Major of the machines are inside. The foundation is completed. The spindles are now running. And we are seeing the throughput which we plan. Of course, we saw some two, three weeks delay, and that's, I think, quite normal to seeing this large scale. But beyond that, today we can say that we have done that piece of work, which is going to really see the revenues coming up, and it has started already, right? Now, we talk about the growth factors, or we talk about when it is visible. I think... I've been very consistent in giving a guidance that what was the status of the factory. Now the machines are up and running, and this is now we see from two, three onwards. We also have started seeing the throughput. So that's the situation right now, Mr. Amit. And if you talk about capacity-wise, you can see an ARR. The capacity which is now installed, we should see an ARR from FI28 roughly more than around 30 minutes or so. So that's the capacity built now.

Mr. Amey?

In advance, and we are going to do bill discounting, I just wanted to understand that when we may see the peak cash burn now, considering that the fixed cost is all there, it is now going to be advertised, the fixed cost base is not there. Maybe, you know, working capital will also kind of plateau from here. So, just wanted to understand the cash, when will we see cash?

I believe we can see that as I mentioned now we are in Q3, right? So the Q3 as the throughput is now started coming out. It's not that it's going to come, it's started. And the supplies will start from the end of Q3 and Q4. As we mentioned, we started the bill discounting. We started, you know, taking things. So I think by Q3 and Q4, sorry, Q4 and Q4 is where we can see the cash throwing out of the company. That is a period we see that coming in. And consistently, if you talk, Q1 of next year would be perfectly thin. But we can see something in Q4 as well, the cash coming out of the company.

Wonderful, sir. That's all from my side.

Thank you. The next question is from the line of Gaurav Nagori from Avendis Capital Private Limited. Please proceed with your question.

Thanks. Thanks for the opportunity. Sir, I want some more color on this capacity that now that you have fully commissioned with six lines. So correct me if I'm wrong, if I'm right, that the existing capacity, excluding Tuniki, Bularam, has a potential of about 500 crore odd, And this new facility... Would have a potential of about another 1,200, 1,300 crore odd revenue, which means in totality of the total CAPEX or all the capacities put together, you have a potential of 1,800, 1,900 crore. Of that, you are saying that you would reach 1,300 crore by next year itself. Is that understanding, correct?

Yeah, so you see the ARR, what we start seeing is 1300 plus, okay? And how we move ahead, definitely it will cross more than that, right? And we being always conservative in giving any kind of guidance, we are very, very conservative in giving the guidance. So this is the bare minimum we have said, this will cross, definitely it will grow to the level, but I don't think, maybe next quarter I can update you exactly what would be the range, but What capacity we see now and what throughput we are seeing now has gone beyond 1,300 plus. Understood.

And second question is for the discussions that you are having with the GE nuclear with your aerospace line. So, given that Sunki Boratam is now fully leased out with these six lines, what about the additional contracts that you win? Would you have to buy a separate line or where those capacities would come in?

No, we have left one or two buildings, which is still in Tungi. As I mentioned in my call, as we are dedicating facilities for the energy, oil, and gas, now Aerospace also has come forward. So a few of the customers, I can't name them now, and we are going in a similar model of dedicating a facility there, and they want to book us for next. Whatever years they want to book, and that's ongoing right now. So very soon, we'll inform you on that, and that capacity is also well taken care.

Understood, understood. And as Vishnu mentioned that you would be start delivering the aeroengine aerofoils from next year. So have you received the qualifications or you are expecting that to come? That's exactly what Vishnu mentioned.

We'll give you very good news very soon. Right? So after this qualification, which we completed, almost completed, you know, 2024 is where we start. And finally, we could, we had the last leg of things, and very soon you will have information that we have delivered our first qualification badge. And that's the start. Once that qualification badge is done, and this is how we really will show that, yes, the parts are now in production. Understood. And this last question... It's a very good progress. There was a very, very good progress, and things went flawless in the qualification period.

Understood. But I'm assuming that, let's say, to get the qualification, you have to incur a new CAPEX for the commercial line. That probably you would plan here.

Sorry, it's already done. The CAPEX is done. We have production ready now.

All right. Okay. Got it. Got it. And just last bookkeeping questions from Ronak. There's one on when you said that you already had a discussion with clients for the advances. Did this discussion also about the margins? Because I'm assuming that clients would not be paying you the same margins and yet giving you the advances also.

No, we have not given any material discount. It's hardly 1% or so. So that is not something we have given very large discount for this advance. And this is in line with our discussion because we are incurring KPS and also investing into the working capital all the time. So we request a customer that why don't you support us for the working capital at least so that it keeps

the ball rolling from both the sides. Understood. And what has caused this sharp increase in the other operating income in, in first half?

Other operating income? Decrease what? Yeah, that I mentioned because of the tragedy, because we have a tragedy which was we raised in QIC, which was there in the...

No, it's other operating income economic that I'm talking about, not other income.

Are there operating income?

There is no decline.

I don't think, Gaurav, which number you are talking about.

Okay, I'll take it. I'll take it separately, Nanak. So, thanks. Thanks for the answers and wishing the team a happy day of the day.

Thank you, Gaurav.

Thank you, Gaurav. Thank you, Gaurav. Thank you.

The next question is from the line of Vikas Singh from ICSA Securities. Please proceed with your question.

Thank you for the opportunity. Good afternoon, everyone, and happy to be welcome to you as well. Sir, my first question is that now that we have a revenue target set for FI28 and probably the growth would come from the existing facility in FI29, beyond that, the growth factor, basically, because we haven't heard any new investment plans from you beyond FI29, Because I believe that still we are very little enough. Wallet share of the customers, and there's an ample growth with the existing customers as well beyond 29. So could you just give us the road path beyond 29 if you had?

Good question, Vikas. So as Gaurav asked the same question on the Rolls-Royce, this is an example what we are going to talk about. So Rolls-Royce, we... We invested. We invested in 2024. You know, a large portion of CapEx has gone in that. And you know the qualification cycle. Without that, you can't go for production more.

Correct?

So now there is certain two engine programs which are going on right now. And we have finished, almost finished the qualification line. And the production starts on these two lines. So CapEx, what we have done, what was visible to us. So the visibility, the customer, what it does is. Say example, it has got 10 engine or 20 engine programs, but they will not open up everything. They'll say, okay, this is what we have. These two engines we are offering you, and you finish this qualification. So basis two engine, what is visible, we invested the CapEx. As we deliver, once the confidence is up, as the qualification is through, then they open up, right? So, we will know this, as I mentioned to, you know, Gaurav as well, that I will be able to give you more color, maybe next quarter. Same thing, I'm informing you as well. But what happens is the next phase of CapEx is once we qualify this, and once we go to the next phase, then they open up, like the, and then we will plan our CapEx for FY29 onwards. So that's what we are trying to, you know, figure out. And as we see the growth, definitely we'll go for a QIP or, you know, maybe when it's required. We will go in that session. But today, as we speak, what we have invested, what we have done, that has now moved on to the next phase.

Notice that. And sir, just regarding this new facility which you have commissioned, especially the recent two-one, had the associated order was already received and it was a part of the 6,500 crore or there is a chance that these facilities getting booked for next five years and the order book would increase only in next few weeks or so?

So, these contract requirements are rolling, okay, and we have really have the visibility, we already have the contracts, we already have the visibility, but how long, what beyond it is going to go, and it is, you know, we cannot say something which is a bit forward-looking. No, we definitely have a visibility on that, for sure, yeah.

No, sir, just one last question, if I can switch. Any update on the engines, right, basically?

I am also eagerly waiting for the testings that are ongoing right now, and, you know, they are quite receptive in giving the information out, but we are just waiting for the testings that are ongoing that I know, all right? We are about to deliver the second engine as well. When this engine flies on the weapon, that's where they're really going to open up, and we are 100% sure it's going to be a big one for sure, right? So we just wait. We all have to have, especially me, I'm super excited for the results of the engine coming out. So, once it comes out, maybe the second engine, third engine, fourth engine, whichever flies the weapon, that means we are very close to going in the production mode, which is not far away. I have very limited information on this.

Yeah, that's great to hear, sir. Thank you, and all the best.

Thank you. Thank you so much.

Thank you. The next question is from the line of Suraj Malu from Tadharam in Venture Capital. Please proceed with your question.

Hello, sir. Thank you for this opportunity.

Sir, can you help understand like what is the current order backlog and across segments and what was that in the previous quarter?

So, thank you for your question. So, our current order book is close to over 6,500 crores. And like Mr. Chobdar mentioned, this is a rolling order book. So across each of the segments, today this is an order book, and there are contracts that are under discussion. So if you look at our projections with the 25% growth over the next few years, you will be able to see that, you know, this audiobook over time will, one, it will keep getting consumed from, but it's a rolling audiobook, right? These are not project-based demands. These are annual demands that occur across these product lines. But you will also see that new parts, you know, newer contracts are added to this over time. So this is how the audiobook will grow.

Right. So as you mentioned rightly, right, so these are like rolling order books.

So as and when six months are executed, you will get for another six months, right, because these are continuously manufactured. And as and when we add like new components, like let's say hot section and all those. So like, do we see a step up in this order backlog somewhere?

Do you see what? I'm sorry.

A step up in this order backlog, like when we have like new

components with a large order in flow, like the 6500 can become like 7000, 8000.

Yeah, so of course that will happen, but I would like to just make a slight direction to what you said. So this is not order backlog. This is a set of contracts that we're working on. So we should not look at it as an order backlog. This is based on the demand that the customer has given it to us over the next five to seven years, which is detailed by product and by customer. So we understand that. So we should not be looking at it as an order backlog. That's why if you look at our capacity build-out, we're not building infinite capacity on day one. We are building capacity on the back of what we need to deliver to our customers based on the schedule. So, this is not all the backlog. We just wanted to bring that slight nuance in.

Thank you.

Okay. Thank you.

Thank you. The next question is from the line of Alicia from Trust Mutual Fund. Please proceed with your question.

Hi, sir. Good afternoon, and thank you for the opportunity. Sir, X of Rolls Royce, how many customers are we currently in Delta qualification with?

You talk about the air engines. We have, apart from Rolls-Royce, followed by Pratt & Whitney, Saffron. So, these are the two ongoing behind Rolls-Royce.

And on the oil and gas side or the energy side, we are done with all kinds of qualifications, right? There is no Delta qualification pending there.

Delta is going on. Major qualifications are almost done, right? Delta is ongoing right now. What is Delta? Example, I'll tell you. With the existing, we have a facility which we have qualified maybe, say, three years before or four years before. The moment you shift to a new facility, when you move the machines, the location, because in their system, Qualification says, what are the parts? What are the machines? What is the location of the facility? That is recorded. Once you change it, they have to update it. This is not a full qualification. It is mandatory that they validate what the machine has moved properly. The processes are the same, what we qualified here, and the parts are coming out well. So the delta qualification is defined in that way. It's not a full qualification. It's as good as a...

So, that I understand. We're just trying to understand how many of our customers are we still in that phase with, hence the question, but I get what you're saying. The next question was that as now we're moving, we're finalizing these Delta qualifications and, you know, you've given us the ARR roadmap of 1300 close class. What will the contribution be from the aero side or will it still be oil and gas energy heavy?

It will be mixed. It will be mixed, and we see this, as I mentioned, once the Rolls Royce qualification is done, and the revenue will just add up. We don't have any revenue with Rolls Royce. We have revenue, but it's not for the production revenue. That's going to start, then followed by Pratt & Whitney, then followed by Saffron. So this is something that if we keep on growing, but for your information by FY3031, energy and oil and gas will be almost to a range where the energy will come down to say 55-60% and the rest, the growth will be, you know, I'm sorry, I mean not come down, the energy contribution will be 55-60% and this will be taken by the A&D.

Understood. But some of this revenue will start seeing flow through from FY28.

Yes, yes, yes. And just to add to what Mr. Choblar is saying, see, our plan for the next five years, so is based on, so there is a revenue visibility that we have on the parts that are qualified with our existing customers and are wrapping up. So that will take care of the revenue projections that we have for the next five years. While at the same time, we are also adding capabilities and qualifying newer products, which will keep getting added, like the Rolls-Royce qualifications that we're doing, Zafra and Pratt & Whitney, etc. And the other qualifications. Qualification is... Qualification is a continuous process in this industry. Like, you would know that we are today catering to under 2% of the wallet share of our customers. So for us to be able to cater to a large market, we will have to continue the process of qualification. What changes in the business is that the quantum of qualification versus production will now largely shift. So if you were to look at energy business, say, let's say, seven, eight years ago, you would see that we would still doing a lot of qualifications. But today you'll see that, you know, it is largely production and a little bit of qualifications going on. Aerospace five years ago would have seen a lot of qualifications, but last year we delivered 100 crores. So this is the process that continues. Yeah, over to Mr. Chukra.

So just explain, I just explained to Gaurav this key question, like what are the production cycles for the Rolls-Royce? As we mentioned, we were given only two engines, but Rolls-Royce has many engines, right? And once these two Indian qualifications are done, these two Indian comes in production, and rest of the Indians will go into qualification. So this will be a continuous process. Same thing with Prat & Whitney, same thing with SAFTA. So that's why we say that massive growth, which we are going to see, this is how we have laid the foundation. It's now ready, and now we will definitely see the revenues coming from the qualifications part done, and then qualifications also keep adding to it. So, it's a continuous process, is what I mean to say.

Understood. Understood. And just one last question on the energy and oil and gas side. We're not seeing any slowdown from our customers, right, based on the visibility that they've shared. Is that slowing down or is that getting slightly more delayed or pushed out?

No, no, no, no. It will never happen for us, for sure, because Azhar is now, you know, when we started 2010, 10, 12, 13, 14, whatever years which we were doing qualifications and we were doing production. And the way the projections were shown to us, it was all, it is all in intact. And as we said, the wallet share per customer is less, is a single digit right now. We have a long journey to go ahead to pick up the two-digit number or whatever, you know, we see a massive growth coming from the existing customer base without adding, you talk about this AI stuff and all this coming up, which didn't affect us before and it doesn't affect now also. We have not come to that level. We are in our regular business mode where we are going with the inception where we started with single-digit reaching to two-digit wallet share. So, we don't see anything affecting us or anywhere in kind of the growth factor what we have calculated for next five years.

Understood. Great. All the best, sir, and thank you.

Thanks a lot.

Thank you. The next question is from the line of Kunval Pleetsing from Ambit Capital. Please proceed with your question.

Yeah, hello, sir. Thank you so much for giving some visibility beyond FY30 as well. You know, I wanted to ask you about how you see your factors of production in this regard. So, a few quarters ago, you spoke about hiring, you know, seeking around 150, 200 people per month. So as you ramp up your sales to 2,000, 3,000 crores of revenue, how do you see labor being added to your roles, and do you look at more automation in that regard, and how do you see turnover change because of this, if you can provide some?

Yeah, so this is a classic example. Thanks for the question. This is a classic life thing which is going, if you notice our manpower cost has gone high, right? This manpower is like we have installed the capacity, right? The capital from treasury moved to the capex. Capex was in transit, received, and then factory installed. Now, after having, as we are in a very, very sophisticated business, right, and it's not some casual manpower, we need highly skilled manpower. So, the reason the spike of, the spike of the, The cost in the manpower is just because the capacity which is there is manpower is higher. And we are not seeing revenue today. As I mentioned, it just started, the spindles just started, but you don't get them ready-made today. So we had a plan to go back a month or two before and we started hiring and we start preparing ourselves to have this manpower and now the revenue starts. And next quarter or following quarter of that, you will see manpower costs going down because the revenue will add to that. Similarly, this cycle, we would, you know, carry on of seeing in four to six quarters, you will see one quarter, the manpower going high, and then again coming down. So this will be a continuous process going ahead in a way we have to plan in advance every aspect. It doesn't matter if we are at 8,000 euros revenue or 3,000 euros revenue.

Okay, so you're saying that labor will scale linearly with sales growth, but it will be instant-loaded.

Yeah, so you'll see next to next quarter, you'll see a drastic downfall in the manpower cost, because that cost we are attributing now, and that will compensate it with the revenue which is going as a throughput.

Right. Now, my question was whether, you know, once you reach a scale of 2,000, 3,000 crores, if it's still tenable to, you know, like, look for, because at that time, maybe you will be looking at 1,000 people in a month. So, if that just will be tenable or you will look for more automation. Ah, okay.

So, yeah, yeah. Okay. So now what we are doing is we are adopting lean manufacturing system, right? We are definitely, we have a target to depend more on automations and, you know, a bit of, you know, the ERP systems, the new tools we are using to attribute to see that we dependency on the manpower is going to the lower side. That's the target we're already working on. Okay, okay. Great.

Sir, my question is about the aftermarket. So, as I understand, the OEMs make most of their profit on, you know, the MRO, aftermarket, and SPAIRs. So, if you can provide some color on what is the replacement cycle for, you know, aerofoils and bains, and whether today your part meets the aftermarket either directly or indirectly. I understand that, you know, Azar's supplier may still have fixed pricing, whether it is new build or aftermarket build, gives visibility in terms of repeat revenue. So, if you can provide some information on that.

So the OEM, when they place an order on us, they are a part which we will not know whether these OEMs are buying these parts for the aftermarket sales or for the new build. So we will not know about it. We will not know whether this part is being utilized in aftermarket or it is utilized in the new build, and we will not know about that on the aftermarket way.

Okay. So, but any idea on the replacement cycle, like if you provide... Okay, yeah.

So, usually, usually on a gas turbine, between 10 to 12 years, they have to be replaced. And in steam, in the thermal, other areas, it touches around 16 to 18 years.

Okay. And is this similar across both hot and cold section? Like if you are making hot sections?

No, I'm talking only about the cold. I'm talking only about the cold. And the hot section has just started. You know, we just started with Mitsubishi. And that's a big story going to happen in the hot section, right? So we are still in the cold section, but hot section is a different... Very different to cold section. That itself is something which we really, you know, like the volumes are super heavy, and the cycles are differently looked after. So the hot section parts, I really don't have a proper answer for you right now. But maybe as we progress with the current qualification, maybe in the next few quarters, I can answer you on that. Okay, great.

Sir, lastly, after FY30, as you ramp up on your 600, 6,500 backlog, or whatever is the runway that you are seeing, do you expect to seek more land? Because what you have, including the Mangumpet land that you have, would that get exhausted? Like, how are you thinking to plan for land beyond FY30?

See, I'll tell you, this growth, what we're seeing now, we could see this, we could project this and way back in 2022, 23, right? 21, 22 is where we saw what's coming up. So the phase one of Thumti Balaram, which is now fully done, right? It is covered, not, and Similarly, we could also foresee that you will need more land beyond this. So, the Mangum bed is all ready for the phase two. So, that is also covered, very well covered. So, once we are done with this, definitely we have a plan for that land and we are going to start up there.

Okay, great. Thank you, Thurpa, for answering my questions. I'll come back in the queue.

Welcome.

Thank you. Ladies and gentlemen, due to interest of time, that was the last question for today. I would now like to hand over the contents to management for their closing comments.

Thank you so much for giving us an opportunity to run you through our company's operational and financial performance for the quarter and half year that ended FY27. We hope that everybody has sought answers and clarifications on how we would be building the organization over the next few quarters in the year. We wish everyone a very happy Diwali and festive season. Thank you.

Thank you. On behalf of Azad Engineering Limited, that concludes this conference. Thank you for joining us and you may now disconnect your mind. Thank you.