Ladies and gentlemen, welcome to Azad Engineering Q2 FY 2025 conference call hosted by ICICI Securities. This conference call may contain forward-looking statements about the company, which are based on the belief, opinion, and expectation of the company as on date of this call. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. As a reminder, all participants' lines will be in listen-only mode. There will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your telephone. Please note that this conference is being recorded. I will hand the conference over to Mr. Amit Dixit from ICICI Securities. Thank you, and over to you, sir.
Thank you. Good afternoon, everyone. On behalf of ICICI Securities, I welcome all the participants to today's call. To be honest, I would like to thank the management for giving us an opportunity to host this call. From the management today, we have with us Mr. Rakesh Chopdar, Chairman and CEO; Mr. Vishnu Malpani, Managing Director; and Mr. Ronak Jajoo , Chief Financial Officer. We will have brief opening remarks from the management, after which we will open the floor for an interactive Q&A. Without much ado, I would hand over the call to Mr. Chopdar to take us forward. Over to you, sir.
Thank you so much. Thanks a lot. Good afternoon and greetings to everyone. Welcome and thank you for joining today on this earning call. On this call, we are joined by our Mr. Vishnu Malpani, Managing Director, and our CFO, Mr. Ronak Jajoo , and ICICI, our investor relation advisors. The results and presentations are loaded on the stock exchange and the company website. I hope everybody had a chance to look at it. We have delivered a strong performance. In this quarter, we have our revenues growing significantly to INR 111 crores, demonstrating robust growth on a year-on-year basis, showcasing a growth of 35%. Adjusted EBITDA this quarter stands at INR 21 crores. Level of PAT has grown from INR 19 crores in Q2 of 2024 to INR 21 crores in Q3 of 2024, showcasing a growth of 8%.
We have come a long way in our journey from doing business of INR 100 crores per annum to INR 100 crores per quarter, demonstrating an exponential growth in the last few years. This progression is a result of our commitment to excellence and our persistence in leadership. We spent the initial few years concentrating on getting ourselves qualified and approved. Today, we are in this unprecedented growth phase. Growth momentum has just started, and we are confident that we will be able to capture a larger pie of our business. Market share by leveraging our capabilities to better serve our customers' needs for new and existing facilities in place. Allow me to spend 10 minutes on the new orders that we have won during this quarter.
We are honored to share that we have signed an MoU with Baker Hughes, Kingdom of Saudi Arabia, in the presence of His Royal Highness Prince Abdulaziz bin Salman Al Saud, Minister of Energy, and distinguished associates and committee members of Local Content Forum at Riyadh, Saudi Arabia. This arrangement, amongst other things, enables us to set up a facility to manufacture and supply precision components for assemblies to meet the requirements within the Kingdom of Saudi Arabia. In another remarkable achievement, we have had an order wins from Mitsubishi Heavy Industries, Japan. This is approximately INR 700 crores order, which will be executed over five years. This win is a testament of Azad's grit and vision, as we are the only critical supplier in India for that orders.
This demonstrates Mitsubishi's continuous confidence in us as an efficient strategic supplier and carry forward a long-outstanding partnership with them that was started in the way back 2012. This order is this way for them to block work packages in the dedicated manufacturing, upcoming manufacturing plant we are building for them in the upcoming fiscal year. Foundations stone laid in the year 2023. Recently, we secured a $16 million order from Honeywell to manufacture and supply complex components for the aerospace and defense departments. We have a critical contract with Siemens Energy to manufacture, supply complex, very complex components for energy sector for the tenure of six years. These wins not only demonstrate our strategic partnership we have built with those OEMs, but also reflect our growth journey. Way back, I recollect I started Azad with just one machine.
Today, we have become a global leader in providing high-precision engineered components and solutions to the largest OEMs across energy, defense, oil and gas sectors. I am very happy to share that just now, Azad Engineering has received a prime supply commitment with Arabelle Solutions France, a French company, a supplier of critical, highly complex steam stationary components to meet the global demand in the nuclear power generation industry. The value of the supply given for its term is valued approximately $30 million. That is INR 350 crores.
This supply agreement has initiated a strategic collaboration with Arabelle Solutions France. With the above wins, our orders stand at INR 4,200 crores as on today, adding the 314 [audio distortion]. We are confident that it will continue to increase significantly as we have a strong pipeline of contracts with our key customers. To update you on our CapEx plan for the new upcoming plant, the civil work is progressing as per the plan in line with our orders and deliveries. We have placed orders for machines and other equipments. Everything is on track for our commissioning of Q3 beginning through one of our FY 2026. On the expansion front, as you all are aware, we are increasing our capacity 10x. As an update, we are well on track, and we will start delivering revenues from our new plant from FY 2026.
Further, we continue to provide guidance of 25%-30% for [audio distortion] , with improvement in our margins in operating leverage, losses efficiency, along with backward integration. I hand over the call to Mr. Vishnu Malpani, our whole time director to take this conversation. Thank you.
Thank you, Mr. Chopdar, and special greetings to everyone. Good afternoon and welcome to our earnings call for Azad Engineering. Azad's story has always been about breaking new ground, and that journey continues. From being one of the first Indian companies to be able to manufacture complex and critical components such as 3D airfoil, to now building a plant with clients for these life and mission-critical components, our progress is nothing short of being extraordinary. Today, we are a trusted partner to some of the world's biggest OEMs, whether it's the energy sector, aerospace and defense sector, or the oil and gas sector, and our commitment to innovation remains stronger than ever. We've worked very hard in our pursuit to diversify, and it's starting to pay off.
Our energy business, which contributed to our 28%-29% of the revenue in Q2 of our FY 2025, continues to grow at a very healthy rate. With major orders from companies such as Mitsubishi, GE, and Siemens, we are on a path for increasing our volume share in the segment from the current 1.5%-2% to 5%. Similarly, with [TechsaHuge], we are conquering our positions in the oil and gas sector. The tremendous potential and opportunities of setting up a manufacturing plant outside of India as well. Our aerospace and defense business has mostly doubled in the last year, now accounting for 16%-17% of the revenue. Key orders from clients such as Rolls-Royce, GTRE, DRDO, Honeywell, among others, drive further growth in this sector. I think it's important to note that we are not just making life-critical and mission-critical components, we are also moving to full assembly.
We are on our verge to be manufacturing an engine end-to-end for GTRE, moving up the value chain in manufacturing itself. With the recent wins and new facilities will unlock even more growth, allowing us to serve our current customers better while opening doors to newer opportunities and markets. Through smart acquisitions, as Mr. Chopdar mentioned, of Leo Primecomp and VTC Surface Technologies, we are building future capabilities and creating new avenues for growth. We are not here to settle for the status quo. Our goal is very clear: to grow our addressable market from $28 billion to a much, much higher number, and to increase our volume share from 1%-5% to 10%. We are on a path to become something far greater than we are today. Together, we are building not just a company, but the future.
I would like to now hand over to Mr. Ronak Jajoo , our Chief Financial Officer, to discuss the key highlights on our financials. Thank you.
Thank you, Vishnu. Let me talk about those financial highlights of Q2 FY 2025. Revenue from operations came at around INR 111 crores in Q2 FY 2025. The blended average growth rate in H1 FY 2025 is 32.37% when we compare it to H1 FY 2024. The blended average growth rate for Q2 FY 2025 is 32.5% compared to Q2 FY 2024. The blended average growth rate from Q2 FY 2025 is 30.21% compared to Q1 FY 2025. The other income mainly consists of interest income and fair value fluctuations during H1 FY 2025. In H1 FY 2024, it was higher on account of sales of certain subsidiaries and land, which had resulted into high base of other income during that period.
EBITDA improved through property leverage and the process improvement, which stood at INR 41 crores in Q2 FY 2025. EBITDA margins have increased by 200 basis points during the last three months of this quarter. This improvement is largely driven by operating leverage in material cost, tools, expenses, and power cost optimization. Land cost mainly represents the interest towards working capital and term loan in our books, as there are no permanent CCPS, which got converted into such equity in the Q1 quarter. Adjusted PBT for Q2 FY 2025 stood at [audio distortion] and there is an improvement of 273 basis points.
It is in line with our average margin in the year. Profit after tax improved at [INR 21 crores] with 19% for pre-tax margin. Our net debt position as on September is [INR 112 crores]. Operating expenses had peaked in the second quarter and they will be settled down as major capital expenditure has been completed, and we are able to originate raw material with one of the main in the year four. Now I would like to open the floor for questions and answers. Thank you.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question, please press star two one from your telephone. If you wish to remove yourself from the question queue, you may press star two two . Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait a moment while the question queue assembles. The first question is from the line of Bala Krishna from Women Investment Advisors. Please go ahead.
Hi, good morning. My first question is regarding the new facilities which we are building in Bollaram. So in FY 2026, by which quarter we can expect that to be on stream? And another facility we are planning in Sangareddy for RSP. So by when we can-
Sorry for the interruption. Your voice is not clear. Could you speak a little loud?
Yeah. My first question is regarding the new facilities which are coming on stream. So this Bollaram facility you told in FY 2026, so in which quarter we can expect that to be on stream and by when we can expect to reach an optimum level? Second is on the Sangareddy new facility. What is the plan for that one?
Yeah. First, the facility what we are building at Tuniki Bollaram, that's going in a phase-wide manner because it's very large facility, right? We are pumping out the other facilities to every customer. What we are planning to do is we now the facility for GE Steam Power coming next year, GE Vernova. That is the first facility which is going to come up. It will be within the calendar years of FY 2025, in the first half of the. I said by January, February, the facility should be done. In terms of March, facility operation. Then similarly, every two to three months, we will be having one facility for Mitsubishi. This is a progressive, it cannot be done all at a time. Do you understand what I'm trying to say, Mr. Bala ?
Yes, sir. Regarding Sangareddy facility?
We are going to finish this work as we take up that facility. We are going phase-wise. This will be a -
I see.
First it will come for steam power system, then it will come for Mitsubishi, then all the facilities are lined up. One during the middle, we have not disclosed yet. But every customer has his own facility in our factory. It is factory within the factory.
Okay, understood. Regarding the order wins in the products we are listed, we have another product which has value. When can we? Almost all the previous quarter orders. From FY 2026 onwards, we can expect the execution of all these orders?
Yes, that is the plan. That is the plan. From 2026 onwards, you will see incremental revenue coming up from the new facility which we are adding as per what we have been able to pen it, right, with what exactly it is.
Then we can achieve a good jump in the number compared to the existing guidance.
Yes, we will get in. Hopefully, everything goes well as planned. Until now, whatever planned, everything has gone perfect.
Okay. Lastly, on this hydrogen business, you are going to start a plant in Saudi Arabia?
Yes. We already have in [JMU]. We are now planning to put this shop in Saudi Arabia.
My other question, sir, in Gulf of Saudi Arabia. The cost of production would be much higher as compared to India. Maybe it-
Not really.
It can impact the margins slightly.
No. Nothing is in government or environment, it is typically for Saudi Arabia and Dubai area, right? And the margin structure is not as India structure. Right? So what we see is technology, everything is ours, right? So we have our own way of manufacturing. It does not matter if it is in Saudi Arabia, if it is in India, or it is in U.S. or Europe. Product does not matter.
Yeah. Lastly, one small question, sir. So in order wins, so in new orders, sir, we are getting the value of order.
We can't disclose, Mr. Bala Krishna. We can't disclose. What we can disclose, we are disclosing. Just now uploaded on our
Yes, I saw that.
We got a contract from Arabelle, a French company. We got a large contract for the new year.
Okay, that's all. Okay. Thank you.
Thank you.
Thank you. Ladies and gentlemen, in order to ensure that the management is able to address questions from all participants in the conference, please limit your question to talk with participant. The next question is from the line of Jeevan Patwa from Sahasrar Capital. Please go ahead.
Yeah. Congratulations, Rakesh. Wonderful set of numbers, and excellent order wins in the last quarter and even today's order. Just one question on this. We are now seeing we have won the contract with Arabelle Solutions, which is a nuclear power. Are we exploring any domestic opportunities in the same sector and the area?
Okay. Hello, Jeevan. Nice to talk to you. This contract, Arabelle Solutions, it's a EDF. I hope you have heard the word EDF.
Right.
EDF is a French government company. EDF Energy controls the major nuclear power across the world. It is a pride moment for us to have this contract from you, which is very stringent. Nuclear rules from EDF is very stringent. This is where we stand tall, and this is a starting to that contract and I think you have seen because it is coming up in the power generation space. Please select a section of yours on the domestic look, we have only BHEL, and what you will come to know very soon because we are in talks with the very senior management of BHEL. There are many RCF cases still in force. We got into collaboration with them and what Azad is manufacturing, extending, and what spare parts, we create with that.
We had a discussion with them, and actually, we could track something which is coming up from BHEL as well. Thankfully you are right. There is a kick-off from BHEL as well.
Okay. Secondly, on the Saudi, we are going to set up a manufacturing facility in Saudi. Any color on that, how big it could be? What will be the investment, and what could be the potential?
I cannot give you much details. Given that I will tell you one thing as a given idea. This requirement is nothing to do with whatever existing business of Azad with BHEL. This is for the kingdom, it is a kingdom. They do not have very much manufacturing facilities. It is not just what Azad plays a role. Azad plays a role where it is not just technology where you can buy. With a flick of money, you buy technology, and you even talk. It is not that. We value add. We value add in the process engineering and all. That skill set which Azad has got, it is very rare.
This is where the Prince wanted us to sit together, where we can provide solutions to them. Whatever business is coming in, it is first for the kingdom of Saudi. These are quite large numbers. I cannot disclose any numbers right now. So it is quite unique.
Okay. Thank you very much.
Yes, thank you.
Thank you. The next question is from the line of Kamlesh Bagmar from Lotus Asset Managers . Please go ahead.
Yeah. Thanks for the opportunity and congrats on the set of numbers and very strong commentary as well.
Thank you, Kamlesh.
Yeah. Just one question on the cards that-
Excuse me, Kamlesh. Can you speak louder, please?
Yeah. Just one question on the card that we have a very ambitious target of next capacity play. What would be Azad's capacity spread over the next, let's say, three, four or four, five years?
Again, it depends on the business cases. As Vishnu mentioned, we are going in component manufacturing. This is, of course, that is on track, and we are going in assemblies, we are going in sub-assembly. So every business will have its own business case of investments. So it's very difficult to listen, and I'm also going to visit Azad so that we can showcase you all these things, exactly we are talking about. It's very difficult to justify one particular investment on one particular customer. So very diversified. Azad is playing multiple roles in multiple verticals. Very verticalized its own set of investments. So it's a very well planned, very difficult plan.
You have a guidance of roughly around INR 200 crore investments per year. So going forward, over the next three, four years, how the CapEx would be there? Because you have a certain-
We are doing phase-wise. As Vishnu said in the session. All the CapEx is not going to get consumed at once. Phase-wise. It's not small to think what we are doing. It's big. And every customer has this large order, like we keep iterations for Azad. So we are investing ahead of time to balance their requirements, extending the kind of contracts with Arabelle. This is for again last contract. So this contract is coming because of this capacity. So hard part was done already, long back. So what Vishnu was saying, we are increasing the volatility from 1%- 3% to 5%- 10%. That's the reason this is a very well laid out connection strategy. There's a plan behind this connection strategy. So I request you to visit Azad, and we can take it more in detail. I can share you all these things.
Because it is not just one CapEx, I would have given you one number.
On the debt side, net debt in this quarter has risen to roughly around INR 127 crore. I do appreciate that you have a surplus of roughly around INR 127 crore in this quarter. Going forward as we expand and increase our capacity, what are the debt levels or net debt we would be comfortable with?
Yeah, Mr. Kamlesh. Ronak here. Our net debt to EBITDA guideline is around 1.2x to 1.3x. We always maintain that particular ratio, and we are at
This would remain in that range.
Yeah.
Great. Thanks a lot, Ronak.
Thank you. The next question is from the line of Aditya Bhatia from Investec. Please go ahead.
Hi. Good morning, sir. My first question is, on new large contracts that you brought from companies like Mitsubishi and Honeywell. These companies are existing large customers, and you have already been executing orders to them. Just want to understand, these new orders should be seen as something which is completely incremental to what you were already doing or part of the existing business that can be made in the new order wins that we are speaking about, especially from Mitsubishi, because that is a fairly large order.
Yeah. It is purely incremental of the volume. The existing business, what we are doing with every customer, is we have limited capacity. Right? This revenue is what we are doing at the moment. And we are going into 10x. There is a plan behind this, why we are going to 10x, is because we know that these orders are on its way. As we are showing the books, we are showing the OEM that are really going to purchase orders. This is an incremental which will be continuing. As Vishnu mentioned, 1% to 2%- 3% to 5%- 10% volume share. Incremental volume share in every customer. This is a concrete example how the volume share is increasing.
Understood. Perfect. And one thing-
It is now uploaded on our investor relations page. You can use the power.
Right. The EDF part.
Yeah.
We should be assuming slower and gradual type of ramp of capacities coming operational, and fair to assume that revenues that you are getting from some of these new contracts 2 years down the line will be higher than first year, third year will be higher than second year. Is that how we should be building that in?
Aditya, hi. Vishnu here, and thanks for your question. Just adding to the first question that you asked. If you look at the way our Japanese plant generally works is, they work on booked orders and then that needs to be executed. Since the new capacity is coming up, every OEM is then making efforts to book that capacity for the next three years so that there is a clear clarity somehow the ramp-up is going to happen in terms of volume share. All the contracts that you see with our customers, with our existing customers and existing product lines are towards increasing our volume share. That is how we are looking at it. Secondly, currently we are constrained with capacity. Right?
So when you see a ramp-up, you should look at customers that we have been talking to, that we are in production mode. Those customers will constantly keep increasing their books rate. The customers that are currently in developmental phase or qualification phase will slowly ramp up, as is the nature of the industry because these are mission and life-critical components. Right?
Interesting. Vishnu, given that the Mitsubishi order is about INR 700 crores for, I think, over a five-year period. On average, let's say it works out to be INR 150 crores per year. Let's say we see that ramp-up over there. Third year, we will be having INR 150 crores, INR 170 crores of possible revenues coming from this order. That is a fairly substantial part of incremental growth that we are speaking about. We are speaking about not one such order, but multiple such orders. Should we think about growth possibly being faster than what we have been seeing until now? Is it possible that with so much capacity coming on stream and with the kind of order wins that we have had, instead of 25%-30% growth, we can be at a faster trajectory?
Definitely, Aditya. I think that's the most logical response to this question. For the market, we are still guiding at 25%-30%, but internally we are obviously chasing higher numbers, as you would know. These contracts, like you rightly said, come in with specific delivery schedules and specific timelines. We are ramping up quickly. If you look at our addition in our capacity, it's not 25%-30%, it's higher than 25%-30% per annum. We are obviously internally targeting higher and chasing, guiding the market at 25%-30%. That's how I would like to explain it.
Okay. Even for 25%, this 25% guidance looks to be on the conservative side. Unless it is a scenario that we are facing a big capacity constraint until the time new capacity comes on stream, it's difficult to understand. If we are now already doing INR 100 odd crores per quarter, we could be assuming, let's say 3%-5% sequential growth every quarter for the next two quarters. We are speaking about hitting the upper end of the guidance. Historically, we have done a sharper sequential growth than that. Is it just to play it extremely conservative or are we facing capacity constraints at this stage?
No, it is definitely capacity constrained. The current facilities that we are, we are going to be pushing our capacity very, very soon. That's why you see our endeavor or our attempt is to start productionizing the new facility as soon as possible. Today, while 25%-30% we have hit INR 100 crore revenue per quarter. We are looking at increasing it and optimize it for sure, credit managers internally. Since a new plant comes up, I think the growth can be much higher. There is definitely capacity constraint, but we are still managing with 25%-30% and we should get the uptime as well.
Sure. Just last question from my side. There is obviously this capacity question that we are undertaking is the question that we have to set up in Sangareddy area. Any break up of [audio distortion] that you can provide at this stage about how we should be thinking about for the next two or three years, and how much [audio distortion] we would have already incurred in a factory, right, and this new capacity that is coming on stream?
So, Aditya, for this conversation, I'd like to take you back to say about 2 years back when we were actually INR 100 crores annum. Our serviceable capacity was 4x. Today, we've reached a point where we reached INR 100 crores per quarter, right? We do have a plan of ramping up in a pragmatic way until FY 2027, FY 2028. We internally have also started planning our business beyond FY 2027, FY 2028 onwards to much higher numbers as well. The capacity planning is underway and I think today we do know the capacity addition that we need to do till FY 2027, FY 2028. We are working towards going from FY 2027, FY 2028 to say FY 2032.
We are in the process of doing the math around the CapEx deployment. But in all likelihood, you understand the assets loans that we have in our business. You understand the kind of potential that we're looking at. It will be a fair assumption to look at that and make a good guess. But from our side, I think it is going to take maybe a couple more months to come out with more concrete, exact numbers. Happy to discuss.
Sure. That's helpful. Thank you so much, Rakesh, Vishnu. That's all.
Yes. You are welcome.
Thank you. The next question is from the line of Sanjay Shah from Nishtha. Please go ahead.
I hope you can hear me.
Yes, Mr. Sanjay.
Thank you. Actually, most of the questions have been answered. I do not have any questions left. I do want to take this opportunity since I am on the line to congratulate you. I do not think that we have a better company in our country than you. So all my best to you.
All my best to you too, Sanjay. All the best.
The next question is from the line of Rajesh Vora from Jainmay Venture. Please go ahead.
Good afternoon, Rakesh. Congrats on winning the prestigious orders from some of the clients in the world, and also good numbers. You mentioned in your opening remarks that first quarter of next financial year, you are going to start the phase one of expansion. So what percentage of 95,000 sq m of phase one will be ready in first quarter?
Thank you so much for the question. It doesn't go like that. Every OEM has their own requirements, right? We can't compare that with gates and we have to compare with the capacity associated to add that gate. That should be ideal thing to explain you. It's too technical to give you the number of machines and all that. I'd share with the most suitable person so I can give you more detailed present numbers.
Sure. I understand. I have already made sure and visited your plant.
Yes.
Thank you so much for that. What all of us are trying to understand, Mr. Rakesh, is that there is a clinic that should be expanded. There is a soaring order book, which is also very commendable. What we are trying to get our arms around is what percentage of that is going to be ready out of the 10x? Is 1x going to be ready in first quarter? Is it when you say we are going to start? How do we scope that?
What guidance we are giving, Mr. Rajesh, is the 25% guidance is the market. We have our internal target different. Correct? This is where we are trying to explain you that the growth is what we are seeing for FY25 and onwards the incremental. As you come nearer to FY 2025 and as we also see how progressively we can build this capacity ASAP, that could be an ideal situation to give you a sense how it is going to come and incrementally change.
Sure. I understand that. Okay. Wallet share targets that you have put out is roughly 5% from each customer on an average basis. Will that be achieved once you have the entire 10x capacity under your belt?
Every OEM has a different capacity. When we say 3%-5% it is an average.
Sure.
Yeah.
That average will be achieved once we have the 10x capacity?
Yeah, 10x is now, then as earlier also another gentleman asked on the first question what Mr. Rajesh Vora also asked Phase one is 95,000 sq m, and we have another 17,000 sq m that we are getting. If we finish this first, then we go more quicker. This 10x may become 12x to 15x quickly.
Okay.
This is the requirement. As the volume share as we increase, we agree.
Okay, wonderful. Good. All the very best, Mr. Rakesh.
Thank you. Thank you.
The next question is from the line of [Partha] from Eastern Financiers Limited. Please go ahead.
Hello, sir. Am I audible?
Yes, Mr. Partha.
Thanks for the opportunity and congratulations on wonderful set of numbers. I have a couple of questions. First one is, do we have further scope of margin improvement from here onwards?
Of course. We all look for that, right? We will not leave anything, which is w e will not let it go either way. Because if we go to the customer or we come to us, either of it.
Okay. Thanks, sir. It is just on working capital, I am just concerned whether our working capital days has been stretched or has it become some challenges on procurement and raw materials?
Yeah. This is the biggest problem of government consumption. Everything is in short. Now, what we are doing is, while we try to take an order from Bombay, all this we have to know major aspects. Shipping advance, and then the manufacture, then the shipping time, then it comes in its inventory, then we start manufacturing. It takes quite a time to turn out that. We are now in TV, are successful in developing into Indian mills here. And these Indian mills is at the production right now.
And if you will see very much development, major of the qualification is coming now. So very soon you will get out of it. This is a temporary issue. This working capital issue is a temporary issue. And very soon you will see a dip of the number of the days which are coming up. That is why you will very soon see that this will remove the problem very soon.
Thanks, sir. And the last one, sir, with regards to the-
Sir, I am interrupting you, sir. We request that you return to the question queue for follow-up question.
It was just the last one.
Sir, you can also return to the question queue for follow-up questions.
Sure.
Thank you, sir. The next question is from the line of Mayur from Wealth Managers India Private . Please go ahead.
Hello, sir. Am I audible?
Yes, Mr. Mayur.
Yes. Congratulations on a good set of numbers. Just two questions. I actually joined the call a little late because of network issues, but I hope if you can answer me again, if this has already been asked. The point I was trying to understand was, we have the customer confirmations and orders in place. We are putting up the capacities in order to execute that. We have the product approvals and validations all done. So, sir, what is the risk I am trying to understand? What is the risk in theoretically trying to ramp up 3x in two years? Why can't we do that? Because I understand that-
I will answer you. I understood your question, I'll answer you. Building, construction, people, money, everything is available. What about the equipment? Every equipment is all imported. The deliveries of the equipment are not handy as per the construction wise, how many takes three months? In the time which we add more resources, we can do it in two months. We can add more people, we can train more people, we can do all sort of things which we are in our control. But when we talk about these kind of equipment which we need to manufacture the components are also majorly imported. This is where we sometimes have this long lead delivery as such, which is not in our hands. And we cannot anticipate an order which will come after six months and place an order today on this front.
We will only place an order once we have a contract in hand. You get my point, sir? This is one kind of-
But sir, we have INR 4,000 crores worth of orders, sir. Where is the-
Yeah, we place the second order. They are all coming in. This is what I am telling you. You will see the payment again from FY 2026. Correct. You will see a shift from FY 2026 for sure, because the capacity will be done, it will be in place.
Okay. The question was, normally when we see what we have understood about airfoils and other parts which are there or rather which goes into the It is critical in nature, it is important in nature. And we say we are among the lowest cost for most of our parts which are there. Why is it this advantage, which is for the customer, which is low cost, it is critical in nature, we have the orders in hand, why is this advantage not getting reflected in terms of our working capital cycle, which can be much, much lower than what normally a critical manufacturer of a supplier would normally get the benefit of, sir?
Yeah, of course, you are right. When you say qualification, this is a very continuous process. You keep qualifying, you keep your order share increasing, you keep your order books in an incremental way, right? Today, if we capitalize our development cost for this, we call the qualification cost Our FY is 3%-4% higher, but we expense out. We do not show that as making the compensation out. We do not recognize that amount. If we stop doing that, we cannot stop it, right? We would have only covered INR 4,000 crores. We are looking at TAM, which is total addressable related to is around [$ 35+ billion] , right? This is just a start. Now, when you try to reflect things, we need to have the capacity for almost this specific amount.
Second, the qualifications which we finished, if you see in our working capital, which is having higher number today, because of the reasons which I am sure you must have versed into during the previous question, that the raw material, the qualification has a minimum order quantity of, if you have to qualify five customers, for that you need to buy 10 machines. You have purchased all the 10 machines which stays in inventory. Once you finish the qualification, then it will slowly start getting reduced. That means the profit coming. Correct. We are just coming out of that phase. From FY 2026, you will see a beautiful story coming up.
Sir, you think that to understand better, at INR 1,000 crore turnover, you believe the working capital, will it be meaningfully lower than the current working capital it is?
Of course. We can't survive having such long working capital, right? It's not a thing, but this is the case, I'm telling you. Not me, anyone has to go through this.
Okay-
As you mentioned, we have good cost, we have good margins, we have good customer profile. We are the only one in the country for certain products.
There is no one else. This is what you say.
Yes. Hard work is just done, sir. Now you will see, you will definitely witness. We all wish you this, right? All these years we kept struggling. Now we are coming gradually.
Okay, sir. Thank you so much, and wish you all the best.
Thank you, Mr. Mayur . Thank you.
Thank you. Ladies and gentlemen, participants who wish to ask a question, may please press star then one. The next question is from the line of [audio distortion] Integrated Service Limited. Please go ahead.
Hello, sir. Am I audible?
Hello, sir. Please can you be a little louder?
Right, sir. Am I audible, sir?
Yeah. Okay. Yeah, please share.
Good afternoon, sir. I just want to understand the thing I was looking for the presentation, and our total addressable market for FY 2027, even if you consider the 1% of that, then it would be around INR 2,500 crores-INR 2,600 crore in all the three segments we are working. Is it understanding right that if we can just grab the 1% share of total digital market, we can get revenue or turnover around FY 2027, FY 2028?
Of course, sir. That is the reason we have taken a factory, right? We know the addressable market. We are there for. We have qualifications and approvals are majorly done. It is only the first issue right now. That is what we are trying to say. Based on the first issue, we did this factory A has to be upped. That is the whole intention to get the volunteer which is available, and we have already started churning out. You can see the factory is nothing but a production payment. Correct?
Okay, sir. Okay. My second question is that, whatever the contracts or regiments we are signing or we are getting, the value of all the things, let us say if a contract is for five years, then in five years it will get completed and all the revenue will be realized. Is my understanding right?
This is not an end, right? This is just the start.
Okay, sir. Right. Got you. Thank you so much, sir, and all the best for the future.
Thank you.
Thank you. The next question is from the line of [Partha] from Geetin Financial Limited. Please go ahead, sir.
Yeah. Thank you for the opportunity. Sir, I have just one question with regards to this issue-based order. I think it is very important.
Yeah, it is an agreement. It is just the capacity which is higher what we are doing.
There are no competitors in India.
No. Just to give you one more good thing which we all should feel proud is, not just India, few of the components, we are the only output there in the whole world. There is no one else. Either it is manufactured by us or made in India.
Okay. So before other statements, where have any other companies which are actually doing it and other institutes you work from?
Yeah. See, where other companies are, that completes China, Europe, Korea, Japan, and U.S.
Okay.
Right. The volume which is coming in from, of course, in the competition.
Thank you, sir.
Yeah. Okay.
Thanks.
Thank you.
Thank you. The next question is from the line of Mr. Amit Dixit from ICICI Securities. Please go ahead, sir.
Yeah. Thanks for the opportunity and congratulations for actually the designation of very high number.
Thank you.
The first one is on commercial aerospace. We are seeing that things are now improving all the competitive upstream criteria, whatever there is optimistic from all the global majors. I just wanted to understand that whether we have anything on annual or lease engines. Are we now getting some reports or are we buying for specific engines? Because basically, as you know, it will be the fastest-growing engine in the history of aviation.
Yeah. Basically, when we are in this industrial engines for us, it doesn't matter if it's a military engine or a commercial airline engine. For us, it will not matter. The customer base is the same. The only thing is, we are not talking much of it because we want to get ready because these are some market requirements. And that engine components are critical and rotating components. It's not easy to start that work. Azad has already put in the work. Very soon you will learn a lot about these things.
Yeah, because the question was more in relation to the fact that both GE Aerospace and Safran, who have certain collaboration, they are our clients. I was just wondering that we should also have a foot in, at least.
We are GE Aviation, we're already an approved supplier. Safran, we are already an approved supplier. Also, GE Aerospace, already an approved supplier. That's not a problem. It's just we are getting ready to take that big jump. As I said, the custody is a major issue. That is all work going on, and we can share more details once it comes closer and we are up to close deals.
Okay. The second one is on the order that we won earlier for Rolls-Royce. When we can see a vacation of the contract award, which is here.
The qualification is on with [Sumit]. As per the contract, by calendar year 2025, we should be in the middle of the qualification. As the qualification is done, we can sign the contract from there.
Some of the earnings contribution, incremental earnings from hydrogen.
Yes. We also have a lot of hopes on hydrogen, which will open. At least give a contribution. At least it will give some small checks in the future years. We can start taking baby steps from hydrogen. What we are doing currently, it will add baby steps on a hydrogen, then we can leap ahead and it's all working well.
The second one is on the Saudi Arabia investment collaboration.
Yeah.
Can you give us any range that whatever [JDA], Singapore, other markets, whatever it is, we will be taking up certain opportunities in Saudi Arabia for JDA use? Is it through a JV or how does it work? Can you just give us a broad contour for the subsidy size that we understand?
It's an interesting question, Mr. Amit. I will tell you, it's a very big step. It's not something. It's all in millions, and it's been converted into a lot. When we met the Ministry of Energy, we met their clients. They can give approval to airlines, to Saudi Aramco, and many more companies. As I presented Azad Engineering, they are actually a business company which will come and set up a shop. Their approval, who has accepted that Deakin has got suppliers to become a shop with these capabilities. It's not just Deakin, it's in connection with the Ministry of Energy as well as their customers where these products are going to use. Who is going to use these products, right? They also need to give their consent. They also approved us. Azad Engineering is a trusted, you can go and get that.
If there is a certain intrinsic approval from the ministry, intrinsic with their customers, then Azad gets it. It was not just one-day story. We had gone, we had presented there. We had to match, and we definitely matched with the requirements, and we were welcomed, and we are very happy that this is us.
Okay. So when can we expect the production or the decision about this?
This is at a very early stage. We just agreed. Now we are having discussions as to the package, we are evaluating, we are thinking of how best to tap into select package plans. We are also thinking to have a local partner there. Because the administration works and all that thing, we would like to make a local JV with local partners there. We are identifying a few of the major companies there. We can have a JV with them, and we can start this activity so that we put a lot of it there. Now to give that JV. So we are making it a smart workout. We are trying to make sure that we do not take much investment, we do not take much risk, and we keep major of the things in our control, and things will go easily.
The last question from my side. Last time you mentioned that all this, FY 2025 would be better in terms of margin than just doing this. Now it is interesting that despite lower QOQ share of aerospace, you still have margin improvement. Is it due to the order execution sequence or the impact of value addition to these new acquisitions, or how should we read into this?
Sorry, Mr. Amit. Can you please repeat the question here?
Yeah. The question is that last time in the conference call, you mentioned that FY 2025 would be better in terms of margin, and your margins are somewhat better, to be honest, quarter-over-quarter. This is despite looking quarter-over-quarter flat in the revenue. Then energy contribution is higher. I mean, aerospace, by looking quarter-over-quarter basis. Is the improvement in margin basically because of the orders we are executing, the nature of orders that might carry higher margins? Or is it that they have acquired the two acquisitions that they have made? Is it the impact of these?
Yeah. Amit, this is a function of process improvement and the lower employee cost. We are not adding employees, and our sales are growing at 17% quarter-over-quarter. It is a function of operating leverage and the process improvement what we have done. It is not because of the subsidy that we have acquired.
Okay. That is too at once.
Yeah.
Okay, wonderful. Thank you and all the best.
Thank you. The next question is from the line of Chirag from Neo Asset Management. Please go ahead, sir.
Yeah, hi. I sort of understand that, from your comments we can understand that if a new entrant wants to enter into this business, it will not be very easy for that player to build up the kind of capacity industry build up and there will be lots of entry barriers. But at the same time, if you want to increase your market share for OEM, you will be grabbing the market share from other suppliers based in China, Japan, U.S., and all. So what difference will you be providing to these OEMs that they will be encouraged to come to you and not to go to the other suppliers who are also there in the business?
Yeah. Hello, Chirag. Actually, see, first thing in our business is first comes to the entry barriers. First you need to go to design and manufacture these ignition components. We now want a nuclear or we are now making ignition components for the aircraft. You can imagine the life of this component. We are not talking about some armrest, or we are not talking about some component which does not directly affect the life of the component, right? In a sense, it is an armrest manufacturing. You go and get approval after the CNC machines, you can manufacture armrest. Manufacturing an ignition component of an engine, you can imagine how many barriers are there to make it comes to the level of doing a testing of the ignition component manufacturing, wherever the facility is and setting up and utilizing it. Correct?
These first barriers are there, qualifications are there, and then comes the price level. Whoever has broken the barriers, they must be a great company, China or Japan or U.S. or Korea. They must be planning in their parts whenever they had started this business 50 years ago. Azad Engineering being a new entrant, so everybody knows that it's not easy just to put technology and we can get these orders. There are barriers also. In this regard, what we can tell you is, the orders what we have is definitely we are competing the world. We have the best cost. I don't use the word low cost. I say it's the best cost and give a solution to the customers. Anything which a qualification takes for any OEM to approve any supplier is a cost to the customer also.
Definitely, if the cost is not beneficial to them, they will not switch. It's a very tedious work and it's a long journey to do the qualification. You have to spend so much money. Other than invest money, you also invest a lot of money in qualification for years. So that benefit, if you don't pass on, why will the order come to us? They will stay in China or Japan, wherever they have put it already. Definitely, there is a cost advantage as well. First, if they capability, go and then comes the cost.
Okay. Thank you.
Thank you. Ladies and gentlemen, due to time constraint, that was the last question. I now hand the conference over to management for closing comments. Please go ahead, sir.
Thank you so much. Thank you everyone for your time and patience for coming in this call and asking your questions. I hope we could answer all your questions. Anything is there, if you write an email to us, we can answer all the questions basis time constraints. That is it from my side. Thank you so much, everyone.
Thank you. Thank you from Azad's side. We are very happy to take on a call and address the questions that anybody had, and it is always a pleasure to talk about a business and get more clarity into discussions. These are some very interesting set of questions, and I hope we have been able to bring more clarity into the company and for our business in many ways. So thank you so much for joining us today.
Thank you all for taking time for the call, and it was great session where you have asked lot of interesting questions and hope we are able to give you the answers. Thank you.
On behalf of ICICI Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your line.