Rakesh Chopdar Chairman and CEO, Azad Engineering Limited

18 Dec 2023 , 03:09 AM

The company has come a long way since its humble beginnings. What have been the key learnings and achievements in this journey?

I established Azad Engineering in 2008, starting with just one machine and operating as a self-operator. Our journey has been truly from scratch to where we stand today – a robust team of over a thousand individuals. Azad is dedicated to serving various sectors, including aviation, energy, oil and gas, and defense. Our focus lies in a niche industry, producing specialized products, particularly critical rotating parts used in turbines.

These turbines find application in three major industries: land-based operations, aviation, and space. On land, these engines play a crucial role in power generation, utility services, mechanical drives, and oil and gas applications. The market for land-based turbines is predominantly controlled by three global OEMs – Siemens, Mitsubishi, and GE, overseeing various fuels such as nuclear, gas, and thermal.

In the aviation sector, these turbines are extensively utilized in both commercial and military aircraft. Key players in this domain include Rolls-Royce, Pratt & Whitney, GE Aviation, Safran, and Honeywell. Our expertise lies in the intricate engineering of rotating components that are not only niche but also life-critical and pivotal in the functioning of these turbines.

Currently, our revenue is derived from sales to over 15 countries, constituting a significant international presence. 80% of our revenue is generated through exports. Presently, our manufacturing operations are distributed across four plants, collectively covering an area of 20,000 square meters. We are in the process of establishing two additional plants, which will significantly enhance our manufacturing capacity, providing an additional 8x capacity to meet growing demands.

Why should retail investors consider Azad Engineering IPO?

When examining our business landscape, it becomes evident that each sector we operate in is not only highly stable but is also experiencing substantial growth. The aerospace and defense industry, in particular, is on a robust growth trajectory, characterized by stability, while the oil and gas sector continues to expand.

Our clientele comprises industry giants such as GE, Mitsubishi, and Siemens, who collectively control a significant portion, roughly 70%, of the entire industry. In the aerospace domain, we have forged partnerships with five out of the seven major players in the industry. This strategic alignment positions us as a key contributor, creating products tailored to meet the specific needs of these industry leaders. By working with the right players and producing the right products, we are well-positioned to capitalize on the growth and stability observed in these pivotal sectors.

This is an industry with the highest entry barriers possible. There is a moat on capability which takes several years to build, there is a moat on time and on the technical expertise needed to grow here. Building this specialized expertise and market presence took time, precisely 15 years. During this journey, we have broken numerous barriers and competed globally, going head-to-head with industry giants in China, Europe, Japan, and the USA. The validation of our capabilities is underscored by the willingness of OEMs to work with us, especially in the production of critical rotating parts. Unlike forging or machining, our work involves intricate processes, including 3D products that require extensive innovation in terms of man, machine, tool, process, and methods. This continuous innovation is what sets us apart.

Our expansion into the energy sector, producing parts for turbines, demonstrates the versatility of our expertise. The same airfoils used in aviation are applied in energy, showcasing our adaptability across different technologies, materials, tolerances, and cultures while adhering to the same fundamental principles.

Please provide a snapshot of the company’s financial profile.

In terms of our financial profile, over the last three years, we have achieved substantial growth, with a remarkable 43% increase in revenue. Additionally, our EBITDA margins have seen impressive growth, reaching 31.2% and marking a 46% increase.  Our return ratios are also very healthy.

The runway is indeed clear for future growth, especially considering the current wallet share is less than 1% of our existing  customers. Our approach of focusing on capabilities, gaining technical and techno-commercial approvals, and then competing is a strategic path for sustainable growth.

While your clientele is impressive, one may look at client concentration as a risk with top 5 clients contributing 65% of the company’s revenues. What is the strategy to reduce this risk?

Aviation industry has a duopoly nature, primarily dominated by Airbus and Boeing. The concentration of 91% control in their hands underscores the challenge and limited options in this sector. Similarly, the engine industry, with only four major players, adds another layer of complexity and regulation. In the land base too there are handful of 4-5 companies. It is a highly regulated but small sector.

Our approach to diversification is strategic, especially considering the client concentration in industries like aviation, defense, oil and gas, and space. The ability to work with different fuels in the energy sector, such as nuclear, gas-based, steam-based, and hydrogen-based turbines, showcases a level of diversification that goes beyond mere client variety.

The emphasis on working within a customer, across different fuels and critical components, speaks to the depth and breadth of our company’s diversification strategy. This strategic approach not only mitigates risks associated with client concentration but also allows for flexibility and resilience across various sectors and product categories.

Help us understand the key growth strategies of the company. And where do you see the company over the next three to five years?

It’s evident that our current focus is strategically aligned with existing customers, commitments, and the roadmap that has been developed over the years. The emphasis on increasing wallet share with these existing customers through long-term contracts and strategic discussions is a major growth factor. This approach ensures stability and sustainability, backed by the solid foundation and relationships that we have built.

Additionally, our commitment to stabilizing our commitments in sectors like energy, aviation, defense, and oil and gas reflects a forward-looking strategy. The mention of substantial commitments, not just in terms of scale but also in terms of long-term duration, highlights the robustness of our position in these sectors.

The legacy of focusing on class A parts and consistently picking up business from competitors across various sectors showcases our commitment to maintaining a competitive edge.

Some of the IPO proceeds will be used towards repayment of debt. So, help us understand what is the debt on your books currently and what will it be after the repayment?

In the last financial year, we had approximately Rs. 142 Crore of debt on our books. Simultaneously, we had a cash reserve of around Rs. 45 to Rs. 46 Crore. This resulted in a net debt of approximately Rs. 96 to Rs. 97 Crore for the company.

The planned fund raising of Rs. 240 Crore will serve a dual purpose. Firstly, a portion of the funds will be allocated for debt repayment, aiming to further strengthen the company’s financial position and reduce the debt burden. Secondly, the remaining funds will be directed towards growth capital expenditures, focusing on enhancing infrastructure and building additional capacity. The primary objective is to clear the entire debt, transforming the company into a zero-debt entity.

Give us an overview of the ESG strategy of the company.

We have the right constitution of Board of Directors in the company. We have technology experts, and specialists in ESG (Environmental, Social, and Governance) on our board. It is also commendable that the company has worked on creating robust corporate governance and operating governance frameworks, aligning with global standards. The emphasis on ESG is particularly important, given the company’s engagement with global OEMs. Meeting the criteria set by these major players showcases the company’s dedication to sustainability, ethical practices, and social responsibility.

The validation through audits, including financial health, EHS (Environment, Health, and Safety), and ESG audits, serves as a significant endorsement of the company’s credibility and adherence to high standards.