Goldman Sachs Maintains Buy Rating on Azad Engineering, Raises Target Price to INR 2,460

Overview

This report reviews Azad Engineering's FY2026 Q4 performance. Although quarterly EBITDA was slightly below Goldman Sachs' expectations, full-year revenue grew 32% and EBITDA margin improved to 37.4%, both exceeding management guidance. Goldman Sachs believes the company's strong order book (book-to-bill ratio of 10.8x) supports short-term growth and benefits mid-term from supplying high-temperature components to Mitsubishi Heavy Industries and the delivery of the ATGG engine project, driving its transformation from a component supplier to a systems supplier. Based on this, Goldman Sachs maintains a 'Buy' rating and raises the target price to INR 2,460.

Core views

Performance & Financial Highlights: Q4FY26 EBITDA was INR 613 million, up 35% YoY but 5% below Goldman Sachs' expectations, mainly due to a higher-than-expected proportion of the lower-margin energy segment in the product mix. However, full-year FY26 revenue grew 32% YoY to INR 59 billion, with EBITDA margin expanding 204 bps to 37.4%, both exceeding management's guidance of 25% revenue growth and 35% margin. The Aerospace & Defense segment revenue surpassed the INR 1 billion mark for the first time. Orders & Growth Visibility: As of FY26-end, the order book stood at INR 65 billion, with a book-to-bill ratio of 10.8x, providing 5-6 years of revenue visibility according to management. Export business remained the growth driver, accounting for 93% of total revenue. Goldman Sachs views the robust order book as the primary driver of future earnings growth. Strategic Transformation & Catalysts: Mid-term growth potential stems from two key developments: first, an 8-year contract with Mitsubishi Heavy Industries (MHI) for high-temperature nozzle guide vanes, marking the first Indian supplier to qualify in this critical component category, enhancing long-term margins; second, the ATGG engine project is set for delivery (expected in three batches from FY27, totaling 20 engines and spare parts), signaling the company's shift from a pure component supplier to a systems solution provider. Additionally, while the oil & gas business is in early qualification stages, the new Baker Hughes facility's ramp-up is expected to drive rapid profit growth in FY27. Valuation Adjustments: Considering Q4 results and management commentary, Goldman Sachs raised FY28E/FY29E EBITDA forecasts by 1%/2%. Valuation-wise, a P/E approach was used, discounting FY31E EPS at a 13.3% cost of equity to FY28E and applying a 26x target P/E (in line with global peers), resulting in a revised target price of INR 2,460/share.

Analysis framework

Goldman Sachs' analysis follows the theme of 'short-term focus on orders, mid-term on transformation.' First, by dissecting quarterly financial data, it identifies that despite minor quarterly fluctuations, full-year core metrics (revenue growth, margins) exceeded expectations and guidance, confirming fundamental strength. Second, it emphasizes the order book size (10.8x book-to-bill ratio) as core evidence of short-term earnings certainty. Finally, it delves into the company's strategic qualitative shift—via the MHI contract and ATGG engine delivery—to climb the value chain (from components to systems), serving as the key rationale for sustaining mid-to-long-term high valuation and earnings growth. Valuation-wise, a 26x forward P/E was selected as the anchor, considering global peer comparisons and the company's limited trading history.

Methodology notes

• Valuation MethodPE/PEG valuation

  Forward EPS-based P/E Valuation

  The report uses P/E for valuation, specifically discounting longer-term (FY31E) EPS to near-term (FY28E) and applying a target P/E multiple. This method is common for high-growth companies with unreleased earnings potential, smoothing short-term volatility and reflecting long-term growth prospects.

• Industry/Industrial Analysis Framework

  Book-to-Bill Ratio Analysis

  The report highlights the 'book-to-bill ratio' (10.8x), the ratio of new orders to recognized revenue. A ratio >1 indicates strong demand, with order accumulation outpacing delivery, serving as a key leading indicator for predicting future revenue visibility in manufacturing firms.

• Competitive & Strategic FrameworkValue chain analysis

  Transformation from Component to Systems Supplier

  The report underscores the company's shift up the value chain by delivering complete engine systems (ATGG project) rather than individual components. This transformation typically implies higher technical barriers, stronger customer stickiness, and better long-term margin structures.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Azad Engineering (AZAD.BO)

  Beneficiary: Direct coverage, strong order book & smooth strategic transformation

  Strengths

  Large order book (10.8x book-to-bill ratio), exclusive MHI qualification for critical components, ATGG engine system delivery capability, high export share (93%)

  Weaknesses

  Negative free cash flow, long working capital cycle (263 days), reliance on single clients/projects

  Risks

  Qualification ≠ guaranteed orders, delayed free cash flow generation, prolonged working capital cycle

Key data

• FY26 Revenue Growth32%YoY, exceeding management's 25% guidance
• FY26 EBITDA Margin37.4%YoY expansion of 204 bps, exceeding management's 35% guidance
• Year-End Order BookINR 65 billionBook-to-bill ratio of 10.8x, providing 5-6 years of visibility
• Q4FY26 EBITDAINR 613 millionUp 35% YoY but 5% below Goldman Sachs' expectations
• Target PriceINR 2,460/shareBased on 26x FY28E equivalent P/E
• Net Debt/EBITDA1.2xFY26-end net debt of INR 2.7 billion, previously net cash

Impact & implications

Goldman Sachs believes that despite short-term negative free cash flow and extended working capital cycles due to capacity expansion, the company is on a steep earnings trajectory. The MHI contract and ATGG engine delivery are not just revenue sources but also markers of technological prowess and industry status, improving long-term margin structures. The nascent oil & gas business also offers incremental growth. Overall, macro tailwinds and execution strength support its high valuation.

Risks

• Free cash flow generation may further delay: Sustained capex is needed to maintain high growth; if development cycles extend, cash flow improvement may lag beyond FY35E expectations.
• Product qualification ≠ guaranteed orders: Despite rigorous qualification and development costs, actual orders depend on maintaining cost competitiveness versus peers.
• Working capital cycle may remain tight: Cash conversion cycle is expected to drop from FY26's 263 days to below 150 days by FY30E, but delays in qualification or orders could prolong it.

What to watch

• Stabilization & utilization progress of new facilities in FY27
• ATGG engine project delivery progress in FY27
• Inventory days reduction to management's target of 160-170 days by FY27-end from ~200 days
• Oil & gas business (especially Baker Hughes project) profit ramp-up in FY27