Azad Engineering's Q4FY26 slightly missed expectations, but the order book and high-end turbine component opportunities support a Buy rating

Overview

This report is Goldman Sachs' review of Azad Engineering's Q4FY26 results. Quarterly performance was slightly below Goldman Sachs' expectations, mainly because the product mix was more skewed toward Energy rather than Aerospace, which led EBITDA and margins to come in slightly below forecast. On a full-year basis, however, FY26 revenue grew 32% and EBITDA margin reached 37.4%, both better than management guidance. Goldman Sachs believes the company remains on a steep earnings growth trajectory, supported in the near term by a strong order book and in the medium term by MHI hot-end components, the ATGG engine program, and the qualification and ramp-up of the oil & gas business.

Core views

Goldman's core view is that although Azad Engineering posted a modest quarterly miss, underlying execution momentum remains strong and FY27 guidance may prove conservative. Around 70-80% of Phase 1 infrastructure is complete, and four dedicated factories are already operational. Going forward, the focus will shift from aggressive greenfield expansion to qualification ramp-up, higher capacity utilization, and operating leverage. The INR 65bn order book provides multiple years of revenue visibility, and FY27 guidance only reflects already qualified products, without fully capturing the optionality from future qualifications. Goldman raised FY28E/FY29E EBITDA by 1%/2% and maintained its Buy rating.

Analysis framework

The report updates the company's near- and medium-term earnings growth and valuation by combining quarterly results, full-year execution, management call guidance, the order book, segment revenue, cash flow, and working capital changes. Valuation uses a P/E approach based on the average P/E of global peers, while also taking into account the company's limited trading history.

Methodology notes

• Valuation methodsP/E valuation method

  Target price derivation

  Goldman Sachs discounts Azad's FY33E EPS to FY28E at a 13.3% cost of equity and applies a 26x target P/E to derive a 12-month target price of INR 2,460/share.

• factor_profileGS Factor Profile

  Growth, financial returns, valuation multiples, and composite factor comparison

  Goldman Sachs Factor Profile provides investment context for a stock by comparing its growth, financial returns, and valuation multiples with the market and industry peers.

• corporate_activityM&A Rank

  Probability score for a potential acquisition target

  Goldman Sachs uses an M&A framework globally to assess the likelihood of a company becoming a takeover target, scoring it from 1 to 3; the report discloses the framework but does not use it as a core part of the Azad investment conclusion.

Asset mapping & comparison

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

• Azad Engineering equity (AZAD.BO)

  core coverage name

  Strengths

  Strong order book with a 10.8x book/bill ratio; FY26 revenue and margins above management guidance; MHI LTCPA and ATGG engine program support value-chain upshift; high export mix with globally relevant end demand.

  Weaknesses

  Q4FY26 slightly below Goldman Sachs' estimate; cash conversion cycle stretched to 263 days; FY26 free cash flow negative; net debt worsened materially versus FY25 net cash position.

  Comparison

  Goldman Sachs uses the global peer average P/E as the 26x target multiple because Azad's listed trading history is limited.

  Risks

  Free cash flow generation could be delayed further, qualification does not guarantee orders, and the working capital cycle may remain elevated.

• Energy & Oil & Gas segment

  current main revenue source

  Strengths

  Q4FY26 revenue of INR 1.3bn, accounting for 81.3%, up 32.2% YoY; Baker Hughes-related facilities may drive oil & gas ramp-up in the future.

  Weaknesses

  The product mix was more skewed toward Energy than Aerospace, which was one reason EBITDA missed expectations this quarter; the oil & gas business is still in an early qualification stage.

  Comparison

  Compared with Aerospace, Energy & Oil & Gas currently contributes more to revenue, but higher-value aerospace and defence business may improve the long-term margin structure.

  Risks

  Qualification, customer order timing, and cost competitiveness remain uncertain.

• Aerospace & Defence segment

  long-term growth and valuation support business

  Strengths

  FY26 revenue exceeded INR 1bn for the first time; qualification progress with Pratt & Whitney and the ATGG engine program nearing delivery support the transition to a systems supplier.

  Weaknesses

  Q4FY26 revenue contribution was only 17.6%, so near-term contribution to overall revenue is still smaller than Energy & Oil & Gas.

  Comparison

  Compared with Energy, Aerospace & Defence has a higher value-chain profile and could improve long-term margins and the valuation narrative.

  Risks

  Qualification cycles are long, development costs are high, and order conversion timing may be delayed.

Key data

• Q4FY26 EBITDAINR 613mnUp 35% YoY, but 5% below Goldman Sachs' estimate.
• Q4FY26 EBITDA margin38%Up 204bps YoY, but slightly below Goldman Sachs' estimate.
• FY26 revenue growth32% YoYAbove management's 25% revenue growth guidance.
• FY26 EBITDA margin37.4%Above management's 35% margin guidance.
• Energy & Oil & Gas Q4FY26 revenueINR 1.3bn, accounting for 81.3%Up 32.2% YoY.
• Aerospace Q4FY26 revenueINR 277.5mn, accounting for 17.6%Up 12.2% YoY; FY26 Aerospace revenue exceeded INR 1bn for the first time.
• Export revenue mix93.3% in Q4FY26, 93% in FY26Exports remain the company's main growth driver.
• Order bookINR 65bnImplies a book/bill ratio of 10.8x, and management says this provides 5-6 years of visibility.
• Cash conversion cycle263 days230 days in FY25; management guides to a reduction to 200 days in H1FY27 and around 160-170 days in inventory days by FY27 end.
• Net debtINR 2.7bnNet debt/EBITDA was 1.2x at FY26 end; FY25 end was a net cash position of INR 4.6bn.
• FY26 capexINR 5.7bnDrove fixed asset capitalization of INR 3.9bn and added three plants.
• FY26 free cash flow-INR 6.94bnNegative free cash flow due to capex and working capital pressure.
• Target priceINR 2,460/shareBased on 26x FY31E EPS and discounted to FY28E; corresponding FY27E and FY28E P/E are 95x and 69x, respectively.

Impact & implications

The report is moderately positive for Azad Engineering's investment case: in the short term, the strong order book and already qualified products provide revenue visibility; in the medium term, the MHI hot-end component contract, ATGG engine deliveries, and ramp-up in Aerospace & Defence and Oil & Gas could help the company move from a component supplier to a systems supplier. However, the key constraints investors should continue to monitor are the high valuation, delayed free cash flow generation, extended working capital, and uncertainty around order conversion after qualification.

Risks

• Free cash flow generation could be delayed further, even beyond Goldman Sachs' FY35E estimate.
• To sustain high revenue growth, the company must continue to invest heavily in capex, which may keep pressuring cash flow.
• Product qualification does not necessarily mean orders will follow; the company still needs to wait for customer orders and maintain cost competitiveness versus peers.
• If qualification or orders are delayed, the cash conversion cycle could remain elevated.
• Working capital pressure is already reflected in the FY26 cash conversion cycle rising to 263 days, free cash flow turning negative, and net debt increasing.
• The high valuation implies strong growth expectations, with target price corresponding to FY27E and FY28E P/E of 95x and 69x, respectively.

What to watch

• Whether the cash conversion cycle falls to about 200 days in H1FY27, as management guided.
• Whether inventory days can be reduced from about 200 days to 160-170 days by FY27 end.
• The ramp-up pace and margin contribution of the Mitsubishi Heavy Industries hot-end nozzle guide vane LTCPA.
• The execution pace of ATGG engine and spares deliveries in three tranches starting from FY27.
• Whether the Baker Hughes facility and the Oil & Gas business enter a clear earnings upcycle in FY27.
• Qualification progress, capacity utilization, and operating leverage release at newly commissioned facilities.
• Whether FY27 guidance is revised upward once the facilities stabilize.
• Whether the order book stays around INR 65bn or higher and converts into revenue.