Aeroflex Industries Ltd Q2 FY2026 Concall Summary

Key Takeaways

• Record quarter despite tariff drag: Revenue crossed ₹100 crores for the first time, EBITDA margins hit 23.5%, yet management says performance would have been "much, much better" if not for U.S. tariff-driven shipment deferrals.
• Liquid cooling is now a multi-order reality: A second order from the same large U.S. customer converts a breakthrough win into an emerging vertical, with exclusive India supply rights and a hint at future international expansion.
• The margin mix is shifting up: All-time-high material margins flowed from value-added products and a deliberate pivot to higher-diameter hoses, where Aeroflex faces less competition and earns better pricing.
• U.S. demand is intact, just delayed: Zero order cancellations despite 50% tariffs prove sticky demand; management bets on a tariff reduction by December to unlock a "significant uptick."
• What to watch next quarter: Execution of the first liquid cooling order, any tariff movement out of Washington, and whether the Hyd-Air capacity expansion plan firms up into a committed number.

The Tariff Overhang: Deferred, Not Destroyed

• Shipments pushed, not cancelled: U.S. customers deferred some orders from Q2 to Q3, and the expected sharp spike in bellows orders did not materialize; management received zero cancellations, which it reads as proof of sticky demand and a lack of immediate alternative suppliers.
• Bellows hit hardest: Bellows was a new product introduction for U.S. customers, so the tariff shock stalled the anticipated order ramp; new bellows orders did arrive from Europe, Canada, and Argentina in the same period.
• The pricing cushion: U.S. manufacturers also import raw material subject to tariffs, so the post-tariff pricing differential is not large; the tariff on Aeroflex's conversion cost remains well below U.S. manufacturing cost, muting the demand destruction risk.
• December catalyst: Management expects tariffs to come down by end of calendar year, and discussions for next calendar year's business have already begun with many customers; next year's U.S. business is expected to be "much higher" than this year's.

Daud: "We did not receive a single cancellation of orders from our U.S. customers, which shows that there is a huge demand for our products, and there is no immediate alternate supplier for them who could actually fulfill their demand."

Liquid Cooling: From Breakthrough to Build-Out

• Second order secured: The same large listed U.S. corporation that placed the breakthrough order in July placed a second order in September; the first order ships in Q3, the second in early Q4, so revenue contribution begins this fiscal year.
• India exclusivity locked in: Aeroflex signed a contract with the Indian subsidiary of this U.S. company to supply liquid cooling solutions for data centers, with exclusive rights as sole supplier for India.
• International path hinted: The customer has indicated that once satisfied with quality, supply, and service, it could explore Aeroflex delivering this product to its international customers as well, though management frames this only as "something in the future."
• Capacity expansion being planned: The customer has asked Aeroflex to ramp up capacity to serve them over the next couple of years; the company is working on infrastructure, machines, ancillary equipment, and capital requirements, with more details expected in the next month or so.
• Segment ambition: Management expects liquid cooling to become a significant contributor to Aeroflex over the next 2 to 3 years, and the broader new-age industry segment, already at ₹30 crores quarterly, is expected to grow "leaps and bounds" over the next few quarters and next year.

Daud: "It's a contract with them that we have exclusive for India. So, we will be their sole suppliers for the liquid cooling project in India."

Margin Structure: Mix Shift at Work

• Record material margins: EBITDA margins reached almost 23.5% in Q2, driven by material margins at an all-time high, which management attributes to a focus on higher-margin, value-added products.
• The diameter pivot: The company is deliberately shifting toward higher-diameter hoses (6-inch, 8-inch, 10-inch, 12-inch) where margins are much higher and competition is thinner; Aeroflex claims leadership in these sizes, and sales of high-diameter hoses have increased significantly over the past two quarters.
• Volume vs. value explained: Meter volumes may appear lower year-on-year, but that reflects the mix shift to larger-diameter, higher-value hoses, not weakening demand; per an analyst's math, H1 production was ~1.1-1.15 crore meters versus 1.34 crore meters last year, which management confirmed is consistent with the diameter strategy.
• Margin guidance tempered: Despite the 23.5% Q2 print, management guides EBITDA margins to remain within 21-22% in coming quarters, with H1's 21.7% as the full-year range.

Hyd-Air and Domestic: The Second Engine

• Hyd-Air scales fast: Hyd-Air sales hit ₹9 crores in Q2 versus ₹1.5 crores in Q2 last year, and management confirmed a clerical error in the presentation that understated the Q1 FY26 figure.
• Domestic mix jumps: Domestic sales contribution improved from 19% to 27%, driven by Hyd-Air growth plus increases from steel plants, ports and terminals, and the power sector; the domestic business of the standalone Aeroflex entity also grew, so the shift is not purely acquisition-driven.
• Capacity expansion imminent: A plan to increase Hyd-Air capacity is under discussion, with an announcement expected in the next month or so.

Demand Environment by Geography

• U.S. (40-45% of exports): Demand is intact but gated by tariff uncertainty; the Vice President spent all of September in the U.S. meeting customers and secured further orders for supply in the current quarter and start of next calendar year.
• Europe (second-largest market): Some European countries already saw an uptick in demand this financial year versus last year; management expects a broader uptick from next calendar year onwards.
• Competitive moat reinforced: Management argues that in its industry, customers cannot easily switch suppliers because building equivalent capacity, efficiency, quality, and pricing takes significant time, a structural advantage that showed in the zero-cancellation outcome.

Daud: "In our industry, it is unlike, say, a consumer industry where the supplier or the vendor can shift from a supplier to A supplier to a B supplier very easily. In our case, it is not that easy... it takes a lot of time because for somebody else to build up that capacity to build up that efficiency and to give that kind of quality at that kind of price, it takes time."

Capex and Capacity: The Build Phase

• All capex on track: Hose assemblies, metal bellows, and miniature metal bellows expansion all remain on schedule for completion by March 2026.
• Utilization ramp timeline: After expansion is completed, peak utilization is expected "in the next couple of years post that."
• Bellows expansion continues: Ongoing expansion on miniature metal bellows is underway, with further capacity planning in progress.
• Liquid cooling capex being scoped: The customer-driven capacity ramp for liquid cooling is still in the planning stage, with details on capital requirements expected in the next month or so.

Guidance & Commitments

Key Metrics