Support is now available for virtual machines (VMs) with custom images to replace existing disks during the restore flow.
Previously, Azure Backup supported a number of ways to restore a VM, including creating a new VM, restoring as disks, and replacing existing disks, from the selected recovery point in the Recovery Services vault. However, when replacing existing disks of source VMs, support was only available for VMs with marketplace images. With this feature, support is now also extended to VMs with custom images.
Read the documentation here.