Avalon Technologies Limited IPO (May Subscribe)

Incorporated in 1999, Avalon Technologies Limited is a leading fully integrated Electronic Manufacturing Services (EMS) company. They have end-to-end operations in delivering box-build solutions, with a focus on high-value precision-engineered products. The company provides a full stack product and solution suite, right from printed circuit board (PCB) design and assembly to the manufacture of complete electronic systems (Box Build), to certain global original equipment manufacturers (OEMs), including OEMs located in the United States, China, Netherlands, and Japan. It serves end-use industries like Industrial, Clean Energy, Mobility with Communication, and Medical. These industries are well established, have high growth, and have a long product lifecycle.

Avalon Technologies Ltd operates through its wholly owned Indian subsidiaries Avalon Technologies and Services and Sienna ECAD Technologies along with its wholly owned US subsidiary ABV Electronics Inc. It has 12 manufacturing units located across the US and India, 1 unit in Atlanta, Georgia, 1 unit in Fremont, California, 7 units in Chennai, Tamil Nadu, 1 unit in Kanchipuram, Tamil Nadu and 2 units in Bengaluru, Karnataka. In addition, a new facility in Chennai, Tamil Nadu, is currently under construction.

Key Highlights

• Avalon Technologies has a unique global delivery model, comprising design and manufacturing capabilities across India and the United States. Avalon Technologies is the only Indian EMS company with full-fledged manufacturing facilities in the United States, which gives them a unique competitive advantage in the North American markets.
• The company’s business is well-diversified regarding end-use industries, customers, geographies, and offerings. They have over the years diversified and expanded their customer bases and developed operations to cater to various end-use industries across multiple product capabilities. They are present in major industry verticals, including clean energy, mobility, industrial, communication, and medical. In FY22, the clean energy segment accounted for 20.3 pct. They also cater to industries that require high-precision manufacturing, including aerospace, defense, and medical.
• Avalon Technologies offers an integrated and well-diversified solution suite comprising PCB design and assembly, manufacture of cable assembly and wire harnesses, sheet metal fabrication, sheet metal machining, plastic injection molding, magnetics, and electro-mechanical integration. This expertise allows them to offer end-to-end box-build solutions. As of Nov 30, 2022, the company has 29 customers for box-build services (48 pct of revenue).
• Avalon Technologies has built long-term relationships with customers over the years through its diversified product portfolio. As of November 30, 2022, they had an average relationship of eight years, with these customers accounting for 80 pct of the revenue in FY22.
• The company’s strong product capabilities, high quality, and loyal customer base have enabled them to maintain strong financial performance. The current order book (open order) of the company stood at Rs 11,902 mn, with the majority of the open orders to be fulfilled within ~1.5 years. The company’s financial stability and positive cash flow have enabled them to meet the present and future requirements of its customers.
• For the 8m FY23, Avalon has reported revenues of Rs 5.8 bn with gross profit margins at 37 pct. EBITDA stood at Rs 0.7 bn with PAT at Rs 0.3bn. EBITDA margins and PAT margins are 11.6 pct and 5.8 respectively. Its order book stands at Rs 11.6 bn with a book-to-bill ratio of 2. Capacity Utilization for the company is 59 pct.

Key Risks

• The markets in which its customers compete are characterized by rapidly changing preferences and other related factors, including lower manufacturing costs. As a result, the company may be affected pct by any disruptions in downstream industries.
• The global nature of its operations exposes it to numerous risks that could materially adversely affect the financial condition and the results of operations.
• Dependence on Subsidiaries exposes it to significant risks.
• Dependence on a limited number of customers for the major portion of its revenue.

Valuation

Avalon Technologies Ltd. is a fully integrated EMS company with end-to-end operations delivering box-build solutions in India. Avalon has a strong presence in sunrise sectors like clean energy, mobility, and industrial which has potential for expansion. Strong entry barriers and the reputation for quality products places Avalon in a sweet spot. In the Indian EMS Industry, Avalon stands to benefit from the GoI plan to see India as an export hub for the world, along with its ‘Make in India’, and ‘PLI Scheme’ initiatives. On the upper end of the price band, the issue is valued at a PE of 55.5x based on FY23E annualized earnings which we feel is richly valued. Only high-risk, cash-rich investors ‘May Subscribe’ for a longer-term perspective.

Disclaimer: The views expressed in the blog are purely based on our research and personal opinion. Although we do not condone misinformation, we do not intend to be regarded as a source of advice or guarantee. Kindly consult an expert before making any decision based on the insights we have provided.