The IPO of Avalon Technologies is set to open on April 3, 2023 and close on April 6, 2023. The IPO size is ₹865 crore out of which ₹320 crore is fresh issue, ₹545 crore is an offer for sale. The price band has been set as ₹415-₹436. The market capitalisation of the company post issue will be ₹2,791.3 crore at the upper end of the price band. The company intends to utilise the proceeds from this issue to repay part of the consolidated debt (₹145 crore), fund its working capital needs (₹90 crore) and for general corporate purposes. The promoters will own close to 52 per cent of the company post issue. The company has also done a pre-IPO placement to Unifi Capital at ₹375.8 per share in October–November 2022, which is at 16 per cent discount than the IPO price of ₹436.
Avalon Technologies is an EMS (Electronic Manufacturing Services) company involved in providing end-to- end solutions in delivering box build solutions to original equipment manufacturers (OEMs). Its recent track record and growth have been impressive, and long-term prospects look interesting. However, given significant revenue exposure to the US (62 per cent of revenue) and economic headwinds there, with risk of recession this year, there could be speed bumps to deal with.
IPO priced at 47.65 times FY23 PE (8 months earnings annualised), while not expensive when compared to peers, is not cheap either at an absolute level, given the economic uncertainties. Hence, we recommend investors to wait and watch for now and look for better entry points, post listing.
Business and prospects
Avalon Technologies was incorporated on November 3, 1999, and started production of metal and plastics. Over the years it has expanded its competencies and also entered verticals such as aerospace, Railways and clean energy. The core competency of the company includes PCB (printed circuit board) assembly design and assembly, cable assembly and wire harnesses, sheet metal fabrication and machining, magnetics, injection moulded plastics and end-to-end box build of electronic systems.
The company is not involved in making components for the consumer capital goods but manufactures components for industrial use. The box build solution, which the company seems to be focussing on, is the process where it manufactures all the components of the final product and assembles it as per the specification and design given by its customers.
Within the EMS sector, Avalon Technologies is a high-mix and flexible volume player which means it produces high variety of products in defined quantities i.e., it follows make-to-order operations. The company serves a variety of segments, including power, clean energy, Railways, aerospace, and medical industries. Some of the end products it assembles for its clients are solar inverter, which it manufactures for an American client, and track management system assembled for a Japanese vendor (Kyosan), which supplies to Indian Railways.
The potential for the EMS segment looks optimistic due to the global strategy of China-plus one and the schemes of the Indian government, such as PLI (production-linked incentives). The range of services offered by EMS companies extends from partnering with end customer for product design/prototyping to manufacturing and providing after-sales service. According to the Frost & Sullivan report in the prospectus, the EMS market in India is valued at ₹1,469 billion in fiscal 2022 and is expected to grow at a CAGR of 32.3 per cent till fiscal 2026 to ₹4,502 billion.
An important tailwind for the company is the semiconductor manufacturing in India, which is expected to provide positive opportunities for the EMS industry as it will also boost PCB design and assembly . The company also expects to benefit from the government push on infrastructure, clean energy, and infrastructure. The orderbook currently stands at ₹1,190 crore and based on FY22 revenue the book to bill ratio comes to around 1.5 times.
The company has a total of 12 manufacturing facilities in India and the US. The facilities in India are located in Chennai and Bengaluru. Some of its eminent clients are Kyosan, Collins Aerospace, Atos, Cummins and Faiveley Transport.
Financials and valuation
Avalon Technologies has reported a decent set of numbers over the past few years. Revenue grew at a CAGR of 14.45 per cent during FY20-FY22 whereas EBITDA for the same period grew 23 per cent. Revenue for 8 months ending November 2022 is ₹584.7 crore which is 8 per cent higher YoY, EBITDA for the same period is ₹ 68.05crore, which is 16.2 per cent higher YoY. EBITDA margin has stayed in the range of 9.5-12 per cent during FY20-FY22 and for 8 months ending November 2022 it was 11.64 per cent, which is marginally higher than same period previous year. On the upper band of ₹436 the PE comes to 47.65 times (annualised EPS of 8 months ending November 2022).
The P/E of the company at 47.65 times looks reasonable when compared to the trailing 12-month P/E of peers like Syrma SGS (102 times) and Kaynes Technologies (97 times). However, the revenue growth of Avalon has been 14.45 per cent CAGR for FY20-FY22 whereas Syrma SGS grew at a CAGR of 27.58 per cent and Kaynes Technology at a CAGR of 38.49 per cent for the same period. The company has close to 52 per cent of revenue coming from the US and therefore the impending global slowdown poses some risks. In such a scenario the valuation of 47.65 times P/E seems a bit steep.