Avalon Technologies’ IPO is scheduled to begin on April 3, 2023 and close on April 6, 2023. The IPO size is ₹865 crore, of which £320 crore new issue, £545 crore a sell offer. The price range was set at ₹415-₹436. The company’s post-issuance market capitalization will be ₹2,791.3 billion at the high end of the price range. The company intends to use the proceeds from this issue to repay part of the consolidated debt (£1.45 billion), to fund its working capital needs (£90 billion) and for general corporate purposes. The promoters will own nearly 52 percent of the company’s mail output. The company also completed a pre-listing with Unifi Capital from October to November 2022 at £375.8 per share, a 16 percent discount to the IPO price of £436.
Avalon Technologies is an Electronic Manufacturing Services (EMS) company that provides end-to-end solutions for the delivery of box-build solutions to original equipment manufacturers (OEMs). Its recent track record and growth has been impressive, and the long-term prospects look interesting. However, given its significant sales exposure to the US (62% of sales) and economic headwinds there, with the risk of a recession this year, there could be a bump.
The IPO is valued at 47.65 times FY23-PE (8-month annualized earnings), while not expensive compared to peers, it’s not cheap on an absolute basis given the economic uncertainties. Therefore, we recommend investors to wait and see for better entry points for now, after the listing.
business and prospects
Avalon Technologies was incorporated on November 3, 1999 and began manufacturing metal and plastics. Over the years, it has expanded its competencies and has also entered industries such as aerospace, rail and clean energy. The company’s core competencies include printed circuit board (PCB) assembly design and assembly, cable assembly and harnesses, sheet metal fabrication and fabrication, magnetics, injection molded plastics, and end-to-end box build of electronic systems.
The company is not involved in the manufacture of components for consumer goods, but manufactures components for industrial use. The box-build solution that the company seems to be focusing on is the process where it manufactures all the components of the end product and assembles it according to its customers’ specifications and design.
Within the EMS sector, Avalon Technologies is a high-mix and flexible volume player, meaning that it produces a wide variety of products in defined quantities, ie make-to-order. The Company serves a variety of segments including power, clean energy, rail, aerospace and medical. The end products it assembles for its customers include solar inverters, which it makes for an American customer, and a track management system that it assembles for a Japanese supplier (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 Indian government’s programs like PLI (Production-Linked Incentives). The range of services offered by the EMS companies ranges from partnering with the end customer for product design/prototyping to manufacturing and providing after-sales service. According to Frost & Sullivan’s report in the prospectus, the EMS market in India is estimated at £1,469 billion in FY2022 and is projected to grow at a CAGR of 32.3 percent to £4,502 billion by FY2026.
A key tailwind for the company is semiconductor manufacturing in India, which is expected to offer positive opportunities for the EMS industry as it will also drive PCB design and assembly. The company also expects to benefit from the government’s push in infrastructure, clean energy and infrastructure. The order book currently stands at ₹1,190 crore and based on FY22 revenues the book-to-bill ratio is approximately 1.5x.
The company has a total of 12 production facilities in India and the USA. The plants in India are located in Chennai and Bengaluru. Some of its significant customers are Kyosan, Collins Aerospace, Atos, Cummins and Faiveley Transport.
Finance and Valuation
Avalon Technologies has reported a decent string of numbers over the past few years. Revenue grew at a CAGR of 14.45 percent in FY20-FY22, while EBITDA grew 23 percent over the same period. Revenue for the 8 months to November 2022 is £584.7 billion, up 8 percent year-on-year, EBITDA for the same period is £68.05 billion, up 16.2 percent year-on-year. The EBITDA margin remained in the range of 9.5 to 12 percent in the period of FY20 to FY22 and for 8 months to November 2022 it was 11.64 percent, which is slightly higher than the same period last year. On the upper band of ₹436, the P/E is 47.65 times (annualized EPS from 8 months to November 2022).
The company’s P/E of 47.65 looks reasonable compared to the trailing 12-month P/E of peers like Syrma SGS (102x) and Kaynes Technologies (97x). However, Avalon’s revenue growth was 14.45 percent CAGR for FY20-FY22, while Syrma SGS grew at a CAGR of 27.58 percent and Kaynes Technology at a CAGR of 38.49 percent over the same period. The company gets nearly 52 percent of its revenue from the U.S., and as such, the impending global slowdown poses some risks. In such a scenario, the valuation of 47.65 times P/E seems a bit steep.
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