Avalon Technologies Ltd – IPO Note

Firm Overview:

Avalon Applied sciences Restricted (“Avalon Applied sciences”) was integrated on November 3, 1999. Avalon Applied sciences is likely one of the main absolutely built-in Digital Manufacturing Providers (“EMS”) firms with end-to-end capabilities in delivering field construct options in India, with a concentrate on excessive worth precision engineered merchandise. They supply a full stack product and answer suite, proper from printed circuit board (“PCB”) design and meeting to the manufacture of full digital methods (“Field Construct”), to sure world authentic tools producers (“OEMs”), together with OEMs positioned in america, China, Netherlands, and Japan.

Objects of the Supply:

Prepayment or reimbursement of all or a portion of sure excellent borrowings availed by the corporate and one among its Materials Subsidiaries, i.e., Avalon Know-how and Providers Non-public Restricted.
Funding the working capital necessities.
To hold out the Supply for Sale of Fairness Shares by the Promoting Shareholders.
Obtain the advantages of itemizing the Fairness Shares on the Inventory Exchanges.

Funding Rationale:

Distinctive Place: Avalon Applied sciences has a singular world supply mannequin, comprising design and manufacturing capabilities throughout each India and america. Avalon Applied sciences is the one Indian EMS firm with full-fledged manufacturing amenities in america, which provides them a singular aggressive benefit within the North American markets. The corporate has 12 manufacturing models positioned throughout america and India: one unit in Atlanta, Georgia, one unit in Fremont, California, seven models in Chennai, one unit in Kanchipuram and two models in Bengaluru. The electronics manufacturing providers (EMS) market in India was valued at Rs.1.5 trillion (trn) in FY2022 and is predicted to develop at a CAGR of 32.3% to achieve a price of Rs.4.5 trn by FY2026. It will create an opportunity to drive the income development of the corporate.

Excessive Entry Limitations: Avalon Applied sciences has constructed long run relationships with its shoppers and as of November 30, 2022, that they had a median relationship of 8 years, with shoppers who accounted for 80% of their income. Their expertise in providing EMS providers throughout product and trade verticals for patrons globally for a number of years serves as an entry barrier within the trade for any new entrants. Given the depth and nature of the engagement with longstanding prospects, their prospects wouldn’t discover it straightforward to switchover to different EMS suppliers as the price, effort and time for such transitions is excessive. Most of their buyer engagements are with the lengthy lifecycle industries corresponding to energy, railways, aerospace, medical, and so forth.

Monetary Monitor Report: The consolidated income from operations have elevated at a CAGR of 14% between FY20-FY22 from Rs.642 crs in FY20 to Rs.841 crs in FY22. The PAT margin posted a robust development of simply 1.9% in FY20 to eight% in FY22. The corporate has a diversified income base with 20% of the general income caters to scrub power, 27% to mobility, 30% to Industrial, 7% to communication and eight% every to Medical and others. Their order e-book (open order) has stood at Rs.1190 crs (1.4x of FY22 Income) as of November 30, 2022. Most of their open orders will likely be fulfilled inside one 12 months to 18 months.

Key Dangers:

OFS – The IPO is a mixture of supply on the market (OFS) and Contemporary difficulty with OFS being 63% of the general difficulty measurement. Within the supply on the market (OFS), current promoters and shareholders will offload shares price of Rs.545 crs. Promoter & Promoter group promoting shareholders will offload shares price Rs.329 crs and different promoting shareholders will offload shares price Rs.216 crs. The corporate is not going to obtain the proceeds price Rs.545 crs from the OFS half.

Consumer focus Threat – Greater than 50% of the income comes from High 5 shoppers of the corporate. A lack of relationship with any of those prospects can have a big impact on the profitability of the enterprise.

Outlook:

Avalon is likely one of the main built-in digital manufacturing providers firms in India with properly diversified enterprise resulting in sturdy development. Its revenues and margins improved considerably in the previous few years. The corporate’s listed friends in keeping with the RHP are Dixon Applied sciences, Amber Enterprises, Kaynes Know-how India, Syrma SGS Know-how and Elin Electronics. Evaluating to its friends, Avalon is a pure B2B participant with essentially the most diversified finish consumer Industries and solely Kaynes and Avalon have a ten%+ EBITDA Margin when in comparison with others. At increased value band, the itemizing market cap will likely be round ~Rs.2847 crs and Avalon Tech is demanding a P/E a number of of 42x based mostly on FY22 EPS. Whereas evaluating with the Trade P/E of 76x, the corporate appears to be positioned between undervalued to Pretty valued class. Based mostly on the above views, we offer a ‘Subscribe’ ranking for this IPO.