Avalon Technologies Ltd IPO
Published by Sharekhan Education | April 3, 2023
Avalon Technologies Ltd IPO has an Issue size of ₹ 865 Cr and Price Band ₹ 415-436.
The issue opens on Monday, 3rd April 2023 and closes on Thursday, 6th April 2023.
Avalon Technologies Ltd Company Overview:
Avalon Technologies Ltd is one of the leading Electronic Manufacturing Services (EMS) companies. They provide a full stack product and solution suite to original equipment manufacturers (OEM), from the printed circuit board (PCB) to complete electronic systems (Box Build). They are vertically integrated with capabilities in PCB design and assembly, cable assembly & wire harnesses, sheet metal fabrication, machining, and magnetics. The company caters to industries like power, clean energy, railways, and aerospace. They are beneficiaries of govt. initiatives of Aatmanirbhar Bharat and the Production Linked Incentive Scheme.
Objects of Issue:
The IPO consists of a fresh issue of equity shares aggregating to Rs 320 crores, and an offer for sale (OFS) of up to Rs 545 crores by existing shareholders. The proceeds from the fresh issue will be used for funding working capital requirements and repayment of borrowings. Minimum application is to be made for 34 shares and in multiples thereafter. Post allotment, shares will be listed on BSE and NSE.
Industry Overview:
As per Frost and Sullivan, the EMS industry in India is expected to grow at a CAGR of 41.1% over FY22-FY26E. EMS players in India started with contract manufacturing services. Many of them have gradually gone up the value chain to offer design services as well. Post-covid global OEMs are looking forward to diversifying their sourcing to China +1 strategy. There is a growing demand for locally sourced components from Indian OEMs to reduce foreign dependence. PCB is a key component of semiconductors. The advent of semiconductor manufacturing in India promises significant opportunities for the EMS space.
Competitive Strengths:
The company offers one-stop services from PCB design to new product development and subsequent mass production. Their average relationship tenure with customers is around 7 years. The depth and nature of the engagement with longstanding customers serve as an entry barrier for new entrants. The company has developed a global manufacturing footprint that leverages local manufacturing capabilities to provide localized services to global clients. Their strong product capabilities, high quality, and loyal customer base have enabled them to maintain strong financial performance.
Business Strategy:
The company plans to focus on high-margin products in the clean energy, telecom, satellite, and digital infrastructure space. They have recently acquired a manufacturing facility in the Special Economic Zone (SEZ), Chennai, and incorporated a new SMT line in Atlanta. The company aspires to increase its customer base in USA and India. They intend to increase cross-selling of the products to their customers and expand into adjacent product verticals with the existing customers. They would continue to invest in technology infrastructure to promote innovation, operational efficiency, and customer satisfaction.
Key Concerns:
The company’s business requires them to renew certain accreditations, licenses, and permits from regulatory authorities. Failure to renew them on time may adversely affect their business. Any increase in the cost of the raw material, delay or shortage in the supply of raw materials, and major production inputs may adversely affect their business operations. The company faces significant competitive pressures in the business.
Financials:
The company has seen a 14.4% CAGR rise in revenues over FY20-22. Operating leverage has led to EBITDA growing at a CAGR of 23% over the same period. EBITDA margins have shown an improvement from 10% in FY20 to 11.6% in FY22. RoCE increased from 26.8% in FY20 to 27.4% in FY22. Asset turnover has improved from 8.9x to 9.4x over the same period. The order book has grown from ₹504.6 crores in FY20 to ₹857.8 crores in FY22 while the number of clients has increased from 54 to 81 in the same period. At the upper end of the price band (₹415-436) the company seems richly valued at 55x FY23 annualized earnings.
Amit Pathak | Education
Source – IPO Red Herring Prospectus
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