IPO Analysis: Avalon Technologies Limited

IPO Rating: Invest for long term

About the issue:

Avalon Technologies Limited is a leading fully integrated Electronic Manufacturing Services ("EMS") company, which is coming out with its initial public offering (IPO) of equity shares of the face value of Rs 2 per equity share. The price band of the issue has been fixed at Rs 415 to Rs 436 per equity share. The issue size is Rs 865 crore at the higher price band. Out of this, the fresh issue constitutes to Rs 320 crore and rest is offer for sale.

The IPO opening date is April 03, 2023, and it will be closing on April 06, 2023. The issue is likely to be listed on the exchange on April 18, 2023. The IPO market lot size is 34 shares and in multiple thereof. A retail-individual investor can apply up to a maximum of 13 lots (442 shares or Rs 192,712) at the upper price band.

Objects of the Issue

The company proposes to utilize the Net Proceeds from the Fresh Issue towards the following objects:

1. Prepayment or repayment of all or a portion of certain outstanding borrowings availed by the Company and one of the Material Subsidiaries, i.e., Avalon Technology and Services Private Limited (ATSPL).
2. Funding the working capital requirements of the company.
3. General corporate purposes.

Promoter holding

The pre-issue shareholding is 70.75 per cent, post the IPO the promoter stake will be 51.24 per cent.

Company Profile:

Avalon Technologies Ltd. (ATL) is one of the leading fully integrated Electronic Manufacturing Services ("EMS") companies in India in terms of revenue in Fiscal 2022, with an emphasis on high-value precision engineered products. It provides a full stack product and solution suite to certain global original equipment manufacturers (OEMs), including OEMs in the United States, China, the Netherlands, and Japan, using a unique global delivery approach.

Through ATL's end-to-end operations, its customers may achieve tangible benefits such as reduced manufacturing costs, improved supply chain management and reduced inventory obsolescence. ATL's capabilities include PCB 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.

It specialises in the manufacturing and design of critical integrated assemblies, sub-assemblies, components, and enclosures for a variety of industry verticals. It serves a combination of established and long product lifecycle businesses, such as industrial, transportation, and medical devices, as well as high growth "sunrise" industries, such as solar, electric vehicles, and hydrogen in the clean energy sector, and digital infrastructure in the communications sector.

Through a client servicing approach that aims to provide completely integrated solutions, powerful manufacturing capabilities, delivering quality products on schedule, supply chain efficiency, and an emphasis on new product development, ATL has maintained long relationships with certain customers. Kyosan India Private Limited, Zonar Systems Inc., Collins Aerospace, e-Infochips Private Limited, The US Malabar Company, Meggitt (Securaplane Technologies Inc.), and Systech Corporation are among ATL's key customers, with whom it has ties for over seven years.

In addition to maintaining ties with existing clients, ATL has grown its major customer base over time, from 54 in FY20 to 62 in FY21 to 81 in FY22, boosting the order book (open order). Its key client base expanded from 72 on November 30, 2021, to 89 on November 30, 2022, resulting in a rise in the order book (open order) from Rs 918.23 crore on November 30, 2021, to Rs 119.25 crore on November 30, 2022. The company faces no concentration risk because its client base is diverse across multiple end-use industries. In certain ways, it is a fully integrated EMS supplier that is constantly expanding its offerings.

It offers a distinct global delivery approach that includes design and production capabilities in both India and the United States. ATL is the only Indian EMS business with fully operational production facilities in the United States, providing it with a distinct competitive advantage in North American markets. ATL has 12 manufacturing facilities in the United States and India, including one in Atlanta, Georgia, one in Fremont, California, seven in Chennai, Tamil Nadu, one in Kanchipuram, Tamil Nadu, and two in Bengaluru, Karnataka. It also has a new facility in Chennai, Tamil Nadu, which is now being built and renovated.

This enables ATL to provide clients with local manufacturing services across these locations based on their needs, as well as utilise favourable policy initiatives such as the Government of India's 'Make in India' initiative, resulting in high customer retention and cost-effective manufacturing. It also benefits from manufacturing cost arbitrage for the global market through manufacturing facilities in India. Furthermore, it stands to gain from the tailwinds of Aatmanirbhar Bharat and the Production Linked Incentive Scheme ("PLI Scheme") (for which ATL is eligible) across verticals, which will help with decreasing import dependence and positioning India as an export powerhouse. This is the Indian market's one-of-a-kind competitive advantage (i.e., Aatmanirbhar Bharat, PLI Scheme, low labour cost, geographical diversification, among others).

Financial

On the financial performance front, for the last three fiscals, ATL has (on a consolidated basis) posted a revenue/net profit of Rs 641.87 crore/Rs 12.32crore (FY20), Rs 690.47 crore/Rs 23.08 crore (FY21), and Rs 840.72 crore/Rs 68.16 crore (FY22). It earned a net profit of Rs 34.19 crore on a turnover of Rs 596.98 crore in the first eight months of FY23, which ended on November 30, 2022, compared to a net profit of Rs 42.30 crore on a turnover of Rs. 543.72 crore. in the corresponding previous period. Its PAT margins improved from 1.89 per cent for FY20 to 8.11 per cent for FY22. However, the company’s major concern is the high debt to equity ratio which is 3.64x against industry average of 0.65x.

Valuation and Outlook

The issue is priced at a P/BV of 5.37x based on its post-IPO NAV of Rs 81.24 per share and a P/BV of 16.53 based on its NAV of Rs 26.37 as of November 30, 2022 (at the upper price band). If we annualized FY22 earnings and attribute them to post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 41.76x. As a result, the issue appears fully priced, but it may get fancy post listing like listed peers. The company has paid a dividend of 10% for the reported periods of the offer document. It will adopt a prudent dividend policy post-listing, based on its financial performance and future prospects.   

ATL is involved in the global supply of crucial and specialised components to industries across the board, with a major focus on clean energy and new innovations in the EV and Hydrogen space. A solid order book of Rs 1190+ crore as of November 30, 2022, highlights the company's future prospects. It may get fancy post listing due to its niche position in the segment it operates in. Because more than 45 per cent of the funds will be used to lower its borrowings, it will save the cost of interest charges, which will benefit its bottom line in the long run. Owing to these factors we recommend investors to apply for long term.