Avalon Technologies Limited

About the company:

 Business Overview:

Avalon Technologies Limited is one of the leading fully integrated Electronic Manufacturing Services (EMS) companies with end-to-end capabilities in delivering box-build solutions in India in terms of revenue in Fiscal 2022, with a focus on high-value precision-engineered products. It is engaged in providing a full stack product and solution suite, right from PCB (Printed Circuit Board) design and assembly to the manufacture of complete electronic systems (Box Build), to certain global original equipment manufacturers (OEMs), including OEMs located in the US, China, Netherlands, and Japan. Other offerings of the company include cable assembly and wire harnesses, sheet metal fabrication and machining, magnetics, and injection molded plastics. The end-use industries it caters to include a mix of established and long product lifecycle industries, such as industrial, mobility, and medical devices, and high growth “sunrise” industries, such as solar, electric vehicles, and hydrogen in the clean energy sector and digital infrastructure in the communications sector.

IPO Details:

The objective of the issue:

The company intends to utilize the net proceeds received from the fresh issue towards: 

Revenue Contribution by segment as of 30th November 2022:

Key Strengths:

• Avalon Technologies is the only Indian EMS company with full-fledged manufacturing facilities in the US. This gives them a unique competitive advantage in the North American markets.

• The Electronic Manufacturing Services (EMS) sector is a sizeable industry globally, and in India, it is expected to grow at a 3-Year CAGR of 32.30% to reach a value of approximately $60 billion in Fiscal 2026.

• PCB design and assembly plays a critical role in the semiconductor industry. The demand for electronic manufacturing services companies is anticipated to rise with the growth of the semiconductor industry. The semiconductor industry is expected to grow at a 3-Year CAGR of 19.90% to reach a value of approximately $64 billion in Fiscal 2026.

• They are well diversified and are present in virtually every major industry vertical, including clean energy, mobility, industrial, communication, and medical

Financial Snapshot:

 Risks:

• The company and its subsidiaries have had negative cash flows from operating activities in the past. Significant negative cash flows in the short term could materially affect the ability to operate the business and future growth prospects.

• Over the years, more than 50% of the revenue is received through the subsidiary located in US. If there were any unforeseen issues with the subsidiary, it could negatively impact the company’s overall revenue stream.

• A significant portion of the company’s revenue is generated by a limited number of customers. During the 8 months ended 30-11-2022, the top 5 customers contributed 37.14% and the top 10 customers contributed 53.93% of the total revenue.

• Copper is one of the key raw materials required for PCB assembly. The potential increase in China’s demand for copper over the next few months poses a significant risk to the depletion of copper inventories, the emergence of a supply-demand imbalance, and rising copper prices. Due to this, the company may face a shortage in the supply of copper thereby posing a significant risk to the slowdown or shutdown of company operations.

• Comparison of debt-to-equity ratio with listed peers: (FY 22) 

Avalon Technologies Limited has a relatively high debt-to-equity ratio which poses a significant risk to its financial solvency. 

Conclusion:

Avalon Technologies Limited is well diversified and is present in virtually every application segment in India which is a key advantage over its peers. The company’s high debt-to-equity ratio and multiple uncertainties in the future pose potential risks to the company’s growth. A significant portion of the company’s revenue is focused on key customers and dependent on material subsidiaries. The growth prospects of the EMS sector in India over the next 3 years are dependent on various factors. The company comes at higher earnings valuation.

Currently, we advise our investors to AVOID subscribing to the Avalon Technologies Limited IPO. Nevertheless, given the company’s growth potential, investors can reconsider the investment decision once the company’s financials improve and the company’s growth prospects can be determined with certainty.