Avalon Technologies IPO opens today: Should you subscribe to the issue?

The Rs 865 crore initial public offering (IPO) kicks off for subscription on Monday, April 23, 2023. The electronic manufacturing services (EMS) is selling its shares in the fixed price band of Rs 415-436 apiece and the issue can be subscribed till Thursday, April 6.

Incorporated in 1999, Avalon Technologies has end-to-end capabilities in delivering box-build solutions in India, focusing on high-value precision-engineered products. It has 12 manufacturing units located across the US and India offering a variety of solutions and services to its clients.

The brokerage firms are majorly positive on the issue and suggest subscribing to it citing its reasonable valuations, health growth prospects, solid track record and sound balance sheet. However, a few analysts have raised concerns over its dependence on a few major clients, increase in raw material cost and disruptions in continuous operations.

Its scope of work requires complex designing, engineering, component procurement and manufacturing which creates long lead times and consequently entry barriers. It is also likely to benefit from the ‘Make in India’ and the PLI schemes of the government which promote local manufacturing of components and electronics systems, said Reliance Securities.

"The IPO is valued lower than its peers. It intends to deleverage further which should further boost profitability and improve return ratios. Considering the healthy business prospects for the Indian EMS industry, the company’s high return ratios and similar margins relative to peers and valuation comfort," it said with a 'subscribe' rating to the issue.

Avalon Technologies' issue includes a sale of up to 7,339,450 fresh equity shares aggregating to Rs 320 crore, while existing shareholders and promoters will offload 12,500,000 equity shares amounting to Rs 545 crore through an offer for sale (OFS).

Net proceeds from the fresh issue will be utilized towards the prepayment or repayment of all or a portion of certain outstanding borrowings availed by the company and one of the materials subsidiaries; funding the working capital requirements and general corporate purposes. Proceeds from OFS will go to the selling shareholders.

Ahead of its three-day bidding process, the company raised Rs 389.25 crore from 24 anchor investors by allocating 89.27 lakh equity shares at a price of Rs 436 apiece, a circular uploaded on BSE said. For other bidders, the lot size was fixed at 34 equity shares, costing Rs 14,824 a lot. Retail investors can bid for a maximum of 13 lots or 442 equity shares.

At a higher price band, Avalon is demanding an EV/TTM sales multiple of 3.1 times, which is at discount to the peer average of 6.3 times. Based on our FY24E forecasts, the demanded EV/Sales is around 2.3 times, which seems to be attractive for a company like Avalon, which is operating in the high-growth EMS space, said Choice Broking, which has a subscribe tag on it.

EMS is expected to grow at a CAGR of 32 per cent to reach Rs 4,50,000 crore. Its debt-to-equity ratio is above the average of its industry peers. its unique offering and B2B model help Avalon with long-term relationships with its diverse customers, ensuring incremental order book and steady margin, said Canara Bank Securities, with a 'subscribe for long term' rating.

For the period ended on March 31, 2022, the company reported a total revenue of Rs 851.65 crore with a profit after tax (PAT) of Rs 68.16 crore. It had an order book worth Rs 1,039 crore as of June 30, 2022.

The company has reserved 75 per cent of the shares for qualified institutional bidders, whereas 15 per cent of shares will be allocated to non-institutional investors (NIIs). Retail investors will get the remaining 10 per cent of the shares.

Avalon operates a business with high entry barriers and has a global delivery footprint. The company has a strong order book. It has strong and stable financial performance with improving margins. However, its PAT margin for the first eight months of FY22 marked a decline, and it also has a high debt ratio currently, said Swastika Investmart.

"It has a limited number of clients and serves a specific segment where a change in customer preference might affect it adversely. The issue is fully priced at a P/E ratio of around 39 times, after considering all the factors, we will recommend to subscribe to this issue for high-risk Investors for the long term," it said.

JM Financial, DAM Capital Advisors, IIFL Securities and Nomura Financial Advisory & Securities (India) are the book-running lead managers to the issue, whereas Link Intime India has been appointed as the registrar to the issue. The stock will be listed at both BSE and National Stock Exchange (NSE) on April 18.

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