Avalon Technologies
IPO Size: Rs. 865 cr
- Offer for Sale (OFS) of Rs. 545 cr: 60% of OFS is by the promoters (71% stake to drop to 53%) and 40% by 3 individual shareholders (22% combined holding to drop to 12%)
- Fresh Issue of Rs. 320 cr for debt repayment (Rs. 145 cr) and working capital (Rs. 90 cr)
Price band: Rs. 415-436 per share
- Rs. 160 cr pre-IPO placement (Rs 80 cr primary and Rs. 80 cr secondary) undertaken in Oct 2022 at Rs. 358 per share and in Feb 2023 at Rs. 426 per share.
M cap: Rs. 2,757 cr, implying 31% dilution
- 75% of the issue reserved for institutions and 10% for retail
IPO Date: Mon 3rd Apr to Thu 6th Apr 2023, Listing Tue 18th Apr 2023
Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.
Chennai based Electronics Manufacturing Services (EMS) Company
Avalon Technologies manufactures high-value precision-engineered electro-mechanical products for global OEMs, like printed circuit board design, assembly, end-to-end box build, used in industrial, transportation, clean energy, communication, medical and defense sectors. It operates on an asset turnover of 9x as against 5x for Kaynes, having similar product profile, as Avalon is present in higher mix, non-consumer products, with a long product life cycle of 5-15 years. Thus, unlike Dixon, Amber, Elin Electronics, Avalon does not manufacture consumer electronics like mobile, washing machine, AC etc.
Financial Performance
With 63% capacity utilization, FY22 revenue stood at Rs. 858 cr and operating EBITDA (excluding other income) of Rs. 98 cr, leading to 11.6% margin. Excluding exceptional gains, FY22 PBT stood at Rs. 55.5 cr, translating into PBT margin of 6.6%. During 8MFY23, revenue rose 8% YoY to Rs. 585 cr, with operating EBITDA margin maintained at 11.6%. However, PBT (excluding other income) margin dropped to 6%. Annualising 8MFY23 operating PBT of Rs. 35 cr leads to FY23E PBT of Rs.53 cr, which is lower than FY22’s operating PBT of Rs. 55.5 cr, despite surge in revenue.
8MFY23 other income comprised Rs. 8 cr interest, accrued on loans but waived off by related party. And this is not reported in exceptional items! Given the quantum (16% of reported PBT) and timing (just prior to IPO), such transactions can raise questions around corporate governance.
Peer Comparison
Many EMS companies have got listed in the past couple of years, but Syrma SGS and Kaynes are the most comparable peers, given similar business model.
Avalon’s operating parameters is poorer than both these peers, on the following counts:
- Lower Margin: Despite 45% revenue from box build services and 62% exports, which are both higher margin, Avalon’s operating EBITDA margin of 11.6% is significantly lower than Kaynes’ 14.3%. Kaynes has only 28% revenue from box-built and 20% exports, still margin higher than Avalon. Likewise, Avalon’s operating PBT margin of 6% is also lower than Syrma’s 6.5%.
- Smaller Order Book: Avalon’s order book of Rs. 1,190 cr, as of 30.11.22 is 1.4x FY22 revenue, whereas Kaynes’ is much higher at 3.6x.
- Lower Growth: Kaynes is increasing capacity 3.5x, in the next 12 months and Syrma over 2x. Avalon’s capex plans are not as large.
- Purpose of IPO: Both Syrma and Kaynes mainly undertook IPO to fund expansion, while Avalon’s IPO object is mainly OFS, with some debt retirement worth Rs. 145 cr of total Rs. 324 cr (as of 31.1.23).
Expensive Pricing
Syrma SGS, having posted 111% YoY revenue growth and 68% profit growth in 9MFY23, is ruling at FY23E PE multiple of 37x, while Avalon, with 8MFY23 YoY growth rate of 8% and 12% respectively, is being offered at a PE multiple of 46x, (on 8MFY23 annualised performance) despite being half in topline.
Even on FY24E basis, Avalon’s PE multiple of 42x is much higher than Syrma’s 25x. Kaynes is ruling at FY24E PE of 53x, justified by 9MFY23 revenue and profit growth of 63% and 147% YoY respectively. Thus, Avalon’s low growth rates do not justify such high valuation multiples.
Strong industry tailwinds have increased revenue visibility and margins for all players lately. But such high valuation multiples are unsustainable even on an absolute basis, Dixon being a classic example from the recent past.
3rd Apr 2023 at 01:12 pm
30th Mar 2023 at 08:13 pm