Avalon Technologies IPO review (May apply)

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Review By Dilip Davda on March 29, 2023

•    ATL enjoys a niche place in the segment it operates as a most preferred partner.
•    The company has good long-term relationships with many fortune 500 companies.
•    Based on its latest financial data, the issue appears fully priced. 
•    Improvement in the global economy holds the key for this company going forward.
•    Well-informed investors may park funds for medium to long-term rewards.

ABOUT COMPANY:
Avalon Technologies Ltd. (ATL) is one of the leading fully integrated Electronic Manufacturing Services ("EMS") companies with end-to-end operations in delivering box-build solutions in India in terms of revenue in Fiscal 2022 (source: F&S Report), with a focus on high-value precision engineered products. Through a unique global delivery model (source: F&S Report), it provides a full stack product and solution suite, right from printed circuit board ("PCB") design and assembly to the manufacture of complete electronic systems ("Box Build"), to certain global original equipment manufacturers ("OEMs"), including OEMs located in the United States, China, Netherlands and Japan. 

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 specializes in manufacturing and providing design support for critical integrated assemblies, sub-assemblies, components and enclosures for multiple industry verticals. 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.

ATL has developed long relationships with certain customers through a client servicing model which aims to provide fully integrated solutions, robust manufacturing capabilities, delivering quality products on time, supply chain efficiency as well as a focus on new product development. Certain of ATL's key customers include Kyosan India Private Limited, Zonar Systems Inc., Collins Aerospace, e-Infochips Private Limited, The US Malabar Company, Meggitt (Securaplane Technologies Inc) and Systech Corporation, with whom it had relationships for more than seven years.

In addition to maintaining relationships with existing customers, ATL has increased its key customer base over time from 54 customers in Fiscal 2020 to 62 customers in Fiscal 2021, to 81 customers in Fiscal 2022, increasing the order book (open order). Its key customer base increased from 72 as of November 30, 2021, to 89 as of November 30, 2022, increasing the order book (open order) from Rs. 918.23 cr. as of November 30, 2021, to Rs. 119.25 cr. as of November 30, 2022. As the company has a diversified client base across multiple end-use industries, it has minimal concentration risk. In a way, it is a fully integrated EMS provider and continues to expand its offerings. 

It has a unique global delivery model, comprising design and manufacturing capabilities across both India and the United States (source: F&S Report). ATL is the only Indian EMS company with full-fledged manufacturing facilities in the United States, which gives it a unique competitive advantage in the North American markets (source: F&S Report). ATL has 12 manufacturing units located across the United States and India: one unit in Atlanta, Georgia, one unit in Fremont, California, seven units in Chennai, Tamil Nadu, one unit in Kanchipuram, Tamil Nadu and two units in Bengaluru, Karnataka. In addition, it has a new facility in Chennai, Tamil Nadu, which is currently under construction and renovation. This enables ATL to offer clients local manufacturing services across these locations depending on their needs, and also leverage favourable policy initiatives such as the 'Make in India' program of the Government of India, leading to high customer retention and cost-efficient manufacturing. It also benefits from leveraging manufacturing cost arbitrage, through manufacturing facilities located in India, for the global market. Further, it stands to benefit from the tailwinds of Aatmanirbhar Bharat and the Production Linked Incentive Scheme ("PLI Scheme") (which ATL is eligible for) across verticals, which would help to reduce import dependence as well as position India as an export hub. This is a unique competitive advantage of the Indian market (i.e. Aatmanirbhar Bharat, PLI Scheme, low labour cost, geographical diversification, among others). 

The EMS sector is a sizeable industry globally and in India, and is expected to grow at a significant pace. While the EMS market in India was valued at Rs. 1469 billion (US$20 billion) in Fiscal 2022 and is expected to grow at a CAGR of 32.3% to reach a value of Rs. 4502 billion (US$60 billion) in Fiscal 2026, the EMS market in the United States was valued at approximately US$140 billion in 2021 and is expected to grow at a CAGR of 6.1% to reach US$188 billion by 2026. (Source: F&S Report). As of November 30, 2022, it had an overall of 2004 employees (including contract labour and consultants). Improvement in the global economy holds the future prospects of this company. Currently, it enjoys a shifting of global demand from China to India and thus it has bright prospects ahead. 

ISSUE DETAILS/CAPITAL HISTORY:
The company that originally planned an IPO for Rs. 1025 cr. has already done pre-IPO placement worth Rs.160 cr. (from fresh equity shares portion) and is now coming with a revised IPO size of Rs. 865 cr. (approx.19839442 shares at the upper cap), consisting of a fresh equity issue worth Rs. 320.00 cr. (approx. 7339444 shares at upper cap) and an offer for sale of Rs. 545.00 cr. (12500000 shares (at upper cap). It has announced a price band of Rs. 415 -Rs. 436 for an equity share of Rs. 2 face value. The issue opens for subscription on April 03, 2023, and will close on April 06, 2023. The minimum application is to be made for 34 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 30.39% of the post-IPO paid-up capital of the company. 

From the net proceeds of the fresh equity shares issue, ATL will spend Rs. 145.00 cr. for repayment/prepayment of certain borrowings, Rs. 90.00 cr. for working capital and the rest for general corporate purposes. The company has allocated 75% for QIBs, 15% for HNIs and 10% for Retail investors. 

The joint Book Running Lead Managers (BRLMs) to this issue are JM Financial Ltd., DAM Capital Advisors Ltd., IIFL Securities Ltd. and Nomura Financial Advisory and Securities (India) Pvt. Ltd. while Link Intime India Pvt. Ltd. is the registrar of the issue. 

Having issued initial equity shares at par, the company issued further equity shares in the price range of Rs. 7.34 to Rs. 592.66 between March 2001 and February 2023 (on the basis of Rs. 2 FV). It has also issued bonus shares in the ratio of 24 for 1 in December 2003, and 4 for 1 in March 2007. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. NIL, Rs. 0.01, Rs. 2.01, Rs. 2.15, Rs. 2.33, Rs. 3.79, Rs. 23.90, and Rs. 61.59 per share. 

Post-IPO, ATL's current paid-up equity capital of Rs. 11.59 cr. will stand enhanced to Rs. 13.06 cr. Based on the upper band of the IPO pricing, the company is looking for a market cap of Rs. 2846.76 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a turnover/net profit of Rs. 653.15 cr. / Rs. 12.33 cr. (FY20), Rs. 695.90 cr. / Rs. 23.08 cr. (FY21), and Rs. 851.65 cr. / Rs. 68.16 cr. (FY22). For the first 8 months of FY23 ended on November 30, 2022, it earned a net profit of Rs. 34.19 cr. on a turnover of Rs. 596.98 cr. against a net profit of Rs. 42.30 cr. on a turnover of Rs. 543.72 cr. for the corresponding previous period. Its PAT margins of 5.73% for 8M of FY22 mark a decline from 7.78% of 8M FY21. 

Its PAT margins improved from 1.89% for FY20 to 8.00% for FY22. However, declined PAT margins for 8M of FY22 and the higher debt ratio of 3.64 against an industry average of 0.65 are the major concerns. 

For the last three fiscals, ATL has reported an average EPS of Rs. 7.36 and an average RoNW of 60.58%. The issue is priced at a P/BV of 16.53 based on its NAV of Rs. 26.37 as of November 30, 2022, and at a P/BV of 5.37 based on its post-IPO NAV of Rs. 81.24 per share (at the upper cap).

If we annualize FY23 earnings and attribute it to post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 55.54 and based on FY22 it is at a P/E of 41.76. Thus the issue appears fully priced, but it may get fancy post listing like listed peers. 

DIVIDEND POLICY:
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. 

COMPARISON WITH LISTED PEERS:
As per offer documents, the company has shown Dixon Techno, Amber Enterprises, Syrma SGS and Kaynes Techno as their listed peers. They are currently trading at a P/E of 92.45, 368.30, 137.90, and 79.30 (as of March 29, 2023). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
The four BRLMs associated with the offer have handled 73 public issues in the past three years (including the ongoing fiscal). Out of which 25 issues closed below the offer price on the listing date.

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