The maiden public issue of Avalon Technologies witnessed a tepid response from investors despite improved equity market conditions. The IPO garnered bids for 2.53 crore equity shares against an offer size of 1.14 crore shares subscribing 2.21 times on April 6, the final day of bidding.
Retail investors, who has 10 percent reservation in the IPO, bought 84 percent shares from the quota allotted to them, while high net worth individuals subscribed to 41 percent of the portion reserved for them.
Qualified institutional buyers (QIBs) put in bids 3.57 times the portion set aside for them; 75 percent of the offer was reserved for them.
The electronic manufacturing services company, which provides end-to-end operations in delivering box-build solutions in India, aims to raise Rs 865 crore via a public issue that comprises a fresh issuance of shares worth Rs 320 crore and an offer for sale of Rs 545 crore by selling shareholders including promoters.
Avalon already raised Rs 389.25 crore via anchor book on March 31, at Rs 436 per share.
The price band for the offer, which opened on April 3 and closes today, was fixed at Rs 415-436 per share.
Most brokerage houses recommended Avalon issue with long-term perspective given the expected strong growth in the EMS industry and likely benefits from Make in India and PLI schemes.
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Avalon is an integrated EMS provider with good diversification among end-user industries and clients with strategic manufacturing locations. Its scope of work requires complex designing, engineering, component procurement and manufacturing which creates long lead times and consequently entry barriers.
"It is likely to benefit from the ‘Make in India’ and the PLI schemes of the Govt which promotes local manufacturing of components and electronics systems. The company intends to deleverage further which should further boost profitability and improve return ratios," Reliance Securities said.
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 at 55.5x P/E on annualised FY23 financials, the brokerage house recommended subscribing to the issue.
The company largely generates its revenues from the United States (63 percent of revenues), catering to the sunrise industries such as clean tech, power automation, and mobility. The company has an order book of Rs 1,190 crore as on November 2022 with a customer base of 80.
Overall, the EMS industry is expected to grow at a CAGR of 32 percent to reach Rs 4.5 lakh crore by FY26, from Rs 1.47 lakh crore in FY22.
"Its debt to equity ratio seems to be above the average of its industry peers. However, its unique offering and B2B model help Avalon with long-term relationships with its diverse customers, ensuring incremental order book and steady margin. We recommend subscribing for long-term," Canara Bank Securities.
Avalon has strong and stable financial performance with improving margins; however, its PAT margin for the first eight months of FY23 marked a decline, and it also has a high debt ratio currently. Secondly, it has a limited number of clients and serves a specific segment where a change in customer preference might affect it adversely, said Swastika Investmart which also recommended to subscribe this issue for high-risk investors for the long term.
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