Avalon Technologies IPO opens. Worth investing? Here is what analysts say

The price band has been fixed at Rs 415-436 per share of face value of Rs 2 each.

The Rs 865-crore initial public offering (IPO) of Avalon Technologies, an integrated electronics manufacturing services provider, opened for bidding on April 3. The offer has largely generated positive reviews from analysts who say investors should subscribe to the issue.

The company belongs to a high-growth industry and offers valuation comfort compared to listed peers, making Avalon Tech a favourable investment.

Attractive valuation

Sumeet Shah of Reliance Securities said that on FY23 annualised financials, the IPO is valued at 55.5x P/E at the upper price band, which is lower than its peers. Some, however, find this PE multiple not that attractive despite being lower than peers.

The company 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 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. The company intends to deleverage further, which should further boost profitability and improve return ratios,” Shah said in a note.

The price band has been fixed at Rs 415-436 a share of a face value of Rs 2 each.

Avalon intends to raise Rs 865 crore through the IPO that comprises a fresh issuance of shares worth Rs 320 crore and an offer for the sale of shares worth Rs 545 crore by promoters and other shareholders.

Among the key strengths of the company is a well-diversified business, leading to strong growth avenues, established relationships with the marquee customer base and a global delivery footprint with high-quality standards, analysts at Choice Broking said.

They also counted advanced manufacturing and assembly capabilities, strong financial performance, stable cash flows, visible growth profile and experienced board, management and operating team as its strengths.

Risks and concerns include a general slowdown in the global economic activity lately, unfavourable forex currency movements, delayed execution and expansion of order book, difficulty in maintaining profitability and stiff competition.

Avalon said it is going to utilise the fresh issue proceeds for repaying debt (Rs 145 crore) and meeting working capital requirements (Rs 90 crore), besides general corporate purposes.

Debt worries

Rajnath Yadav of Choice Broking, valuing the company at a different metric said, Avalon is demanding an EV/TTM Sales multiple of 3.1x, which is at a discount to the peer average of 6.3x.

“Based on our FY24E forecasts, the demanded EV/Sales is around 2.3x, which seems to be attractive for a company like Avalon, which is operating in high-growth EMS space. Thus, we assign a “Subscribe” rating for the issue,” he added.

However, some see short0term concerns.

Swastika Investmart analysts said Avalon has strong and stable financial performance with improving margins, however, its profit margin for the first eight months of FY22 marked a decline and it also has a high debt ratio.

Cautioning short-term investors, they said the company has a limited number of clients and serves a specific segment where a change in customer preference might affect it adversely.

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