Electronic manufacturing services company Avalon Technologies is unlikely to make investors happy on its debut on the bourses on April 18, as experts attributed the sentiment to the lukewarm response from investors other than QIBs, rich valuations in the highly competitive industry, and fear of further margin erosion.
The initial public offering of Avalon has managed to get good response on its last day of subscription only from qualified institutional investors and barring them, the response was muted.
The offer was subscribed 2.21 times during April 3-6 as the portion set aside for qualified institutional investors was booked 3.57 times, whereas high networth individuals and retail investors bought 41 percent and 84 percent shares of the allotted quota, respectively.
"We expect company to list at par on listing day," Astha Jain, Senior Research Analyst at Hem Securities, said.
"The company's well-diversified business leading to strong growth avenues along with established relationships with marquee customer base, has seen it have a global delivery footprint with high quality standards and advanced manufacturing and assembly capabilities. However, looking at the B2C market size as compared to B2B which the company is into, valuation looks little bit on higher side," Astha reasoned.
Manish Chowdhury, Head of Research at Stoxbox, also said according to the grey market, the premiums have diluted over time and the issue is expected to open on a flat note on the listing day.
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He feels the tepid response from investors other than the QIB category would weigh on the listing performance of Avalon Technologies.
Moreover, he believes the issue was richly valued, considering the fact company's revenue growth lagged industry average along with the increasing competitive intensity in the electronic manufacturing services industry.
Avalon IPO shares now traded flat to negative in the grey market, analysts on anonymity said. The grey market is an unofficial platform for trading in IPO shares and generally investors look at the grey market to get hint about expected listing price.
The sharp profit booking in the equity markets after nine-day run might also impact the listing performance. The BSE Sensex fell more than 600 points at the time of writing this article, after over 2,800 points rally in previous nine consecutive sessions.
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"Though the EMS industry, in which the company operates, offer a long-term potential, the market does not look ready to ascribe it a P/E multiple of ~40x in the highly competitive and fragmented marketplace where further erosion in margins cannot be ruled out," Manish said.
With India still lagging its global peers in terms of per capita consumption of electronics and contribution of electronics manufacturing to GDP set to increase (from 2.7 percent in CY21 to 4.7 percent in CY26), investors should definitely look out for opportunities in this space at reasonable valuations, he advised.
In the eight-month period ended November FY23, Avalon reported a 19.2 percent year-on-year decline in consolidated profit at Rs 34.2 crore on a high base due to exceptional income in the year-ago period. The profit margin dropped to 5.84 percent from 7.81 percent in the same period.
Consolidated revenue increased 8 percent YoY to Rs 585 crore in the same period, with the maximum contribution from clean energy, mobility and transportation, and industrials segments. At the operating level, EBITDA (earnings before interest, tax, depreciation, and amortisation) grew by 16.8 percent YoY to Rs 68 crore, with the margin expansion of 87 basis points.
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In FY22, Avalon clocked a 195 percent growth in PAT at Rs 68.2 crore and a 22 percent rise in revenue at Rs 841 crore, compared to the previous year. Net profit margin jumped 476 bps to 8.1 percent in the same period, while EBITDA increased 47.5 percent to Rs 97.5 crore, with the margin expanding 202 bps to 11.6 percent.
"Although the overall outlook for Avalon Technologies is positive, investors should be cautious given the current market conditions. The electronics manufacturing industry is known for its volatility, and raw material costs may adversely affect the business," Krishna Raghavan, Founder of Unlistedkart, said.
Avalon Technologies has raised Rs 865 crore via public issue last week, of which the fresh issue proceeds of Rs 320 crore will be utilised for repaying debts and working capital requirements.
The end-to-end electronic manufacturing service solutions provider has an impressive client list, including Kyosan India, Zonar Systems Inc, Collins Aerospace, e-Infochips, The US Malabar Company, Meggitt (Securaplane Technologies Inc), and Systech Corporation.
It has 12 manufacturing units spread across the US and India, offering a wide range of services from cable assembly and wire harnesses to sheet metal fabrication, machining, magnetics, and injection molded plastics.
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