Avalon Technologies coming with an IPO to raise upto Rs 909 crore

Avalon Technologies

• Avalon Technologies is coming out with a 100% book building; initial public offering (IPO) of 2,08,43,373 shares of Rs 2 each in a price band Rs 415-436 per equity share.
  
• Not less than 75% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 10% for the retail investors.
  
• The issue will open for subscription on April 3, 2023 and will close on April 6, 2023.
  
• The shares will be listed on BSE as well as NSE.
  
• The face value of the share is Rs 2 and is priced 207.5 times of its face value on the lower side and 218.00 times on the higher side.
  
• Book running lead managers to the issue are JM Financial, DAM Capital Advisors, IIFL Securities and Nomura Financial Advisory and Securities (India).
  
• Compliance Officer for the issue is Dr. Rajesh V.
  

Profile of the company

The company 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, with a focus on high value precision engineered products. Through a unique global delivery model, 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 its end-to-end operations, its customers may achieve tangible benefits such as reduced manufacturing costs, improved supply chain management and reduced inventory obsolescence.

The company’s capabilities include PCB design and assembly, cable assembly and wire harnesses, sheet metal fabrication and machining, magnetics, injection molded 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 cater 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.

The company has developed long relationships with certain of its 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. Its new product development approach typically starts with component level design engagement with customers. This allows it to be entrenched with the customer from the conception of their product, and subsequently move up the value chain with them by leveraging its fully integrated offerings.

Proceed is being used for:

• Prepayment or repayment of all or a portion of certain outstanding borrowings availed by the company and one of its Material Subsidiaries, i.e. Avalon Technology and Services (ATSPL).
  
• Funding the working capital requirements of the company.
  
• General corporate purposes.
  

Industry overview

Electronics is one of the fastest growing industries in the country. The total electronics market (domestic electronics production and imports of finished goods) in India was valued at Rs 9,263 billion ($124 billion) in FY22, and is expected to grow at a CAGR of 17.9% to reach Rs 17,902 billion ($240 billion) in FY26. The landscape of the industry is changing significantly, and revised cost structures have shifted the focus of multinational companies onto India. At present, the Indian government is striving to strengthen manufacturing capabilities across several electronics industries and to fill in the gaps in order to make the Indian electronics sector globally competitive. India is positioned as both a high-quality destination for design and a cost-effective option. Low manufacturing costs, a skilled workforce and a vast geographical area are some of the driving elements behind the development of India's electronics ecosystem. Also, the manufacturers are slowly shifting their focus on product mix from high-volume, low-margin (HVLM) products to low-volume, high-margin (LVHM) products.

The demand for electronic goods in India has grown significantly in recent years. The domestic electronics consumption market is estimated at Rs 8,117 billion ($109 billion) in FY22, and is expected to grow by 10.5% to reach Rs 12,091 billion ($162 billion) in FY26. An increasing electronics penetration in semiurban and rural markets, a shift in lifestyle among the Gen Y population, and adoption of smart gadgets are some key drivers supporting domestic consumption. Domestic electronics production accounted for approximately 69% of the total electronics market in FY22, valued at Rs 6,376 billion ($86 billion), and is expected to grow to approximately 85% by FY26, valued at Rs 15,159 billion ($ 203 billion), owing to various government initiatives and the development of India's electronic ecosystem. India has the potential to be one of the most attractive manufacturing destinations and supports the objective of the 'Make in India for the World' policy. The government is spearheading various policies and initiatives in the electronics industry to build the complete electronics manufacturing ecosystem, in order to propel India into the top five countries for electronics production and the top three countries for electronics consumption.

Pros and strengths

Well-diversified business leading to strong growth avenues: The company’s business is well-diversified, in terms of end-use industries, customers, geographies and offerings. It has, over the years, diversified and expanded its customer bases, and developed its operations to cater to various end-use industries across multiple product capabilities. It is well diversified and are present in virtually every major industry vertical, including clean energy, mobility, industrial, communication and medical. It services a variety of industries, including the power, clean energy, railways, aerospace and medical industries. This diversified industry presence hedges against global market and industry cycle volatilities. It has also penetrated sunrise industries such as clean energy with presence in the solar, hydrogen, and electric vehicles industries. In Fiscal 2022 and in the eight months ended November 30, 2022, clean energy accounted for 20.28% and 23.36% of its sales, respectively. It also caters to industries which require high precision manufacturing, including aerospace, defense and medical.

Established relationships with marquee customer base: The company’s thrust to become a significant player in the EMS industry has hinged on its performance and ability to build longstanding relationships with its customers. This has been made possible by virtue of its adaptability to changing customer needs and its ability to service product lines right through their life cycle. Its product portfolio has helped it forge strong relationships with its major clients. It has established and will continue to focus on strengthening longstanding relationships with well-known customers across the end-use industries that it caters to. It has a number of reputed multinational companies as its customers across industry vertical, thus indicating the quality of its client base. The varied applications of its products have helped it build a wide customer base across many end-use industries. This is complemented by a strong client value delivery process, with strong focus on up-selling and cross-selling.

Global delivery footprint with high quality standards: The company currently operate through 12 manufacturing units, spread across two states in the US (California and Georgia) and two states in India (Karnataka and Tamil Nadu), and are supported by 1,783 permanent employees and 221 persons employed as contract workers/temporary employees, as of November 30, 2022. In addition, it has a new facility in Chennai, Tamil Nadu, which is currently under construction and renovation. All its locations have been chosen keeping in mind the availability of skilled labor and a strong pool of engineering/managerial talent. It serves customers primarily in North America, India and Europe through these locations. The company’s manufacturing facilities in EMS are equipped with modern and high-speed equipment that can handle surface mount components and through-hole components for PCBs. Its machinery capabilities allow it to reduce manual intervention in the manufacturing process, thereby improving product quality of the PCBs.

Experienced board, management and operating team: The company’s highly experienced and dedicated management team also enables it to capture market opportunities, formulate and execute business strategies, manage client expectations, and proactively manage changes in market conditions. The quality and experience of its management team has been critical in achieving its business results and allowing it to make strategic and timely business decisions in response to evolving customer needs and market conditions. In particular, its management team has sound cross-functional expertise across product design and technology and deep industry experience. In addition to its senior management team, its middle management team and skilled workforce, comprising 1,589engineers which includes 26 sales and marketing professionals and other skilled workers as of November 30, 2022, provide it with the depth of expertise and managerial skills required to manage its business.

Risks and concerns

Dependent on certain customers for portion of revenues: There is no guarantee that the company will retain the business of its existing key customers or maintain the current level of business with each of these customers. The loss of these customers or a loss of revenue from sales to these customers may materially affect its business, financial condition, results of operations and cash flows. While it catered to more than 200 customers in Fiscal 2022 and more than 210 customers as of the eight months ended November 30, 2022, reliance on certain key customers for significant revenue may generally involve several risks. These risks may include, but are not limited to, reduction, delay or cancellation of orders from its significant customers, failure to renew contracts with one or more of its significant customers, failure to renegotiate favorable terms with its key customers or the loss of these customers entirely, all of which would have a material adverse effect on the business, financial condition, results of operations and future prospects of the company. In order to retain some of its existing customers it may also be required to offer terms to such customers which it may place restraints on its resources.

Face significant competitive pressures: The company faces significant competition in its business. The markets for its products are characterized by factors such as rapid technological change, the development of new end products and their rapid obsolescence, evolving industry standards and significant price erosion over the life of a product. It may not be able to maintain its competitiveness in any of these areas with respect to any of its products. Its efforts to offset pricing pressures, including strategies to collaborate with or integrate its services into its end customers’ product development process to produce tailored solutions for new end products, advance its technological capability, or enhance its production efficiency to reduce costs, may not be successful. Its existing and potential competitors may equal or surpass it in terms of their financial, production, sales, marketing and other resources. If it fails to compete effectively in the future, its business and prospects for growth could be materially and adversely affected.

Depend on availability of timely and cost-efficient transportation: The company’s operations depend on the timely transport of raw materials to its manufacturing facilities and of its products to its customers in India and overseas. In some cases, its orders are on ex-works basis and transportation of products from its facilities is the responsibility of the customer. It typically rely on a variety of common carriers such as cargo/passenger airlines, shipping lines and trucking companies to transport its materials from its suppliers and finished products to its customers. While it does not enter into formal agreements with such third party logistics provider, it executes rate contracts with such providers. Problems suffered by any of these common carriers, including natural disasters, pandemics, labor problems, increased energy prices, or criminal activity, could result in shipping delays for products or materials, increased costs or other supply chain disruptions, and could therefore have a negative impact on its ability to receive products from suppliers and deliver products to customers, resulting in a material adverse effect on its business and operations.

Dependence on Subsidiaries exposes to significant risks: The company currently conducts a significant portion of its operations through its Subsidiaries. It rely on Sienna for expanding its market share and business in the United States, and consequently its revenues, cash flows, investment income, financing proceeds, dividends and other permitted payments. A significant diminution in the value of its investment in its Subsidiaries may have an adverse effect on its financial condition, results of operations and prospects. As its subsidiaries are separate and distinct legal entities, they have no obligation to pay dividends and may be restricted from doing so by law or contract, including applicable laws, charter provisions and the terms of its financing arrangements. It cannot assure that its Subsidiaries will generate sufficient profits and cash flows, or otherwise be able to pay dividends to it in the future. In addition, its financial condition may be adversely affected, if its equity stake in its Subsidiaries is diluted or if they cease to be its Subsidiaries.

Outlook

Incorporated in 1999, Avalon Technologies is a leading fully integrated Electronic Manufacturing Services (EMS) company. It has end-to-end capabilities in delivering box-build solutions in India, focusing on high-value precision engineered products. The company is one of the leaders in the segment in India in terms of revenue in Fiscal 2022. Through a unique global delivery model, Avalon offers 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 countries like China, Netherlands, United States, and Japan. The offerings of Avalon Technologies include PCB design and assembly, cable assembly and wire harnesses, sheet metal fabrication and machining. On the concern side, given the nature and high engineering quality of its products, its customers have high and exacting standards for product quality as well as delivery schedules. Adherence to quality standards is a critical factor in its manufacturing process as any defects in the products manufactured by the company or failure to comply with the technical specifications of its customers may lead to cancellation of the orders placed by its customers.

The company is coming out with an IPO of 2,08,43,373 equity shares of face value of Rs 2 each. The issue has been offered in a price band of Rs 415-436 per equity share. The aggregate size of the offer is around Rs 865.00 crore to Rs 908.77 crore based on lower and upper price band respectively. On performance front, the company’s total income increased by 22.38% from Rs 6,958.97 million in Fiscal 2021 to Rs 8,516.50 million in Fiscal 2022 primarily due to an increase in revenue from operations. The company’s profit for the year increased by 195.32% from Rs 230.82 million in Fiscal 2021 to Rs 681.64 million in Fiscal 2022. Going forward, the company intends to leverage its experience and expertise to focus on upcoming, high growth sectors, such as clean energy and emerging communication technologies. It aims to focus on high margin value products with medium to long life cycles that need precision engineering, expertise to innovate, the ability to deliver flexible manufacturing plans, and rapid development in the NPD stage, such as the clean energy and emerging communication technologies sectors.