About the Company and the Services Provided: -

Incorporated as Avalon Technologies Private Limited is 1999, the name of the company was subsequently changed to Avalon Technologies Limited in 2022.

The company is one of the leading fully integrated Electronic Manufacturing Services (“EMS”) companies with end-to-end operations in delivering box build solutions (box build solutions mean designing and manufacturing the enclosure, installing a PCBA, installing cables and the cable harness assembly and even installing electrical systems), with a focus on high-value precision engineered products.

Through a unique global delivery model, it provides a full stack product and solution suite (full stack mean end to end), right from printed circuit board (“PCB”) design and assembly to the manufacture of complete electronic systems, to certain global OEMs, including OEMs located in the United States, China, Netherlands, and Japan. Through their end-to-end operations, their customers can achieve benefits such as reduced manufacturing costs, improved supply chain management, and reduced inventory obsolescence.

Their capabilities also include cable assembly and wire harnesses, sheet metal fabrication and machining, magnetics, injection molded plastics, and end-to-end box build of electronic systems.

They specialize in providing design support and manufacturing for critical integrated assemblies, sub-assemblies, components, and enclosures for multiple industry verticals. The end-user industries they cater to include 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.

Their 12 manufacturing units located across the United States and India, enables them to offer clients local manufacturing services across these locations depending on their needs, and also leverage favorable policy initiatives such as the ‘Make in India’ program of the Government of India, leading to high customer retention and cost-efficient manufacturing.

Images to Understand the Business Better:

Industry Outlook: -

China leads the global EMS business with a 46.7% share in 2021. It is a global leader due to operational cost benefits, availability of a large number of highly skilled personnel, infrastructure, logistical advantages etc. However, post-COVID, many global electronics manufacturers are contemplating a China + 1 strategy and are looking for alternate manufacturing locations for exports, creating tremendous investment potential for countries like Vietnam, India and Philippines etc.

The EMS market in the USA was around USD 140 billion in CY2021 and it is expected to grow at a CAGR of 6.1% to USD 188 billion by CY2026.

The EMS market is a sizable industry in India and is expected to grow at a significant pace. There is a strong push from the government to develop India into an ideal location for electronics manufacturing in the region. Under the National Policy on Electronics (NPE), India announced various programs in 2019, including EMC 2.0 to enhance the electronics manufacturing infrastructure and offer incentives to manufacture more products that promote the industry in India.

The PLI program, which benefits electronics manufacturing firms, was introduced in 2020. In Chennai, in the southern state of Tamil Nadu, an electronics manufacturing corridor is being built. The EMC Smart City investment in Greater Noida is planned at USD 162.7 million. Kaynes, Jabil, Dixon, Bharat FIH, Flextronics, SFO, Elin, Rangsons and Centum are among the companies that have invested in manufacturing capacity as a result of the ”Make in India” policy’s efforts.

The government has recently come up with an incentive scheme for the development of a semiconductor and display manufacturing ecosystem in India. In CY 2021, India's EMS market was estimated at around USD 20 billion with a market share of 2.2% and it is expected to grow at a CAGR of 32.3% to USD 80 billion with a market share of 7.0% by CY2026.

So, the industry outlook seems to be very good.

The Objects of the Offer: -

The issue is divided into 2 parts:

OFS amounting to INR 545 crores (this money will not go to the company but go to the selling shareholders)

Fresh issue amounting to INR 320 crores (this money will go to the company)

The main objects of the fresh issue are:

1. Prepayment or repayment of all or a portion of certain outstanding borrowings availed by the Company and one of their Material Subsidiaries, i.e. Avalon Technology and Services Private Limited (“ATSPL”); - INR 145 crores

2. Funding the working capital requirements of the Company – INR 90 crores and

3. General corporate purposes.

Key Financials: -

Valuation: -

1. The company’s PE on the upper price of Rs. 436 comes to 38.6 times and the industry average PE is 76.4 times, indicating an undervaluation.

Key Risks: -

1. Any increase in the cost of the raw material or components, delay, shortage, interruption or reduction in the supply of raw materials and major production inputs to manufacture products can adversely affect the business of the company.

2. The company is dependent on a limited number of customers for a significant portion of its revenues. Revenues generated from sales to top 10 customers were 64.57% of the total revenue for FY22. Loss of one or more such customers, the deterioration of their financial condition or a reduction in their demand for the company's products could adversely affect the company's business.

3. Company faces significant competition in business. The markets for 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.

4. The company may be subject to significant risks and hazards when operating and maintaining manufacturing facilities, for which the company’s insurance coverage might not be adequate.

5. There are outstanding litigations against the Company, Promoters, Directors and Subsidiaries. An adverse outcome in any of these proceedings may affect the company's reputation and standing and impact the company's business.

6. The Company has in the past been in non-compliance with certain reporting requirements under FEMA.

7. The Company has certain contingent liabilities that have not been provided for in the financial statements, which if materialized, may adversely affect the company's financial condition.

IPO Details: -

1. The IPO is open for subscription from 3 April 2023 to 6^th April 2023.

2. The IPO has a lot size of 34 shares and a retail individual investor can apply for a minimum of 1 lot worth Rs. 14,824 and a maximum of 13 lots worth Rs. 1,92,712.

3. The share is trading at a GMP of 2.29% as of the time of writing this blog.