Fundamental Analysis Of Avalon Technologies: The Indian EMS market is expected to grow rapidly at an annual rate of 32.3% and reach USD 80 billion by FY25–26. One such company in this sector is Avalon Technology, which differs from other players. Read this article to learn more about this company, its financials, and how it stands out from other players.

Fundamental Analysis Of Avalon Technologies – Company Overview

Avalon Technologies, was established in 1999, it is one of India’s leading fully integrated Electronic Manufacturing Services (EMS) companies, a prominent player in the Electronic Manufacturing Services (EMS) domain, and boasts 14 strategically positioned manufacturing units across the United States and India that integrate manufacturing, warehousing, and logistics, distinguishing itself as a leading EMS provider with a global footprint.

With a diverse product portfolio catering to industries such as clean energy, transportation, industrials, communication, and medical devices, Avalon serves as a one-stop destination for all EMS requirements.

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Through a distinctive global delivery model, Avalon offers end-to-end solutions, encompassing PCB design and assembly, cable assembly and wire harnesses, sheet metal fabrication and machining, magnetics, injection-molded plastics, and complete box-build services for electronic systems.

Unique among its Indian competitors, Avalon is the sole EMS company with manufacturing facilities in the United States. Its client base extends to global OEMs across the United States, China, the Netherlands, and Japan, reflecting Avalon’s reputation. 

Segment Analysis 

Clean Energy: Avalon is operating in key product categories in the clean energy sector, such as solar, hydrogen, and electric vehicles (EVs).

Mobility: Avalon collaborates with clients in air, rail, and automotive transportation to create resilient and sustainable systems. It manufactures complex sheet metal fabrications, machining, and injection-molded plastics for applications in the aerospace sector.

Industrials: Avalon’s integrated design and manufacturing solutions help innovate across technologies such as power electronics and transformers.

Communication: Avalon supports 5G network equipment manufacturers with concept-to-realisation and turnkey builds. Its integrated vertical manufacturing for products helps its customers use 5G technologies.

Medical & Others: The Company offers PCBAs for oxygen concentrators, PCBAs for blood analyzer instruments, and cables for flow meters, etc.

(Source: Annual Report)

Industry Overview

India continues to remain a bright spot in the global economic landscape. It leverages its demographic dividend, digital transformation, and innovation potential to drive sustained growth.

According to the economic survey, India’s GDP growth is forecast to reach 6.5% in FY24 and will be one of the fastest-growing economies, driven by a progressive regulatory environment, a strong industrial policy, a deleveraged private sector, and sustained capital expenditure.

The Indian EMS market was estimated at USD 20 billion in the fiscal year 2021–22. The market is expected to grow rapidly at an annual rate of 32.3% and reach USD 80 billion by FY25–26.

India’s electronics industry is gaining global recognition, particularly for its research and development hubs, design and engineering services, and Electronics Systems Design and Manufacturing (ESDM) capabilities.

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Fundamental Analysis Of Avalon Technologies – Financials

Revenue & Net Profit

The financial statement of the company indicates that revenue has increased by 12 per cent from ₹841 crore to ₹945 crore from FY22 to FY23, respectively. On a 3-year CAGR basis, the company grew by 10.15 percent. 

The company’s net profits have decreased by 20 per cent, from ₹67 crores in FY22 to ₹53 crores in FY23. On a 3-year CAGR basis, the company has grown by 45 percent. The decrease in the net profit ratio is due to higher profit in the previous period on account of income arising in respect of the exceptional item.

The EMS industry is experiencing strong favourable trends in India, which caused the order book to increase by 43.5% to Rs. 1,231 crores as of March 31, 2023, compared to Rs. 858 crores as of March 31, 2022, which gives them greater revenue visibility for the mid-term.

The table below exhibits the revenue and profits of Avalon over the last 4 years.

Fiscal YearRevenue from operations (In Crores)Net Profit (In Crores)
202394553
202284167
202169123
202064212
3-year CAGR10.1544.97

Profit Margins

The financials reported an operating margin of 12% and a net profit margin of 5% in FY23, compared to 12% and 8%, respectively, in FY22. From a four-year perspective, operating margins stand at 11% and net profit margins at 4.5%.

The margins have been increasing constantly in the past years as a result of deliberate choices, a focus on integrated solutions with substantial engineering content, and a commitment to high-margin sectors such as aviation and clean energy. The fall in NPM in the current year was due to a fall in net profit.

The table below exhibits the profit margins of Avalon over the last 4 years.

Fiscal YearOperating Profit Margin (%)Net Profit Margin (%)
2023125
2022128
2021103
2020102
4-year average114.5

Return Ratios

As for its return ratio, Avalon’s business generates a good return on capital employed and equity. Its RoCE and RoE stood at a similar scale at 17% respectively, in FY23, indicating efficient utilization of resources and good returns.

The RoCE has remained stable, and the ROE has decreased compared to last year due to an increase in equity on account of the IPO. From a longer perspective, the ratios have improved.

The table below shows the ROE and RoCE of Avalon for the last 4 years:

Fiscal YearReturn on Capital Employed (%)Return on Equity (%)
20231717
20222369
20211643
20201825
4-year average18.538.5

Leverage Ratios

Looking at the company’s leverage ratio, we can see that the debt-to-equity ratio has decreased. This indicates that the company is relying less on borrowed capital for financing its business and can retain more of its revenue. The debt was reduced by a significant amount compared to 3.37 times in FY22 due to the repayment of borrowings from the proceeds of the IPO.

The company’s interest coverage ratio has strengthened, with ICR standing at 3.65 times in FY23 and the 4-year average of 3. This indicates that the company can pay its interest easily.

The table below shows the D/E and interest coverage ratio of Avalon for the last 4 years:

Fiscal YearDebt / Equity (Times)Interest Coverage Ratio (Times)
20230.573.65
20223.374.37
20214.932.65
20205.341.69
4-year average3.553.09

Fundamental Analysis Of Avalon Technologies – Key Metrics

ParticularsAmountParticularsAmount
CMP529Market Cap(Cr)3,472
EPS7.12Stock P/E81.1
RoE48RoCE28
Promoter Holdings50.98%FII Holdings5.70%
Debt to Equity0.57P/B6.46
Operating Profit Margin12%Net Profit Margin5%

Fundamental Analysis Of Avalon Technologies – Future Plans

  • India is especially at an inflection point, which is set to expand the country’s market share in the global EMS sector from 2.2% to 7% by 2026, creating a huge opportunity.
  • The company has an outlook of doubling its revenues over the next three years and achieving robust revenue growth in the future.
  • Avalon will maintain an optimal mix of customer bases across India and the US to onboard high-value businesses in the US and execute them in India at a low cost.
  • The company has plans to grow traditional businesses by increasing wallet share through cross-selling and upselling. 
  • Avalon commenced the expansion of two manufacturing plants with a total area of approx. 1.6 Lakh sq. ft. at MEPZ-Chennai, which will predominantly be utilized for big box-builds

Conclusion

In the article, “Fundamental Analysis Of Avalon Technologies” we have looked into its business, how it performed in the last four years, and what its plans are. The EMS sector has huge opportunities in the current world, with the fastest-growing markets being India and the US, giving Avalon additional benefits.

Further analysis is required before investing to understand the risk & return characteristics of the company. What do you think about this company? I hope to hear from you in the comments section below.

Written By Ashish

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