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Avalon Technologies Limited
A IPO Analysis
Abuot Business
Business Overview
The company is one of the leading fully integrated Electronic Manufacturing Services (“EMS”) companies with end-toend operations in delivering box build solutions in India in terms of revenue in Fiscal 2022 (source: F&S Report), with a focus on high value precision engineered products. Through a unique global delivery model (source: F&S Report), company provide 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 their end-to-end operations, they believe their customers may achieve tangible benefits such as reduced manufacturing costs, improved supply chain management and reduced inventory obsolescence.
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. Company is specialize in manufacturing and providing design support for critical integrated assemblies, sub-assemblies, components and enclosures for multiple industry verticals. The end-use industries they 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.
Company have developed long relationships with certain of their 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. Company's new product development approach typically starts with component level design engagement with customers. This allows them to be entrenched with the customer from the conception of their product, and subsequently move up the value chain with them by leveraging their fully integrated offerings. Certain of their key customers include Kyosan India Private Limited, Zonar Systems Inc., Collins Aerospace, e-Infochips Private Limited, The US Malabar Company, Meggitt (Securaplane Technologies Inc) and Systech Corporation, with whom them have had relationships for more than seven years. In addition to maintaining our relationships with existing customers, we have increased our key customer base over time from 54 customers in Fiscal 2020 to 62 customers in Fiscal 2021, to 81 customers in Fiscal 2022, increasing our order book (open order) from ₹5,046.72 million as of March 31, 2020, to ₹6,345.79 million as of March 31, 2021, to ₹8,578.69 million as of March 31, 2022. Our key customer base increased from 72 as of November 30, 2021 to 89 as of November 30, 2022, increasing our order book (open order) from ₹9,182.32 million as of November 30, 2021 to ₹11,902.46 million as of November 30, 2022. The company have been recognized by their customers with various awards including “Best Supplier Award for demonstrated sustained performance” from Collins Aerospace, Bengaluru in 2019 and “Supplier Excellence Award for Strategic Partnership” from Faiveley Transport Rail Technologies India Private Limited, a Wabtec Company in 2018. As we have a diversified client base across multiple end-use industries, we have minimal concentration risk.
Our Capabilities and Value Propositions
The company is a fully integrated EMS provider and continue to expand their offerings. Company started in 1999 as a pure play PCB assembler and have invested in their capabilities and become vertically integrated to include multiple offerings as listed below. Company have a significant level of vertical integration in the EMS industry (source: F&S Report), that includes PCB assembly, cable assembly and wire harnesses, sheet metal fabrications and machining, injection molded plastics, magnetics and end-to-end box build. Each of their diversified capabilities stands alone on its own merit, providing customers with a number of options while also enabling their growth in each of these areas. Further, they also provide design and new product development services, leading to an end-to-end service offering. In addition, they have a unique set of customers for each capability.
The company is one of the leaders in the high mix, flexible volume product manufacturing segment and are present across multiple industry verticals with a focus on complex integrated solutions with significant engineering content, leading to profitability (in terms of gross margins/EBITDA margins) (source: F&S Report). Company service a variety of industries including the power, clean energy, railways, aerospace and medical industries, which according to the F&S Report are characterized by long life cycles. Company business has expanded into products such as electric mobility, energy systems, satellite communications, and telematics, among others, that are used in industries such as clean energy and emerging communication technology, which according to the F&S Report are upcoming high growth sectors. These businesses, which have demanding technical requirements, enable them to provide their advanced full spectrum engineering solutions, which enable them to cater to industries such as aerospace and defense, which according to the F&S Report are “high precision” industries.
The continuous learning from their diversified offerings makes them workforce capable and creates a platform for nurturing talent. This ensures cost efficiency in developing special processes for specific product iterations such as ultrasonic welding on piston assemblies for fuel dispensers and vacuum and pressure impregnation system which ensures reliable coating of magnetics and transformers. Company is focus on integrated solutions as opposed to standalone products, led by an engineering-driven new product development approach and sustained by fully integrated in-house capabilities, which enables them to provide holistic solutions to their customers. Company's total income has increased at a CAGR of 14.19% between Fiscal 2020 and Fiscal 2022, from ₹6,531.48 million in Fiscal 2020 to ₹6,958.97 million in Fiscal 2021 and ₹8,516.50 million in Fiscal 2022 and their Profit after Tax has increased at a CAGR of 135.17% between Fiscal 2020 and Fiscal 2022 from ₹123.26 million in Fiscal 2020 to ₹230.82 million in Fiscal 2021 and ₹681.64 million in Fiscal 2022. In Fiscals 2020, 2021 and 2022, their EBITDA was ₹644.79 million, ₹661.43 million and ₹975.48 million, respectively, their EBITDA Margin was 10.05%, 9.58% and 11.60%, respectively, and their PAT Margin was 1.89%, 3.32% and 8.00%, respectively. Company's total income in the eight months ended November 30, 2021 and November 30, 2022 was ₹5,437.20 million and ₹5,964.75 million and their Profit after Tax was ₹423.02 million and ₹341.86 million, during the same periods. Company's EBITDA in the eight months ended November 30, 2021 and November 30, 2022 was ₹582.87 million and ₹680.56 million, respectively and their EBITDA Margin was 10.77% and 11.64% during the same period.
Industry Size - Market
The EMS sector is a sizeable industry globally and in India, and is poised for robust growth over the next five years. While the EMS market in India was valued at ₹1,469 billion (US$20 billion) in Fiscal 2022 and is expected to grow at a CAGR of 32.3% to reach a value of ₹4,502 billion (US$60 billion) in Fiscal 2026, the EMS market in the United States was valued at approximately US$140 billion in 2021 and is expected to grow at a CAGR of 6.1% to reach US$188 billion by 2026. (source: F&S Report)
In particular, the advent of semiconductor manufacturing in India promises significant opportunities for EMS manufacturing, as a key component of such semiconductor manufacturing is PCB design and assembly. In Fiscal 2022, revenue from the India semiconductor industry amounted to ₹2,310 billion (US$31 billion), and the market is expected to grow at a CAGR of 19.9%, to reach a market value of ₹4,768 billion (US$64 billion) in Fiscal 2026. (source: F&S Report)
The company stand to benefit from government initiatives in infrastructure, clean energy and sustainability, both in India and North America. For instance, the rising stringency in the government policies in North America to curb the carbon footprint is witnessing an expansion of electric vehicles and will encourage automakers to opt for electronic manufacturing services. Similarly, the government in India has taken ample initiatives to effectively integrate renewable energy into the present energy mix, which presents an enormous opportunity to establish regional hubs for exporting high-value green products.
Further, India has a unique competitive advantage due to low labor costs, a diverse product offering and geographical diversification. The “Make in India” initiative of the Government of India, a part of the “Aatmanirbhar Bharat Abhiyan” or Self-Reliant India campaign, will provide an additional boost to India’s business operations by encouraging substitution of imports of low-technology products from other countries and generating demand for local manufacturing. The PLI Scheme announced by the Government of India in 2019 expects a total production of ₹11,500 billion including ₹7,000 billion exports in the next five years. These initiatives are estimated to grow the Indian economy at a CAGR of approximately 6.6% (real GDP) and 8.3% (nominal GDP) by Fiscal 2026. We stand to benefit from the tailwinds of ‘Aatmanirbhar Bharat Abhiyan’ and the PLI Scheme across verticals, which would help in reducing import dependence and positioning India as an export hub. (source: F&S Report)
The EMS industry is witnessing a trend to examine practical alternatives to manufacturing in China due to tariff conflicts and the after-effects of the COVID-19 pandemic including supply chain issues, together with rising manufacturing cost structures and the changing geo-political landscape. In addition to China, OEMs are now considering an alternative country for supply chain diversification. India is well positioned, as both, a costeffective option and a high-quality destination for design, to benefit from this “China plus one” strategy.
Competitive Strength
1. End-to-end integrated solutions, providing a “One Stop Shop” for electronics and electro-mechanical design and manufacturing services:
With a focus on our customers’ needs, they offer an integrated and well diversified solution suite comprising PCB design and assembly, manufacture of cable assembly and wire harnesses, sheet metal fabrication, sheet metal machining, plastic injection molding, magnetics, and electro-mechanical integration, which combined allow them to offer end-to-end box build solutions. The company are one of the few EMS companies in India, that offer one-stop services from PCB design and analysis to new product development (“NPD”) and subsequent volume production (source: F&S Report). Company focus on NPD as a means to build long-term customer relationships. Company are able to support NPD initiatives by virtue of their diversified offerings and their ability to catalyze transformation of products from the prototype stage to production. As of March 31, 2022, had 21 customers for our box-build services, which contributed to 44.48% of their revenue from operations in Fiscal 2022 and as of November 30, 2022, company had 29 customers for their box-build services, which contributed to 48.21% of their revenue from operations in the eight months ended November 30, 2022. Further, their capabilities in high precision engineering has led to robust Gross Margins. Set out below are details of their capabilities.
2. High entry barriers to business through our collective cross-industry experience, customer engagement capabilities and leading position in the high mix flexible volume product manufacturing segment:
Company's experience in offering EMS services across product and industry verticals for customers globally for several years serves as an entry barrier in the industry for any new entrants (source: F&S Report). Company have built long term relationships, with certain of their customers extending for more than seven years. As of March 31, 2022, company had an average relationship of more than seven years, with customers who accounted for 80% of their revenue in Fiscal 2022. As of November 30, 2022, company had an average relationship of 8 years, with customers who accounted for 80% of their revenue in the eight months ended November 30, 2022.
Company believe that, given the depth and nature of their engagement with longstanding customers, their customers would not find it easy to switchover to alternative EMS providers as the cost, time and effort for such transitions is high. Particularly in the case of engagements with long lifecycle industries such as power, railways, aerospace, medical, etc. (source: F&S Report), company have expended resources to penetrate the market and sustain the business.
3. Journey So Far:
Similarly, we entered into a relationship through the supply of cable assemblies to a leading OEM of telematics and fleet management equipment in the US, and subsequently, went on to provide a full box build with PCBA. This customer contributed to 8.01% of our revenue from operations in Fiscal 2022 and 4.85% of our revenue from operations in the eight months ended November 30, 2022. Set out below is a timeline of our relationship with the client:
4. Well-diversified business leading to strong growth avenues:
Our business is well-diversified, in terms of end-use industries, customers, geographies and offerings. We have, over the years, diversified and expanded our customer bases, and developed our operations to cater to various end-use industries across multiple product capabilities, as set out below.
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Set out below are details of the total number of customers by end-use industry:
5. Established relationships with marquee customer base:
Company's thrust to become a significant player in the EMS industry has hinged on their performance and ability to build longstanding relationships with their customers. This has been made possible by virtue of their adaptability to changing customer needs and their ability to service product lines right through their life cycle.
6. Global delivery footprint with high quality standards and advanced manufacturing and assembly capabilities:
Company is 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, company have a new facility in Chennai, Tamil Nadu, which is currently under construction and renovation. All their locations have been chosen keeping in mind the availability of skilled labor and a strong pool of engineering/managerial talent.
Company's serve customers primarily in North America, India and Europe through these locations.
Industry Analysis:
Global Electronics and EMS Industry
Overview of global electronics industry:
The electronics market encompasses electronic products, electronic design, electronic components, and electronic manufacturing services. The electronics industry, which has historically been a high-growth sector, contracted by 3.4% in CY2020 due to the decline in private spending induced by COVID-19. The market rebounded in CY2021, as restrictions were lifted, and the market grew by 9%, exceeding pre-pandemic levels.
The global electronics industry was valued at USD 2,494 billion in CY2021. As per Frost & Sullivan’s analysis, the industry is expected to grow at a CAGR of 4.9% to reach USD 3,168 billion by CY2026. Some of the critical factors driving this growth are increasing disposable income, higher internet penetration, inclination of the youth towards next generation technologies, the emergence of e-commerce etc.
Per capita consumption of electronics in major economies
Globally, per capita electronics consumption is increasing and is currently at USD 324. Per capita consumption is highest in North America and Europe and increasing rapidly in major economies such as the U.S., Europe, China, and India, driven by the growing adoption of wireless connectivity for various electronic devices. An increase in investments in Research and Development (R&D) in consumer electronics and technological advancements, coupled with the growing popularity of wearable electronic devices, are also driving the market.
Per capita consumption of electronics in India is only USD 78, 1/4th of the global average. Domestic electronics consumption is increasing rapidly because of urbanization and the adoption of electronic products in Tier 2 and Tier 3 cities. Also, factors such as the economy's stable growth outlook, the digital India program, rising disposable incomes, changing lifestyles, the emerging work-from-home culture, the expansion of organized retail to Tier 2 and Tier 3 cities, and improved electricity and internet infrastructure will provide additional impetus to the industry. Between FY16 and FY22, the country's electronics consumption grew by 14.5%.
Per capita consumption of electronics in major economies, value in USD, CY2021:
Electronics manufacturing contribution to GDP for major countries
Electronics manufacturing contribution to GDP for major countries (U.S., China, India), contribution in %, CY2021
Electronics manufacturing split between in-house and EMS:
Electronics manufacturing has been divided into two categories: products that are produced in-house by OEMs and those that are produced by the EMS companies. Currently, in-house electronic manufacturers account for approximately 65% of the total electronics market, which is a significant contribution. However, in recent years, the involvement of EMS players has expanded significantly, making the job of OEMs easier to manage.
Global electronics manufacturing market - Split between in-house and EMS, value in USD billion, CY2016-CY2026E
Management Of The Company
Kunhamed Bicha: Chairman and Managing Director
Company's Financial Analysis
Profit and Loss
Balance Sheet
Objective Of The Issue
I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Stocx Research Club). I have no business relationship with any company whose stock is mentioned in this article.
Source Of The Data - Company's RHP and Website. Disc - Given IPO analysis is not an recommendation, do your own research before applying.
I am not a SEBI Registered individual/entity and the above research article is only for educational purpose and is never intended as trading/investment advice.
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