What you must know about Avalon Technologies IPO

Avalon Technologies Ltd is a company with a 24 years pedigree. The company was incorporated in the year 1999 as a fully integrated Electronic Manufacturing Services (EMS) company. EMS companies typically specialize in manufacturing niche electronic products on contract basis on behalf of large manufacturers. Avalon Technologies has capabilities in delivering box-built solutions in India on an end-to-end basis. In terms of its niche in EMS, Avalon Technologies ltd is focused on high-value precision engineered products. On this front, Avalon Technologies Ltd offers a full stack products and solutions.

The products and solutions offered range from printed circuit board (PCB) design and assembly to the manufacture of complete electronic systems (Box Built). This is likely to be a big area of growth as increasingly Indian companies are look go set up chip factories and chip fabs in India with billions of dollars in investment. Avalon already supplies to global original equipment manufacturers (OEM) across China, the Netherlands, the US, and Japan. Its offerings include PCB design and assembly, cable assembly, wire harnesses, sheet metal fabrication and machining. Apart from manufacturing support, Avalon Technologies also provides high-end design support for critical integrated assemblies, sub-assemblies, components, and enclosures for multiple industry verticals.

Highlights of the IPO issue of Avalon Technologies Ltd

The size of the issue is known, but the number of shares to be sold is not yet known since the price band for this mainboard IPO is yet to be fixed. What we know, as per the Red Herring Prospectus (RHP) is that the total size of the issue of Avalon Technologies will be worth Rs865 crore. This will comprise of Rs320 crore by way of fresh issue and Rs545 crore by way of an offer for sale. The company has put together a formidable team of BRLMs (book running lead managers) to manage the IPO. The issue will be managed by JM Financial, DAM Capital (formerly IDFC Securities), IIFL Securities and Nomura Financial Advisory. The registrar to the issue is Link Intime India Private Ltd.

The company was promoted by Kunhamed Bicha and Bhaskar Srinivasan. Currently the promoters hold 70.75% of the company, which will get diluted post the IPO. The fresh portion of the IPO will be used for repayment / prepayment of loans taken by Avalon Technologies Ltd and its subsidiaries and for meeting working capital needs of the company. EMS business happens to be a high volume and low margin business and hence the business model has to be adapted to the market conditions accordingly.

As per the terms of the offer, 75% of the net offer is reserved for the qualified institutional buyers (QIBs), while only 10% of the total issue size is reserved for the retail investors. The residual 15% is kept aside for the HNI / NII investors . The company has a par value of Rs2 per share and post the IPO, the stock of Avalon Technologies Ltd will be listed on the NSE and on the BSE. Being a fresh issue of equity, combined with offer for sale, the IPO will result in dilution of equity and EPS, apart from transfer of ownership internally.

Key dates for Avalon Technologies IPO and how to apply?

The issue opens for subscription on 03rd April 2023 and closes for subscription on 06th April 2023 (both days inclusive). The basis of allotment will be finalized on 12th April 2023 and the refunds will be initiated on 13th April 2023. In addition, the demat credits are expected to happen on 17th April 2023 and the stock will list on 18th April 2023 on the NSE and the BSE. Avalon Technologies will be the first mainboard IPO of FY24 and would be crucial in setting the tone for FY24. It is hoped that for the IPO market, the FY24 is able to recreate the IPO magic of FY22. Let us now turn to the more practical issue of how to apply for the IPO of Avalon Technologies Ltd.

Investors can apply either through their existing trading account or the ASBA application can be directly logged through the internet banking account. This can only be done through the authorized list of self-certified syndicate banks (SCSB). In an ASBA application, the requisite amount is only blocked at the time of application and the necessary amount is debited only on allotment. Investors can apply in the retail quote (up to Rs2 lakh per application) or in the HNI / NII quota (above Rs2 lakh). Minimum lot sizes will be known after pricing.

Financial highlights of Avalon Technologies Ltd

The table below captures the key financials of Avalon Technologies Ltd for the last 3 completed financial years.

Data Source: Company RHP filed with SEBI

There are few key takeaways from the financials of Avalon Technologies Ltd which can be enumerated as under

1. In the last 2 years, the revenues have grown at the rate of 13% CAGR. However, as India becomes a bigger part of the China Plus story, this segment is likely to see explosion in top line growth.
    

2. The latest year profit margins are much higher than what is normally seen in the case of EMS companies. The PAT margins for the previous year are more in line with industry standards. A lot will depend on the PAT margins that sustain.
    

3. The company has maintained an impressive rate of sweating assets as is evident from the asset turnover ratio.

While pricing of the IPO will matter here, what is more critical is the eventual PAT margins that will sustain. It is normally in the range of 3-4%, but anything above 5% can be exceptionally good and value accretive for the IPO. While the top line potential is immense, profitable growth could hold the key.