Avalon Technologies Positioned for Major Growth, Motilal Oswal Sets ₹690 Target

Motilal Oswal is optimistic about Avalon Technologies and recommends buying the stock with a target price of ₹690 in their report from October 8, 2024.

Recovery on the Way; Positioned for Future Growth

Avalon Technologies (AVALON) stands out in the electronics manufacturing industry because it has a big presence in the US, which has been a competitive advantage. However, the company has faced challenges recently due to economic problems in the US. Avalon has a clear recovery plan and is growing its business in India at the same time.

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• The US business is starting to recover, moving from reducing stock to restocking. Avalon has also secured new orders and clients during this difficult time.
• The company’s Indian business is also set to grow, with new projects in aerospace, defense, electric vehicles (EVs), and industrial sectors. They are expanding into areas like solar energy and servers and are preparing for more demand by opening two new factories in Chennai.
• Avalon’s US and Indian businesses are expected to pick up in the second half of FY25 and into FY26, leading to strong growth.

US Business Recovery

• Avalon saw a drop in revenue, down 16% year-on-year in FY24, due to economic challenges that led to reduced inventory orders from its US customers.
• However, the worst seems to be over, and customers are starting to restock, with some nearing their original demand levels. Avalon expects more orders coming in soon.
• During this tough period, Avalon took strategic steps like cutting costs, moving labor-intensive work to India, increasing business with existing clients, and acquiring new customers.
• Avalon has also made progress in the clean energy sector and expects to benefit from the US government’s Inflation Reduction Act (IRA). A major customer in this sector has received product certifications, and strong supplies are expected to start in the second half of FY25 and grow more in FY26.
• The company has also signed big contracts with two new auto-component clients and expanded into aerospace by signing a 15-year deal with a major global aerospace company.
• With the recovery in the US, Avalon expects its US business to grow at about 25% per year in revenue from FY24 to FY27, with better margins thanks to improved operations.

Indian Business Leads the Way

• While managing the US challenges, Avalon has been focused on growing its Indian operations.
• The company has strengthened its presence in industrial, rail, and automotive sectors and is expanding into high-growth areas like solar energy, defense, and servers.
• Avalon has won major contracts in aerospace, defense, and EV sectors and secured business from leading companies in industrial and energy sectors.
• Avalon is also working with leaders in the rail industry to develop anti-collision systems, which could significantly boost its rail business.
• To meet rising demand, the company is opening two new factories in Chennai. Avalon expects its Indian operations to grow quickly, starting in the second half of FY25, with even more growth in FY26.
• The Indian business is expected to grow at around 32% annually from FY24 to FY27, contributing about 50% of Avalon’s total sales by FY27 (compared to 41% in FY23).

Valuation and Outlook

• Going forward, Avalon is well-positioned for growth because of: (1) recovery in the US with restocking and new orders, (2) continued growth in India with new projects and the launch of new factories, and (3) an increase in higher-value products through new orders or bigger deals with existing clients.
• Avalon is expected to grow its revenue, EBITDA, and adjusted profit by 28%, 54%, and 78%, respectively, over FY24 to FY27. Motilal Oswal maintains a ‘Buy’ rating on the stock with a target price of ₹690 (based on 40 times the projected earnings for June 2026).