Archives: Ipos

Well-diversified business with varied opportunities for expansion.

The company’s business is well-diversified in terms of end-use industries, customers, geographies, and offerings. They have over the years diversified and expanded their customer bases, and developed operations to cater to various end-use industries across multiple product capabilities. They are present in major industry verticals, including clean energy, mobility, industrial, communication, and medical. In FY22 and eight months ended November 30, 2022, the clean energy segment accounted for 20.3% and 23.4% of revenues, respectively. They also cater to industries that require high-precision manufacturing, including aerospace, defense, and medical. Further, the company has also diversified in terms of offerings, namely PCBA, cable assembly and wire harnesses, sheet metal fabrication, machining, magnetics, injection molded plastics, and end-to-end box-build. The diversification on this front allows them to grow in multiple verticals and also shields them from a slowdown in some industries.

Long-standing relationships with marque customers enable to maintain strong financial performance.

Avalon Technologies has built long-term relationships with customers over the years through their diversified product portfolio. As of November 30, 2022, they had an average relationship of eight years, with these customers accounting for 80% of the revenue in FY22 and in the eight months ended November 30, 2022. The company has established and will continue to focus on strengthening long-standing relationships with well-known customers across the end-use industries. Further, Avalon Technologies is a supplier to certain key customers in the railway and aerospace vertical in India. The company also provides final integrated solutions to some of their customers’ end clients through logistics and warehousing support, realizing significant supply chain efficiencies for such customers. Certain customers locate their distribution centers inside the company’s manufacturing facilities in addition to having dedicated lines, thereby ensuring highly efficient distribution operations for customers.

Valuation and Outlook:

Avalon Technologies has a unique global delivery model, comprising design and manufacturing capabilities across both India and the United States. Avalon Technologies is the only Indian EMS company with full-fledged manufacturing facilities in the United States, which gives them a unique competitive advantage in the North American markets. The company also developed strong relationships with certain 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. The company’s strong product capabilities, high quality, and loyal customer base have enabled them to maintain strong financial performance. The current order book (open order) of the company stood at Rs 11,902 mn, with majority of the open orders to be fulfilled within ~1.5 years. The company’s financial stability and positive cash flow have enabled them to meet the present and future requirements of its customers. Further, the company has a track record of sustained growth in revenues and profitability. The company grew its revenue at a CAGR of 14.2% during FY20-22 period, though lower than the industry average of 43.9% registered during FY20-22 period. On the upper price band, the issue is valued at a P/E of 38.8x based on FY2022 earnings which we feel is richly valued. We, therefore, recommend an “Avoid” rating for the issue.

Large and consistent order book of roads, flyovers, and irrigation projects from the Karnataka state government

The primary focus on roads, bridges, flyovers and irrigation projects has helped UIL in gaining technical expertise for undertaking projects of different sizes involving varying degrees of complexities by establishing a modern fleet of construction machinery, equipment, and skilled manpower. As on 31 December, 2022, UIL had an order book of 46 projects (including 24 roads, 7 smart roads, 1 bridge, 9 irrigation projects, 3 civil construction works, and 2 toll plazas) with a total value of Rs. 12,903.8 million, out of which 30 projects are underway and work is yet to begin on the remaining 14 projects. The consistent growth in order book in the past was primarily due to UIL’s ability to successfully bid and win new projects. Technical capabilities, timely performance, reputation for quality and timely delivery, financial strength as well as price competitiveness have enabled the company to successfully bid and win projects. UIL has developed long-standing relationships with clients like PWD,NH, Morth, BBMP, KBJNL,VJNL,KIADB,DHUDA,KPWP & IWTD, and other local bodies.

Strong execution capabilities and experienced management team.

Since fiscal 2015, UIL along with the erstwhile partnership firm, M/s. Udayshivakumar has completed 30 projects, having an aggregate contract value of Rs. 6,846.8 million. UIL has three important ingredients required by any infrastructure company i.e., an in-house design and engineering team, a fleet of modern construction machinery and equipment to ensure high-quality construction, and skilled manpower to execute projects on time. The in-house engineering team of 27 engineers has the necessary skills and expertise in preparing detailed architectural and/or structural designs based on the conceptual requirements of clients. UIL’s management team is well qualified and experienced in the roads, bridges, and irrigation projects’ construction and has been responsible for the growth of their business and operations. The company’s promoter has more than 25 years of experience in the infrastructure sector and has been instrumental in driving growth since the inception of the business.

Valuation and Outlook:

Going forward, UIL intends to capitalize on its experience and continue to selectively pursue larger roads, bridges, and irrigation projects, both independently and in partnership with other players. Inhouse integration has been an integral part of growth over the years and the company seeks to further enhance its in-house competencies by expanding into various functional aspects of projects, thereby eliminating dependence on third parties to avoid risks and minimizing costs associated with these functions. On the financial front, UIL’s EBITDA margin (11.19% in FY21 vs 13.35% in FY22 vs 16.16% in 6MFY23) and PAT margin (4.41% in FY21 vs 6.52% in FY22 vs 9.35% in 6MFY23) have shown an improving trend. However, the company carries concentration risk as it is primarily focused on the State of Karnataka and there has been no meaningful growth in revenues over the past few years. At the upper end of the price band, the issue is valued at a P/E of 11x based on FY2022 earnings which we feel is reasonable. Hence, we recommend a “SUBSCRIBE” rating for the benefit of listing gains.

Higher focus on the engineered quartz segment is set to drive business growth going forward 
It is estimated that the market for EV transmission is expected to grow at a CAGR of 77-82% in the FY2022-27 period in both volume and value terms. To capitalize on this opportunity, the company intends to increase its market share in both the Indian and overseas markets by providing comprehensive transmission solutions and components to EV OEMs and acquiring new customers within this segment. Presently, the company has a contract for the supply of EV transmission systems for one of the leading providers of EVs in India. However, this has not materialized yet commercially. Another area of interest for the company is the UV segment in which its share in total PV production has risen to 35% from 20% earlier. Thus, with higher penetration of DCT in the compact UV and UV segments, the company stands to benefit as it is the only company to manufacture DCT systems in the Indian market.

Strategically located manufacturing facilities
The business has followed a strategic approach in setting up its facilities in a manner that helped them to minimize its costs. Illustrating this, the company’s manufacturing facility – Unit I is located near its key raw material (i.e. blocks of natural stones) where it could source its raw materials more efficiently, thereby reducing the logistics and transportation cost of the business. Moreover, the company has positioned its new manufacturing facility in The Jebel Ali Free Zone, Dubai where it enjoys the benefit of being income tax exempt and having free trade privileges as compared to manufacturing units established in landlocked areas that use rail and roads for transportation.

Valuation and Outlook:

On the way forward, Global Surfaces Ltd. aims on increasing its focus on the engineered quartz segment wherein it commands higher margins as compared to the natural stones segment. While the company’s overall capacity utilization for natural stones stood at 63.0%, 57.2%, and 28.7% for FY20, FY21, and FY22, respectively, the engineered quartz segment’s overall capacity utilization was reported at 70.4%, 64.0%, and 69.0% for the period. On the upper end of the price band, the issue is valued at a P/E of 13x based on FY2022 earnings. However, the declining margin profile of the business (EBITDA margin: 24.7% in FY20 v/s 22.0% in FY22) and deterioration in key return ratios like ROCE (33.0% in FY20 v/s 20.9% in FY22) and ROE (32.5% in FY20 v/s 26.6% in FY22) remain a cause of concern. We, therefore, remain cautious over this issue and recommend an “AVOID” rating.