Tight IPO pricing, existing shareholders’ abysmal cost of holding and promoters’ indifferent corporate governance practice weigh against capital appreciation prospects.
Why should a promoter having more than two decades of experience in the business appoint his aged father as an advisor for a fat annual remuneration of Rs 1 Cr plus on the eve of his company’s public issue?
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AVALON TECHNOLOGIES OFFER AT A GLANCE |
|
| Offer Type | Book Built |
| Platform | Main Frame |
| Fresh Issue | Rs 320 Cr (73,39,450 shares) |
| Offer for Sale | Rs 545 Cr (1,25,00,000 shares) |
| Face Value | Rs 2 |
| Price Band | Rs 415 – 436 |
| Market/Bid Lot | 34 Nos. |
| Implied M-Cap | Rs 2,847 Cr (at cap price) |
| Implied Eq-Cap | Rs 13.05 Cr |
| Implied Free Float | 48.76% |
| Lead Manager | JM Financial, DAM Capital, IIFL Securities and Nomura Financial |
| Registrar | Link Intime |
| Listing At | BSE and NSE |
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INDICATIVE ISSUE SCHEDULE |
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| Opening : 03-Apr-2023 | Closing : 06-Apr-2023 |
| Allotment : 12-Apr-2023 | Refunding : 13-Apr-2023 |
| Demat Credit : 16-Apr-2023 | Trading : 17-Apr-2023 |
The Offer
The Chennai-based Avalon Technologies Ltd (ATL) is entering the capital market with an initial public offer of Rs 865 Cr which translates into 1,98,39,450 equity shares at the cap price. The offer consists of a fresh issue of Rs 320 Cr (73,39,450 equity shares) from the company and an Offer for Sale of Rs 545 Cr (1,25,00,000) from seven existing shareholders, including the two promoters. The offer is being made through the book-building route with a price band of Rs 415-436 for Rs 2 paid-up share.
Applicants should bid for a minimum lot of 34 shares and multiples thereof. The shares are proposed to be listed on the main frame of BSE & NSE on Monday, April 17, 2023. JM Financial, DAM Capital, IIFL Securities and Nomura Financial are acting as book running lead managers to the offer and Link Intime has been appointed as registrar to the issue. The bidding opens on Monday, April 3 and closes on Thursday, April 6, 2023.
The company proposes to utilise the proceeds from the fresh issue towards repayment of loans (Rs 145 Cr) availed by ATL and one of its subsidiaries viz. Avalon Technology and Services Private Ltd; funding of working capital requirements (Rs 90 Cr) and general corporate purposes.
Lineage
ATL was incorporated in 1999 at Chennai as a manufacturing facility catering mainly to ABV Electronics Inc, USA (doing business as Sienna Corporation). The company commenced operations of pure play Printed Circuit Board (PCB) design and assembly in India in the year 2000. The inception of the business had originally commenced with the setup of ABV Electronics Inc, for manufacturing of PCB assemblies at Fremont, California in the US in 1995 by the promoters.
Over the years, ATL has expanded its activity into sheet metal fabrication, cable assembly and wire harnesses, magnetics, electromechanical assemblies, injection molded plastics along with in-house design capabilities, thus making the company a fully integrated player in the Electronics Manufacturing Services (EMS) industry.
Though ATL was formed by T P Imbichammad and Mariyam Bicha (parents of Kunhamed Bicha) in 1999, the IPO document presents Bengaluru-based Kunhamed Bicha and Texas (USA)-based Bhaskar Srinivasan, who hold 17,430,799 and 13,505,309 equity shares, respectively, equivalent to 30.08% and 23.30%, respectively, of the equity share capital of the company, as promoters. Kunhamed Bicha and Bhaskar Srinivasan claim to have more than two decades of experience in the field of EMS, and they have been instrumental in the growth of the company.
In September 2019 T P Imbichammad, Mariyam Bicha, Kunhamed Bicha, Bhaskar Srinivasan and Anand Kumar sold their stake in Avalon Technology and Services Private Ltd (ATSPL) to ATL for a consideration of about Rs 11.15 Cr and ATSPL became a wholly owned subsidiary of ATL. Subsequently, the company also acquired ABV Electronics Inc (doing business as Sienna Corporation) and Sienna ECAD Technologies Private Ltd from the promoters and associates. Two of the entities with which the promoters had earlier associated, namely Sienna Technology & Services Private Ltd and Sienna ECAD LLC, have been wound up in recent years.
How will the promoter, who is new to the investing public, treat the public company can be gauged from the proposal put up by the promoters of ATL. The main promoter’s father, T P Imbichammad, has been appointed as the Chairman Emeritus and an advisor to the company for a period of one year with effect from July 12, 2022. For the advisory services rendered by him, he is entitled to receive a remuneration of Rs 1 Cr, and certain facilities including access to office, chauffeur driven car, communication facilities, etc. To pay more than Rs 1 Cr to him, what’s his qualification and contribution to the company? The offer document is silent about it.
Key Management
India-based promoter Kunhamed Bicha (54), who holds 30% of the pre-IPO equity capital, is the Chairman and Managing Director of the company. He co-founded Sienna and currently serves as its chief executive officer. He holds a bachelor’s degree in mechanical engineering from PSG College of Technology and a master’s degree in science (industrial engineering) from Wichita State University.
US resident Bhaskar Srinivasan (56), who controls 23.3%, is designated as a Non-executive Director of the company. He co-founded Sienna and currently serves as its president. He holds a bachelor’s degree in mechanical engineering from Annamalai University, a master’s degree in business administration from Cochin University of Science and Technology and a master’s degree in science (industrial engineering) from Wichita State University. Prior to joining ATL, he was associated with Applied Materials, Inc.
Luquman Veedu Ediyanam (59), who has 9.23% stake in the company, is a Non-executive Director of the company. He holds a bachelor’s degree in technology (mechanical engineering) from University of Calicut. He has been associated with the company since March 2017. He currently is, and has been the legal partner and the managing director at Dhafir Technologies LLC, United Arab Emirates since its establishment in 1970.
Sareday Seshu Kumar (54) who holds 5.86% of the pre-IPO equity is also designated as a Non-executive Director. He has a bachelor’s degree in arts from Osmania University. Prior to joining ATL, he was associated with Emantras Interactive Technologies Private Ltd as its founder and chief executive officer.
Venkataramani Ananthramakrishnan (54), who is currently serving as the managing director of the BSE/NSE listed IP Rings Ltd since 2010, has been roped in as an Independent Director.
Stakeholders
Of the post-IPO equity capital of Rs 13.06 Cr, the promoter group will have 51.24%, associate Anand Kumar will hold 3.73% and two non-executive directors will have 8.46%. The cost of holding for this 63% equity will be extremely negative while the IPO investors would be holding at Rs 436 a piece at the cap price.
The promoters’ contribution is locked-in for 18 months and the entire pre-Offer equity share capital other than the promoter’s contribution will be under lock-in for a period of six months. There shall be a lock-in of 90 days on 50% of the shares allotted to the anchor investors from the date of Allotment, and a lock-in of 30 days on the remaining 50% of the shares allotted to the anchor investors.
Business Track
ATL is a fully integrated EMS provider and continues to expand its offerings. Though started in 1999 as a pure play PCB assembler, it has invested in capabilities to make multiple offerings. The company has a significant level of vertical integration in the EMS industry that includes PCB assembly, cable assembly and wire harnesses, sheet metal fabrications and machining, injection molded plastics, magnetics and end-to-end box build. Further, it also provides design and new product development services, leading to an end-to-end service offering.
ATL is said to be one of the leaders in the high mix, flexible volume product manufacturing segment and is present across multiple industry verticals with a focus on complex integrated solutions with significant engineering content. It services a variety of industries including the power, clean energy, railways, aerospace and healthcare. ATL’s 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 are upcoming high growth sectors.
Through a unique global delivery model , the company provides 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 its end-to-end operations, the company believes its customers would achieve tangible benefits such as reduced manufacturing costs, improved supply chain management and reduced inventory obsolescence.
In terms of revenue, Box Build contributed more than 55% in fiscal 2022 followed by PCB (25%), Cables (10%), Metal (4%), Magnetics (3%), Design (2%) and Plastics (1%). The company claims to have an order book of Rs 1,190 Cr.
Financial Track
ATL’s revenue has increased at a CAGR of 14% between fiscal 2020 and fiscal 2022, from Rs 653 Cr in fiscal 2020 to Rs 696 Cr in fiscal 2021 and Rs 852 Cr in fiscal 2022. Profit after Tax has increased at a CAGR of 135% between fiscal 2020 and fiscal 2022 from Rs 12 Cr in fiscal 2020 to Rs 23 Cr in fiscal 2021 and Rs 68 Cr in fiscal 2022. The company’s EBIDTA margin fell from 12% to 10.6% in fiscal 2021 but improved to 13% in fiscal 2022.
The company’s bottom line in fiscal 2022 was boosted by an exceptional income of around Rs 20 Cr as Government grant on account of the pandemic. The company’s borrowings have surged from Rs 248 Cr in March 2020 to Rs 316 Cr in November 2022. Also, the company is yet to join the dividend list.
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Avalon Techno Consolidated Financials (in Cr) |
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| Period Ended |
Nov-22 |
Mar-22 | Nov-21 | Mar-21 |
Mar-20 |
| Months |
8 |
12 | 8 | 12 |
12 |
| Revenue |
585 |
841 | 541 | 690 |
642 |
| Operating Profit |
74 |
99 | 60 | 68 |
67 |
| OPM% |
12.7 |
11.8 | 11.1 | 9.9 |
10.5 |
| Other Income |
12 |
11 | 2 | 5 |
11 |
| EBIDTA |
86 |
110 | 62 | 74 |
79 |
| EBIDTA % |
14.5 |
13 | 11.5 | 10.6 |
12 |
| Interest |
20 |
25 | 16 | 27 |
45 |
| Depreciation |
12 |
17 | 11 | 16 |
16 |
| Except Gain/ (-Loss) |
-6 |
18 | 18 | -2 |
-3 |
| Tax |
9 |
14 | 7 | 3 |
2 |
| Net Profit |
34 |
67 | 42 | 23 |
12 |
| Equity (Implied) |
13 |
2 | 2 | 2 |
2 |
| Reserves (Implied) |
505 |
86 | 93 | 58 |
45 |
| Borrowing |
316 |
294 | 270 | 295 |
248 |
| Fixed Assets |
141 |
114 | 98 | 104 |
101 |
Valuation
ATL has kept a price band of Rs 415-436 for Rs 2 paid-up share. The cap price discounts the company’s net earnings more than 65 times, EBIDTA around 26 times and revenue 3.4times.
During the second half of last year, three EMS players tapped the primary market. Of these, Kaynes Technology and Syrma SGS are currently discounted higher than ATL. The most recent one, Elin Electronics, which was incidentally lead managed by the same investment banker J M Financial along with Axis Capital is currently traded at less than half the IPO price at a very moderate discounting as compared to its industry peers.
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HOW AVALON COMPARES WITH SELECT PEERS |
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Financials |
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| (Amount in Cr) |
Avalon Tech |
Kaynes Tech | Syrma SGS |
Elin Eletron |
| Market Cap |
2847 |
5570 | 4534 |
613 |
| Borrowing |
294 |
170 | 194 |
102 |
| Fixed Assets |
114 |
119 | 300 |
188 |
| Revenue |
841 |
707 | 1020 |
1094 |
| Other Income |
11 |
3 | 13 |
1 |
| EBIDTA |
110 |
98 | 107 |
80 |
| Interest |
25 |
26 | 7 |
13 |
| Net Profit |
48 |
42 | 54 |
39 |
| Equity Cap |
13 |
58 | 177 |
25 |
| Reserves |
504 |
815 | 1272 |
471 |
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Stock Features |
||||
| Current Price (Rs) |
436 |
958 | 257 |
123 |
| Face Value (Rs) |
2 |
10 | 10 |
5 |
| Book Value |
79.27 |
150.1 | 81.94 |
99.88 |
| Promoter Stake % |
51.24 |
63.57 | 47.27 |
32.93 |
| Debt/Equity |
0.57 |
0.19 | 0.13 |
0.21 |
|
Profitability |
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| OPM % |
11.8 |
13.4 | 9.3 |
7.2 |
| Net Margin % |
5.7 |
5.9 | 5.2 |
3.6 |
| Cash EPS |
9.32 |
9.43 | 4.10 |
10.78 |
| Earnings Per Share |
6.69 |
7.17 | 3.00 |
7.89 |
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Return |
||||
| RONW % |
33.4 |
4.8 | 3.7 |
12.1 |
| ROCE % |
21.2 |
8.1 | 5.3 |
15.4 |
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Discounting |
||||
| Price/Earnings |
65.2 |
133.7 | 85.5 |
15.7 |
| Price/Cash EPS |
46.8 |
101.6 | 62.6 |
11.5 |
| Price/Book Value |
5.5 |
6.4 | 3.1 |
1.2 |
| Price/EBIDTA |
25.9 |
57.0 | 42.3 |
7.7 |
| Price/Revenue |
3.4 |
7.9 | 4.5 |
0.6 |
| Price/Fixed Assets |
24.9 |
46.7 | 15.1 |
3.3 |
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Distribution |
||||
| Dividend % |
0 |
0 | 0 |
20 |
| Yield % |
0 |
0 | 0 |
0.8 |
| Pay-out % |
0 |
0 | 0 |
12.7 |
Concerns
- In fiscals 2021 and 2022 the company has faced significant shortage of key components, specifically in relation to semiconductors, integrated circuits, MOSFET devices and transistors. Further, it imports nearly a half of its raw materials and components in foreign currencies. Shortage of material supply and exchange rate fluctuations could adversely impact the profitability.
- The Electronic Manufacturing Services industry is characterized by rapidly changing technology, evolving industry standards, new service and product introductions and changing customer demands. Hence, the ultra high P/E multiple cannot hold long.