Well-diversified

Over the years, Avalon has continually expanded its technological expertise in manufacturing electronic products for a range of industries. The company is virtually present in every major industry vertical, including clean energy, mobility, industrial, communication and medical. Avalon also services a variety of industries, including power, clean energy, railways, aerospace – businesses that have long life cycles.

The company has also achieved diversification in its offerings, including PCBA, cable assembly and wire harnesses, sheet metal fabrication, machining, magnetics and injection moulded plastics, and end-to-end box-build. Each of these verticals exist as separate profit and loss centres, besides serving as captive suppliers for offering EMS products. This also helps the company grow in multiple industry verticals. These ensure a diversified revenue stream, and a hedge in the global market against the ups and downs in any particular industry.

“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. The diversification and expansion of our portfolio is primarily driven by the needs of our customers and technological advancements in the industry, and enables us to grow in multiple verticals. Our evolving portfolio has helped accelerate our growth, enabling us to retain both new and existing customers,” notes Bicha.

The company penetrated the sunrise industry such as clean energy with a presence in the solar, hydrogen, and electric vehicles industries. In Fiscal 2022, clean energy accounted for 20.28 per cent of its sales. In FY22, 62 per cent of Avalon’s revenues came in from sales in the US at Rs529.6 crore.

Upscaling revenue streams

The company also has a wide customer base across India and the US with 48 of them in the US and 33 customers in India. Avalon has been able to upscale within its existing clients too, which has enabled it to develop a number of reputed multinational companies as its customers. The company has a strong client value delivery process, with a strong focus on upselling and cross-selling.

For example, Avalon was awarded a new product development for cable harnesses by an entity in motor and drive technology. Thereafter, Avalon ably moved up the value chain to provide PCB assemblies as well, due to its performance and relationship building skills. In another example, Avalon’s initial engagement with one division of a major original equipment manufacturing (OEM) through its metal division enabled it to successfully penetrate multiple divisions of the same OEM through the supply of both sheet metal fabricated parts and injection moulded plastics.

The company has a roster of marquee customers both in India and overseas. Some of its customers include Kyosan India Private Limited, Faiveley Transport Rail Technologies India Private Limited, a Wabtec company, TransDigm Technologies India Private Limited, Zonar Systems Inc., and Collins Aerospace in the mobility industry, Caire Inc, in the medical industry, e-Infochips Private Limited and Haas Automation, Inc. in the industrial sector, as well as TMEIC and Ohmium India Private Limited in the clean energy sector.

“Our long-standing partnerships and high delivery standards cement our relationships and our customers would not find it easy to switchover to alternative EMS providers as the cost, time and effort for such transitions is high,” adds Bicha.

Given the long lead time for customer acquisition, onboarding, prototyping, OEM approvals and production, coupled with the criticality and requirement for high reliability anti-collision signalling systems, there are significant barriers to entry for railway projects. The customer shared their proprietary information for this project with Avalon pursuant to a non-disclosure agreement. This customer is among Avalon’s top five customers in Fiscal 2022.

Such relationships are built with the aerospace industry too which has a development lead time that can extend to several months, if not years depending on the complexity of the product under consideration. In the aerospace industry typical product development has to pass through a number of stages starting with sample development, transition development, pilot lot and subsequently production.

In another instance, the company 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 box build products. This customer contributed 8.01 per cent of its revenue from operations in Fiscal 2022.

Big opportunities

The EMS industry is poised for robust growth over the next 5 years. Besides, the EMS market in India was valued at Rs1,46,900 crore in Fiscal 2022 and is expected to grow at a CAGR of 32.3 per cent to reach a value of Rs4,50,200 crore in Fiscal 2026. The EMS market in the US was valued at approximately $140 billion in 2021 and is expected to grow at a CAGR of 6.1 per cent to reach $188 billion by 2026, according to a Frost and Sullivan report.

With the government looking to encourage domestic manufacturing including semi-conductor manufacturing, this segment promises significant opportunities for EMS manufacturing, as PCB design and assembly is a key driver. In fact, in Fiscal 2022, revenue from the India semiconductor industry stood at Rs2.3 lakh crore while the market is expected to grow at a CAGR of 19.9 per cent to reach a market value of Rs4.7 lakh crore, according to the Frost & Sullivan report.

Avalon stands to benefit from government initiatives in infrastructure, clean energy and sustainability, both in India and North America. For instance, the rising stringency in 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 Indian government 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. India further has a unique competitive advantage due to low labour costs, a diverse product offering and geographical diversification.

Further, with the ‘China plus one’ policy, the EMS industry is witnessing a trend of examining practical alternatives to manufacturing in China due to tariff conflicts and the after effects of the Covid-19 pandemic, supply chain issues, along with rising manufacturing cost structures and the changing geopolitical landscape. In addition to China, OEMs are now considering an alternative country for supply chain diversification.

‘India is well positioned, as both a cost-effective option and a high-quality destination for design, to benefit from the ‘China plus one’ strategy for supply chain diversification,’ noted the Frost and Sullivan report.

Sturdy fundamentals

In Fiscal 2021, Avalon’s gross margin, EBITDA margin, ROCE and fixed asset turnover were one of the highest among its EMS industry peers. Further, among business-to-business focused EMS peers, Avalon had one of the highest revenues from operations in Fiscal 2021.

As of 31 March 2022, the company had 21 customers for its box-build services, which contributed to 44.48 per cent of its revenue from operations in Fiscal 2022. Further, its capabilities in high precision engineering have led to robust gross margins.

Avalon’s total income has increased at a CAGR of 14.19 per cent from Fiscal 2020 to Fiscal 2022. One of its key metrics is the order book which has increased from Rs634 crore as of FY21 to Rs1,039 crore as of 30 June, 2022. Further, its orders are expected to be fulfilled in the next 12-18 months.

“Our financial stability and positive cash flow from operations and a strong balance sheet give customers the confidence that Avalon will be able to support them in terms of both capabilities and capacities, thereby increasing customer stickiness,” says RM Subramanian, CFO at Avalon.

The company has an experienced board, management and operating team, and skilled manpower. Continuous learning from its diversified experience enhances the knowledge level of its workforce, making it capable of delivering solutions and creating talent. The promoters Bicha and Srinivasan have decades of pioneering experience in the field of EMS.

Its key management team, includes Kesavan P, Michael Robinson, Shamil Bicha, OJ Sathish, Savita R Ganjigatti, Rajesh V and Arjun Balakrishnan. This highly experienced team enables Avalon to capture market opportunities, formulate and execute business strategies, manage client expectations, and proactively manage changes in market conditions.

Future ready

Going forward, the company aims to sustain and cater to high growth sunrise industry sectors such as clean energy and emerging communication technologies. With a manufacturing footprint in verticals such as industrials, communication, mobility, and medical and others, which are all growing segments, future revenue growth appears bright and assured.

Avalon's unique delivery model with its automated product manufacturing carried out in the US and the labour-intensive aspect in India has enabled it to offer a huge value proposition for its clients. Over the years, the company has built a strong position in the marketplace. Avalon is looking at raising funds through an initial public offering to retire a part of its debt and raise working capital.

“Our strong and growing customer base and our focus on up-selling and cross-selling has been instrumental in our success to date and is expected to be a strong driver of our future growth and to help expand our market share, develop new products and enter newer markets,” concludes Bicha.