Smallcap Electronic Stock Below Rs 550 Recommended To Buy, Motilal Oswal Sees 16% Upside In Near Term

Motilal Oswal has initiated coverage on a smallcap stock, Avalon Technologies on expectations of US business to bounce back in the medium term. It believes that traction Also, the brokerage said, near-term headwinds persist in the company. Motilal has set a target price of Rs 610, which implies a potential of 16% upside in the near term. Currently, Avalon is at Rs 522.95 apiece.

On Tuesday, Avalon's share price ended at Rs 522.95 apiece, down by 0.51%.

Avalon is a global, vertically integrated electronic manufacturing services company. Its customers span both industry leaders and innovative ventures.

According to Motilal's report, AVALON is uniquely placed in the Indian EMS sector as it is the only company with a manufacturing base in the US (~23% of total production) and serves various emerging and fast-growing end-user industries such as clean energy, mobility, and medical technology.

At present, the company is witnessing a slowdown in its US business, resulting in a revenue decline and losses in the region. The poor performance of its US business (reported loss of ~INR200m in 9MFY24) has overshadowed the healthy performance of its Indian operations, as per Motilal

However, Motilal added, "We believe that the execution of new orders and an increase in order flows, led by positive traction in the end-user industries, will drive a recovery in the US business in the medium term. We estimate a ~30% revenue CAGR for the US business over FY24-26."

Motilal highlighted that US business forms a major part of AVALON's revenues - ~59%/53% of consolidated sales in FY23/9MFY24. However, the business is currently facing a leaner patch, reporting a loss of INR200m in 9MFY24. The weak demand environment (with high inflation and interest rates) in the US is leading to sluggishness in business.

Although Motilal expects the weakness to persist in the near term (with US business expected to record revenue decline for FY24), the positive momentum in end-user industries (especially clean energy) and the execution of new/expected orders should drive recovery in the medium term.

Motilal expects the traction in business and cost optimization measures to lead to a recovery in financial performance in 1HFY25, which will further improve in 2HFY25.

Also, Motilal expects AVALON to be a key beneficiary of the rising shift toward clean energy. Moreover, the company is also witnessing traction in the industrial segment and has received a large order for the industrial surveillance system from a new major customer in the US.

Further, AVALON expects potential orders from a mega CNC machine manufacturing company (key beneficiary of Industry 4.0; Global CNC machine industry to register ~10% CAGR over CY23-30E), which will further bolster its growth runway in coming years, Motilal said.

On the valuation, Motilal's note said, "We believe there are two key growth drivers for AVALON: 1) an increase in the mix of the box build through new orders or increasing the wallet share from existing customers, and 2) order flows from high-growth/high-margin industries such as Clean Energy, Railways and Aerospace. However, the ongoing slowdown in the US business will have a short-term impact on AVALON's revenue and profitability."

Lastly, it added, "We estimate AVALON to deliver a CAGR of 16%/15%/29% in revenue/EBITDA/adj. PAT over FY23-26. We retain our BUY rating on the stock with a TP of INR610 (35x FY26E EPS)."

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.