Recovery in the US business drives operating performance
Earnings above our estimate
Avalon Technologies (AVALON) reported a strong quarter, with revenue growing 37% YoY in 2QFY25, led by a healthy recovery in US operations (up 57% YoY) and consistent performance in the Indian business (up 16% YoY). Operating profitability improved (up 470bp) led by a shift in ~45- 50% of the US manufacturing operations to India and favorable operating leverage.
With the beginning of restocking by US customers, incremental order flows from new customers, and the growing Indian business, we expect AVALON to deliver a strong 2HFY25 performance coupled with margin expansion (operating leverage play).
Factoring in the strong 2Q performance and positive growth outlook, we raise our EPS estimates for FY25/FY26 by 36%/10%. Reiterate BUY with a TP of INR920 (premised on 35x FY27E EPS
Valuation and view
With US operations now witnessing a healthy recovery and the Indian business experiencing growth, we expect AVALON’s revenue and profitability to experience healthy improvement from 2HFY25 onwards. We also believe the company’s long-term revenue trajectory will continue to be strong, backed by: 1) the addition of new customers in the US and Indian markets and 2) order inflows from high-growth/high-margin industries, such as Clean Energy, Mobility, and Industrials.
We estimate AVALON to post a CAGR of 31%/57%/83% in revenue/EBITDA/adj. PAT over FY24-FY27 on account of strong growth and healthy order inflows. Reiterate BUY with a TP of INR920 (premised on 35x FY27E EPS).
