Avalon Technologies is expected to show strong revenue and profitability. Buy for target price of ₹920 (+30% upside): Motilal Oswal

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).

Avalon Technologies Motilal Oswal