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Broad-based growth across geographies

Earnings above our estimate

* Avalon Technologies (AVALON) reported a strong quarter, with revenue growing 31% YoY in 3QFY25, fueled by a continued recovery in the US (+39% YoY) and consistent performance in the Indian business (+22% YoY). Operating profitability improved (+440bp) due to an increase in domestic manufacturing (88% vs. 77% in 3QFY24) and favorable operating leverage.

*oY (from 16-20%), with an expected gross margin of 33-36%. We anticipate a strong 4Q, with ~42% implied revenue growth and margin expansion driven by operating leverage.

* Factoring in the strong 3Q performance and positive growth outlook, we raise our EPS estimates for FY25/FY26 by 9%/6%, while largely retaining our FY27 estimates. Reiterate BUY with a TP of INR1,000 (premised on 40x FY27E EPS).

Healthy gross margin and operating leverage aid margin expansion

* Consolidated revenue grew 31% YoY to INR2.8b, driven by growth in both domestic (up 22% YoY due to traction in the industrials and clean energy business) and US (up 39% YoY due to recovery in the market and order flows from new and existing customers) operations.

* Consolidated EBITDA jumped 2.1x YoY to INR346m. Consolidated EBITDA margin expanded 460bp to 12.3% (+140bp QoQ) led by gross margin expansion (up by 30bps to 37.3%). Operating leverage played its role, with employee expense as a % of sales declining 370bp YoY to 17.6% and other expenses as a % of sales decreasing 50bp YoY to 7.4% in 3QFY25. The company reported an Adj. PAT of INR240m, up 3.6x YoY.

* The total order book stood at INR27.1b with the short-term order book (executable within 14 months) at INR15.95b (up 25%/7% YoY/QoQ) and the longer executable order book (from 14 months up to three years) at INR11.11b (up 32% YoY).

* Gross debt as of Dec’24 stood at INR1.6b vs. INR1.6b/INR1.1b as of Sep’24/Dec’23. Net working capital days increased to 150 from 134 days as of Sep’24, primarily led by higher receivable days (up 15 days).

* During 9MFY25, revenue/EBITDA/Adj. PAT increased 16%/55%/87% YoY at INR7.5b/INR691m/INR392m.

Highlights from the management commentary

* Guidance & outlook: AVALON raised its FY25 revenue growth guidance to 22-24% (from 16-20%) and expects EBITDA margins to sustain over 12%. The gross margin is likely to be in the range of 33-35% going forward.

* Business & market performance: The company is progressing from prototyping to commercial production in industrial, automotive, and aerospace sectors with major US clients, where ramp-up is expected soon. Strong momentum in the US and key wins in India’s industrial, rail, and communications sectors reinforce its market strength.

* Capex: Phase 1 of the Chennai brownfield expansion is complete, with Phase 2 set to begin in the current quarter to meet the rising domestic demand. The company spent ~INR727m in 9MFY25.

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 going forward. 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 30%/57%/80% in revenue/EBITDA/adj. PAT over FY24-FY27 on account of strong growth and healthy order inflows. Reiterate BUY with a TP of INR1,000 (premised on 40x FY27E EPS).

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