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Robust growth momentum continues

* Avalon Technologies (AVALON) reported a robust 1QFY27, with revenue growing 50% YoY, fueled by a strong performance in both the US and Indian businesses (up 47%/54% YoY). Growth was largely broad-based across segments (2.4x/44%/50% growth in Clean Energy/ Mobility and transportation/Industrials). Further, EBITDA margin expanded 270bp YoY, fueled by operating leverage.

* We believe AVALON remains well positioned to sustain strong growth momentum, supported by rising box-build mix, robust orderbook visibility, multiple programs entering into production, and expanding customer engagements across geographies. Emerging opportunities in semiconductor equipment, High-Voltage Direct Current (HVDC) power infrastructure, aerospace, data-center-related power solutions, and defense electronics, along with continued expansion in Europe and Southeast Asia, are expected to support its mid-term growth trajectory.

* Considering the strong growth in 1QFY27, we raise our FY27/FY28 earnings estimates by 8%/4%. We reiterate our BUY rating with a TP of INR2,150, premised on 50x FY28E EPS (implying a 0.9x PEG ratio).

Highlights from the management commentary

* Outlook/Guidance: Management raised its FY27 revenue growth guidance to 26–30% (from 24–27% earlier), targeting to double revenue to INR32b over FY26- FY29 and maintaining its gross margin guidance of 33-35%. The company expects US operations to achieve steady-state EBITDA breakeven by FY27-end. Management remains conservative on near-term forecasts due to the timing uncertainty of large program ramp-ups; it highlighted that the medium-term opportunity pipeline is the strongest it has seen in recent years.

* New program ramp-up: Aerospace cabin sub-assemblies, locomotive engine subsystems, and Kavach are progressing toward commercialization, while semiconductor equipment and HVDC programs have started contributing revenue and are expected to scale further. Management also sees growing opportunities in data center infrastructure, particularly power systems, rack solutions, and cooling infrastructure.

* Geographical expansion & defense: Management is expanding the opportunity pipeline across Europe and Southeast Asia, which are expected to become important growth contributors over the next few years. The company believes India is increasingly emerging as a preferred destination for complex electronics manufacturing. The company is also gradually bolstering its presence in defense electronics through dedicated investments in leadership and capability building.

Valuation and view

* The US business is expected to achieve steady-state breakeven by the later part of FY27; a rising share of higher-margin business and operating leverage benefits are expected to support margin expansion.

* Further, AVALON’s medium-term revenue trajectory is likely to remain strong, backed by:

1) its entry into the semiconductor equipment

2) strong order book visibility across segments

3) increasing demand for industrial automation, power electronics, and railway/aerospace electronics in the industrial segment

4) rising deployments of battery energy storage systems and grid modernization initiatives in the clean energy segment

5) India’s emergence as a global manufacturing base, supported by structural reforms and favorable government policies.

* Considering the strong growth in 1QFY27, we raise our FY27/FY28 earnings estimates by 8%/4%. We reiterate our BUY rating with a TP of INR2,150, premised on 50x FY28E EPS (implying a 0.9x PEG ratio).

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