Buy Avalon Technologies Ltd for the Target Rs 2,740 by Motilal Oswal Financial Services Ltd
Strategic shift toward higher-value electronics manufacturing
Avalon Technologies (AVALON) is strategically shifting toward higher-value, engineering-intensive EMS segments, with semiconductor equipment and battery energy storage systems (BESS) emerging as key growth drivers. The semiconductor opportunity is supported by rising outsourcing by global OEMs, growing demand for AI/high bandwidth memory (HBM), advanced packaging, and ISM 2.0-led localization. Meanwhile, the energy storage systems (ESS) opportunity is underpinned by structural growth in BESS, renewable integration, and grid modernization. Supported by a healthy order book, AVALON is well positioned to deliver sustained growth across ESS, aerospace, rail, and satellite communication
* AVALON’s entry into semiconductor equipment marks a strategic shift toward a higher-value, higher-complexity segment, supported by rising investments in AI, HBM, graphic processing units (GPUs), and packaging. After around two years of development, the company has commenced commercial production of electronic power boxes for a leading global waferfabrication equipment supplier. It plans to establish semiconductor equipment as a standalone vertical within 18–24 months (could further expand into other components for semiconductor equipment). With dedicated Chennai infrastructure, increasing localization/outsourcing, and policy support from ISM 2.0, the segment offers potential for meaningful long-term revenue and profitability contribution.
*AVALON’s clean-energy segment has expanded at a 21% CAGR over FY21-26, with BESS emerging as a key growth driver, particularly in the US. The global BESS market is expected to expand at a 16% CAGR through CY30, supported by rising renewable penetration and grid modernization. AVALON operates across power conversion systems, EMS, and system integration, with a focus on high-value, complex power, and energy management solutions. With the US as its primary market and increasing renewable and data center investments, BESS is expected to ramp up strongly and emerge as a key growth and profitability driver for AVALON’s US operations.
* AVALON’s order book grew 25% YoY to INR22b in FY26, including long-term contracts, providing strong revenue visibility. Production ramp-up across ESS, aerospace, Kavach, locomotive subsystems, and satellite communication is expected to support growth, while long-duration contracts, stringent certifications, mission-critical applications, and complex engineering requirements create high barriers to entry and strengthen customer stickiness. Further, the rising share of box-build solutions (47% in FY25 to 54% in FY26), alongside improving customer quality and expanding global presence, supports AVALON’s growth outlook.
* We estimate AVALON to clock a CAGR of 40%/47%/56% in revenue/EBITDA/Adj. PAT over FY26-FY29. We reiterate our BUY rating on the stock with a TP of INR2,740 (50x Sep’28E EPS).
Strong order book and ramp-up across high-value, long-duration programs
* AVALON reported a strong 25% YoY growth in the order book in FY26, taking the combined order book (including long-term contract) to INR22b, backed by sticky customer relationship and a healthy client mix.
* Going forward, AVALON also expects production ramp-up across ESS, aerospace assemblies, rail safety (Kavach), locomotive subsystems, and satellite communication control units over the coming year.
* Aerospace business serves tier-1 aerospace OEMs through 15-year contracts, while stringent certifications and complex electromechanical capabilities create high entry barriers. In Railways, AVALON has secured 10-year locomotive contracts and is also expanding in high voltage direct current (HVDC) applications, where high-specification power cabinets and mission-critical reliability requirements provide strong barriers to entry.
* Aerospace and Railways offer long-duration programs, high customer stickiness, and superior visibility, supporting AVALON’s shift toward highervalue box-build (from 47% of sales in FY25 to 54% in FY26) and systemintegration opportunities.
* Further, customer quality continues to improve with the addition of large global customers across industrial, defense, semiconductor equipment, and satellite communications, with its presence expanding across Europe and Southeast Asia.
* Overall, a strong order book, improving customer quality, production ramp-up across key segments, and a rising share of higher-value box-build solutions provide strong revenue visibility and support AVALON’s long-term growth outlook.
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