Avalon Technologies Limited (AVALON) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Avalon Technologies Limited Q1 FY '27 Earnings Call hosted by DAM Capital Advisors. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Pranesh Shah. Thank you, and over to you, sir.

Thanks, Operator. Good afternoon, everyone, and a warm welcome to the Q1 FY '27 Earnings call of Avalon Technologies. To take us through the results today, we have with us from the management, Mr. Kunhamed Bicha, Chairman and Managing Director; Mr. Suresh VR, Chief Financial Officer; Mr. Shriram Vijayaraghavan, Chief Operating Officer; and Mr. Venky Venkatesh, Chief Sales Officer. Mr. Bicha will give us an overview of the business performance and will be followed up by Mr. Suresh's remarks on the financial performance, post which we'll open up the floor for Q&A. As we move forward, it is important to bear in mind that any forward-looking statements made during the call are subject to potential risks and uncertainties, both known and unknown. Now without any further delay, I'll hand over the floor to Mr. Bicha for his initial remarks. Thank you, and over to you, sir.

Thank you. Good afternoon, ladies and gentlemen. A very warm welcome to Avalon Technologies Q1 FY '27 Earnings Call. I want to begin by thanking our investors for your continued trust and support. Your confidence has enabled us to stay focused on what really matters, consistent execution, disciplined investment and building a long-term profitable business. We are grateful for your trust and our commitment to deliver has only grown stronger. Q1 FY '27 was another strong quarter. This marks our eighth consecutive quarter of improvement in performance and growth across key metrics. What stands out is the quality and the breadth of this growth. Our revenue growth is well diversified across geographies and industry verticals. Our profitability metrics has improved. ROCE has moved up to 23.4%, reflecting that we are scaling with discipline. Net working capital has improved and our order book continues to provide good visibility on quarters ahead. Our 3 growth engines, our existing business, new program wins and our expanding opportunity pipeline are all gaining momentum together. Based on the strong momentum across our business and the visibility we have on programs ramping through the year, we are revising our FY '27 revenue growth guidance upward from 24% to 27% to 26% to 30%. Moving to the financial highlights. Revenue for Q1 FY '27 was INR 484 crores, up 50% year-on-year from INR 323 crores in Q1 FY '26. Q1 revenues are marginally ahead of Q4 FY '26, a positive start for FY '27. During the quarter, India contributed 41% of the revenue and export business contributed 59%. India business grew 53% year-on-year and export business grew 48% year-on-year with both geographies contributing to the growth. Now on industry vertical revenue contribution. Industrial contributed 32% of our revenues, growing 52% year-on-year. Mobility contributed 25%, growing 36% year-on-year. Within Mobility, Rail accounted for approximately 15% and Aerospace 8%, growing 37% and 47%, respectively. Clean Energy contributed 29%. Our gross margins for the quarter came in at 34.7% within our guided range of 33% to 35%. EBITDA margins came in at 12%, up from 11.8% in Q4 FY '26, reflecting continued operating leverage as revenues grow. Profit after tax was INR 35 crores with a PAT margin of 7.2%, a meaningful improvement year-on-year. As of June 30, 2026, our order book grew 23.4% year-on-year to INR 2,208 crores with an average execution period of 14 months. Long-term contracts with execution timelines ranging from 15 to 36 months stands at INR 1,256 crores. Order book growth remains well diversified across industry verticals and geographies. Net working capital days improved to 117 days in June 2026 to 142 days in June -- versus 142 days in June 2025, an improvement of 25 days year-on-year. Within this, inventory days improved from 104 days to 94 days. Receivable days reduced by 13 days and payable days improved by 2 days over the same period. Asset turns are at 9.9x and return on capital employed stands at 23.4%. India manufacturing operations, which serve both domestic and global customers accounted for 72% of our revenue in Q1 FY delivering healthy profitability at an EBITDA margin of 16.7% and a PAT margin of 11.1%. U.S. operations contributed the remaining 28%. Moving on to our U.S. operations. Losses in U.S. manufacturing has continued to narrow, coming in at approximately INR 4 crores in Q1 FY '27. Our U.S. manufacturing plant has a clear and deliberate role. It is where new customers come in, validate our capabilities and get comfortable with Avalon as a partner. Once that comfort is established, production progressively transitions to India manufacturing where customers benefit from our cost structure, depth of capabilities and scale. Our manufacturing presence in both geographies gives customers the flexibility to start in the U.S. or come directly to India. And we are well positioned to support both. As India manufacturing continues to scale over the coming years, we expect U.S. manufacturing contribution to naturally settle at around 20% of our total revenue. On revenue guidance, we have previously committed to double revenues from FY '24 to FY '27, a target of approximately INR 1,734 crores. Our trailing 12-month revenue has already crossed that milestone, nearly a year ahead of our commitment. As highlighted earlier, reflecting on the strong Q1 performance, we are now focused on the next doubling from INR 1,603 crores in FY '26 to approximately INR 3,200 crores in FY '29. The products we manufacture and the verticals we build are long term in nature. Program life cycles run for years, sometimes decades. Our customer relationships deepen over time and our revenue compound accordingly. We encourage you to evaluate our progress over a multi-year period. That is how we manage this business, and that is the lens through which our strength, performance and value will most meaningfully be perceived. Now moving to our key growth drivers. Our existing business continues to provide a strong and steady foundation with long product life cycles, mission-critical programs and recurring revenues across rail, aerospace, industrial, clean energy and communications. On new business wins, the programs we have been building for the last 2 or 3 years are now progressing well. Aerospace cabin subassemblies are moving towards volume. Production of locomotive engine subsystems is underway. The Kawa anticollectant system is on track for commercial production. On semiconductor equipment, we have increased our allocation with one of our world's leading wafer fabrication equipment suppliers, expanding from PowerBox assemblies into other products with production ramping over the next few quarters. In aerospace, we have secured incremental box business with a leading aerospace company, further strengthening our engagement in the export market. On the opportunities pipeline, we continue to see a healthy expanding set of opportunities across geographies and verticals. Southeast Asia and Europe continue to add a new dimension to our geographical reach. All 3 growth engines are gaining momentum together. On our manufacturing footprint, our new manufacturing plant focused on domestic demand in Chennai is now complete and will commence commercial production from Q2 FY '27. As we deepen our presence in semiconductor equipment and advanced electronics, the need for world-class infrastructure becomes increasingly important. We are in the process of acquiring a large p of land in Chennai that will support Avalon's growth over the next decade, catering to both domestic and export opportunities. We shall share more details as it crystallizes. We are now building the organization for the next phase of growth. We are investing in leadership, process automation, IT systems and AI-enabled capabilities across functions. Some of these investments are being made now ahead of the growth. As I close, let me offer a broader perspective. Global supply chains are being realigned. Customers are looking for reliable manufacturing partners beyond traditional geographies. India is emerging as a credible and competitive destination. We are well placed in this environment. On building a global integrated electronics manufacturing business focused on complex box build solution for mission-critical application across high-growth industries. Our continued goal is to build an enduring institution that customers trust, that is deep in engineering capability and that is built to last. We remain committed to efficient capital allocation, strong governance, disciplined execution and, of course, profitable growth. With that, I hand over to our CFO, Suresh Veerappan, for a detailed overview of our financial performance. Thank you.

Thank you, KB. Good afternoon, everyone. Let me take you through the financial performance in detail. Revenue for Q1 FY '27 was INR 484 crores, up 49.8% year-on-year from INR 323 crores in Q1 FY '26 and up 0.9% sequentially from INR 480 crores in Q4 FY '26. Our average revenue growth over the last 8 quarters has been 46%. Box contribution has increased from 44.5% in FY '22 to 59.9% in Q1 FY '27, reflecting our continued focus on complex high-value manufacturing. Gross margin for Q1 FY '27 was INR 158 crores at a margin of 34.7% within our guided range of 33% to 35%, representing year-on-year growth of 46.3% from INR 115 crores in Q1 FY was INR 58 crores with a margin of 12%, up from 9.2% in Q1 FY '26 and 11.8% in Q4 FY '26, reflecting operating leverage as revenue scale. Adjusting for the tariff pass-through impact, our EBITDA margin would have been approximately 0.9% higher. PAT for Q1 FY '27 was INR 35 crores with a margin of 7.2%, up 45.3% year-on-year from INR 14 crores in Q1 FY '26. We continue to invest in talent, capacity and inventory to support upcoming growth in new programs. These initiatives strengthen our foundation for long-term growth and are expected to enhance operating efficiency as business volumes continue to scale. Moving on to the balance sheet. Net working capital improved to 117 days in June 2026 from 142 days in June 2025, an improvement of 25 days year-on-year. Within this, inventory days improved from 104 days to 94 days. Trade receivable days reduced from 87 days to 74 days. Trade payable days improved from 49 days to 51 days. On a sequential basis, net working capital moved from 112 days in March 2026 to 117 days in June 2026. Cash flow from operations was positive at INR 32 crores in Q1 FY '27, an improvement from INR 16 crores in Q4 FY '26. As of June 30, 2026, total debt was INR 196 crores with cash and investments of INR 171 crores, resulting in a net debt position of INR 24 crores. Net debt-equity ratio stands at 0.03, a comfortable position. CapEx for Q1 FY '27 was INR 16 crores. Asset turns remained strong at 9.9x. Return on capital employed improved to 23.4% from approximately -- from 10% approximately 2 years ago, a consistent and meaningful improvement. With improved business visibility, we have revised our FY '27 revenue growth guidance upwards to 26% to 30% from the earlier guidance of 24% to 27%. To summarize, Q1 reflects continued progress across our key operating and financial metrics, demonstrating the strength of our execution. As we move forward, our focus remains on delivering sustainable profitable growth, improving operational efficiency and strengthening long-term customer relationships. With that, I request the moderator to open the floor for questions. Thank you.

[Operator Instructions] The first question comes from the line of Santosh from Avendus Spark.

Congrats for great set of numbers. My first question is on long-term steady-state gross margin. We have been historically talking about 33 to 35 kind of margins. And just as we think about some of these newer business like semiconductor equipment and the power modules that we are working on. So as it scales up, how should we think about the structural impact of these business on margin profile? Do you think these businesses like inherently higher on the margin curve and any scope for margin improvement? So that's my first question.

Thank you, Santosh. That's an interesting question -- so if you look at the last 5 years or so, we've always maintained this range. Sometimes we are a little bit higher and sometimes a little bit lower, but this is a comfortable range. Saying this certain set of our industries and products have much higher margins and certain industries have lower margin. So, what you see is the blended rate. So as you see the higher margin that they kick in, you will see some difference. But as of now, this rate is at 33% to 35% with a few quarters being up or down.

So there is scope for improvement in the long run. But as of now, we are maintaining at 33% to 35%. So, is that the takeaway?

That's our aspiration, as you very well know.

And my second question is on the cost structure below the gross margin line items. So here, we have been talking about roughly 50-50 split between fixed and variable cost. So, my question here is, given the strong revenue growth and the kind of ongoing investments that we have in the manufacturing footprint that you mentioned in the opening remarks. So, at what stage do you think some of these fixed costs become semi-variable in nature? And what would be the implication on operating leverage over the medium term for FY '27 and FY '28?

Suresh here. Between 45% and 50% of the expenses below the gross margin are semi-fixed or fixed in nature. And some of the expenses, most of the expense semi in nature. What we believe is with scale in revenue, with growth in revenue, we believe the operating leverage will continue to play out. If you look at our India manufacturing business, it has delivered an EBITDA of 16.7% and it is a continuing delivery in terms of profitability over the last few quarters. So, we expect the operating leverage to play out. We will not give any particular guidance per se for EBITDA margins. But otherwise, I would add to what KB said that we have consistently maintained our gross margin percentage in the range of 30% to 35%. We believe we can continue to do that.

And just one last question. Some of your peers have recently spoken about opportunities in the data center space and ramping up business starting from FY '27. So, could you share your perspective on this particular opportunity? Are you currently in talks with any of the potential customers? And also, do you see -- where do you see yourself positioning within this value chain? Will it be mostly in the servers or systems or power management? Any thoughts on that?

So as you know, that one piece is the world is going through a super cycle in power. HVDC systems and all that. So we are playing with some of the leaders that we started production with a couple of them. So that's going to be a part of that. But saying that, we are also working with multiple customers who supply power, off-grid power into the data centers, okay? And that is bound to grow. And also, now into the future, you will see us work more towards the rack and the cooling systems, okay, which we have not won the business yet, but we are still working towards that. And of course, the -- all this growth comes with the semiconductor industry, okay, equipment industry. We are well positioned for that in the near future. So we are not going to make server boards as of now, okay? I'm not saying that we won't do that in the future. But anything around it, which is probably the fastest-growing element we are playing in some of those areas. Did that answer your question.

The next question comes from the line of Siddharth Bera from Nomura.

Congrats on a great set of numbers. Sir, first question is on the [indiscernible]. When should we expect that to come through for this year? And second is on the clean energy side, we have seen a very strong growth in this quarter on a Y-o-Y basis. So is there any new customer addition or it is more from higher share of business from the existing customers? If you can throw some more like this?

Yes. On the first piece, I mean the full revenue has not started, but revenue has started for both the sectors, okay? So FDC as well as semicon equipment revenue has started, but the -- it will gradually grow. It is not -- switch on and off. And because there are multiple systems, multiple products. So it's starting, okay? It started this quarter, and we'll see the ramp in the following quarters. On your second part of your question, clean energy has been fluctuating for us over the years, and this has been a great quarter for that. And we will continue to see the growth. But certain quarters, you may see clean energy up. That's why we are diversified. Certain quarters, you will see the mobility up certain quarters in industrial. I has always been up, okay? It's not that since everything is growing and certain cuts in certain production happen at various time frames. So you will continue to see growth in all sectors. What we are happy is that every sector is growing, except for the communication we.

And would you be able to share the U.S. for this quarter? Have you already turned around where are we in terms of the --

In terms of U.S. manufacturing, we have reported a PAT loss of approximately INR 4 crores in Q1 FY '27. It is largely narrowed down, 2 years ago, it was approximately around INR 14 crores, 1 year ago, it was around INR 9 crores losses and now it narrowed down to INR 4 crores.

The next question comes from the line of Sameet Sinha from Macquarie.

Congratulations on another incredible quarter. I guess a couple of questions here. So, I was really happy to see about how you spoke about bolstering your operations and leadership because usually, when smaller companies grow at this pace, you've done a great job with execution. But at some point, things have to fall by the wayside. So, if you can just talk a little more -- provide a little more color about what you're doing, what sort of leadership positions you're hiring for. I think that will be really helpful. Secondly, historically, most of your products have been PCBA and box-build. Do you think you have an opportunity to go into new product categories? Or you'd rather just service with these products because demand obviously is there and you're executing on the pipeline? Or maybe you'll tell me that covet and aerospace and all have different new products. So I'd like to know more about the SKUs that you have. And the third question is, generally, your business -- the second half of the year, your business does better than the first half. So with 50% growth in Q1, how should we think about the second half? I know the guidance implies kind of 25% growth in the next 3 quarters, but if you can provide some clarity more around the second half versus first half dynamic.

Sameet, nice to talk to you again. So if I miss out any part of your question, just remind me on. The first part was leadership. See, as we grow each of our divisions and capabilities and verticals, we need leadership. These are growing from $20 million to $100 million, however you want to look at it. So we have taken a dedicated or a very focused approach to get leadership. I believe the first level of leadership is there already with our CEO, CFO, CSO. And we're adding probably 5 or 6 new candidates at the VP level to either lead a BU or lead a capability, okay? And that work has already started. So, we're trying to plan for the next 3 years of growth at least, who are the right leaders. The same thing we did 3 years back when we started with the C levels to get the company going in the right direction. And so we are looking for the right candidate. We may be -- we're not going to rush to it because that candidate is very important to us. Yes. So you want to add something?

Yes. Thanks. Sameet, so couple of 3 pieces of fundamental building blocks, right, of growth. One is people. Second, I think what KB touched upon our processes internally. And third is automation, right? So the focus is to build the capability in all 3 areas, and that's work that's underway. I think KB has given you the highlights on the leadership. I just want to touch -- make sure that it's across all 3 areas.

And the second question, if you could remind me, Sameet?

Yes, it was more around products. So historically, you've done PCBA.

So we are vertically integrated. So that's why you see our box-build move from what, 43% to 59% in a year. So we are building a lot more metal. We're building a lot more cables. We're building a lot more plastics. We're building a lot more magnetics to get into the -- into our own final product, and that's why you see a box-build ratio going up. Saying that, there's 1 or 2 areas, actually one which we may announce, I don't want to reset that. We will enter into one area, which is well within our capability. And that, I think in the next 2 quarters, we'll make that announcement. So there's one area we'll add because we see a lot of opportunity in that and it will add to our box-build capabilities.

Just to add to that, we are getting into newer industrial verticals as well as newer geographies like Europe, Southeast Asia. So in terms of getting -- increasing our target market, the work is already underway, and we will start seeing the results of that in the coming quarters.

And last question about guidance.

We are conservative. The problem we have, to be honest, is when we get into these large programs, for example, it may happen in February of next year, or it could -- customer may delay to April. So we're trying to be conservative. So it cuts it in February, everything is well and good, okay? If it cuts it in April, it's a next year thing. But look at us from a 3-year lens, right? Like we said, our business is not quarter-to-quarter because our customers look at us over a multiyear period and are we a good partner over the next 10 years, right? But we're trying to kind of get that all together and try to give you a feel of the -- what we can be. But in a 3-year period, as we have done in the last time we said we'll double 3 years in 2 years. But the aspiration is always to do faster. So you look at us from that rather than what's going to happen next quarter or the following quarter.

The next question comes from the line of [indiscernible] from Arihant Capital.

A follow-up on the previous participant on the guidance side, we are doing INR 50 crores to INR 60 crores annual CapEx INR 500 crores to INR 600 crores additional revenue. I think if you add that it will nearly INR 3,000 crores to INR 3,400 crores by FY '29. And secondly, the sectors like aerospace and defense kind --

So firstly, on the CapEx side, last year, we did a CapEx of INR 56 crores and Q1, it is INR 16 crores. But like what KB highlighted in his opening remarks, we are looking at expanding our manufacturing footprint in Chennai. So whenever that happens, we will do it in a modular fashion, and that will involve incurring additional CapEx to an extent. Having said that, we are focused on capital efficiency. If you look at our ROCE a couple of years back, approximately 2, 2.5 years back, it was around 10%. Today, it is 23.4%. Our goal is to improve that even further. But every asset, new asset, new plant that comes into the picture, it will take its own time frame for it to reach its optimum capacity in terms of utilization. So, it will gradually get to that, but our focus is to improve our ROCE.

And I will add to this as we go into the bigger box build solutions, space is a premium. So, we are building up land and buildings before we actually put machines so that we are comfortable with that. And then we'll add the machines when required.

The qualitative perspective, it's been answered. And sir, my second question, I think you have in Q1, nearly 50% top-line growth, order book also increased nearly to 3%. But if you look at our working capital with growing order book and revenue, it leads to working capital strain, for example, building inventory for new programs. So, I'm just trying to understand how we managed to improve the working capital days and how do you look at in coming years?

Thank you for that. So that was consistent and continuous effort over the last 2, 3 years on each bucket, inventory receivables and payables. Inventory days, it actually improved to 94 days from 104 days -- but again, what we said in the opening remarks in the previous quarters, we are also having some new programs going parallelly. So, for new programs, we may have higher net working capital at the start and you will find that efficiency over a period of time. For existing businesses, we would have already found our efficiency in net working capital. But overall, what was our guided range in the previous quarters were around 120 to 130 days. So we are well within that range.

Sir, my last question is U.S. it's around INR 4 crores in this quarter. Last year, it was INR 9 crores. So, I'm trying to understand what is the minimum revenue run rate required to achieve a breakeven whether we can expect by Q3 or Q4.

We have not given any particular quantum at which we will reach the breakeven. But what we have highlighted in the earlier calls also is by the end of this fiscal year, we would like to see a steady-state EBITDA breakeven and then following that breakeven. But what I would like to highlight here, is the important way to look at our U.S. businesses, U.S. manufacturing operations, that is our plan to reach the customers, make the customers comfortable and then as it ramps up, transition it to India manufacturing. So it is ours from that perspective.

The next question comes from the line of Praveen Sahay from PL Capital.

My first question is related to the box for the last 4 quarters, we are continuously seeing the increase in the contribution from the box and also you had highlighted the way forward, we will see this trend to continue. How you are seeing the gross margin profile with the box-build contribution to increase the way forward?

See, we are always our business model is to get to the box, right? We may start with the PCB, we may start with the metro, we may start with the cable. But our goal 2 to 3 years from where we start with the customer is to do the whole box. If he doesn't give it to us in the beginning. Of course, the gross margins are better in box, okay? And some of these -- it takes time for the gross margins to improve. It's over a period of time. It's not as soon as you start. Then the program starts, the gross margin may be a little lower, okay? But over a period of time, it does increase as the processes and our quantum buys help. The other piece is the status, we're still maintaining gross margins, okay? It does have an effect. Though not a big effect, it does has an effect. So in spite of that, we have maintained the gross margins.

So if you'll maintain this the contribution of 60%, we may see the improvement in the gross margin.

The way to understand it is if you ask do we anticipate our box percentage to go up, the answer is yes because that is one of our strength points, building complex boxes. But on one side, we will have new programs, which will start maybe at a lower percentage. On the other side, we will have existing business, which may be at a higher percentage. What you see is at 33% to 35% is a blended mix of both of that. So I think it is best to assume and estimate a gross margin percentage of 33% to 35% to continue.

Next question is related to the order book. Out of your INR 2,200-odd crores, can you give some indication that how it has been mix of segments?

So it's broadly based on the segments and the growth or the percentages we have kind of declared across verticals, some certain quarters, some may be higher than the others. And we always aspire to be around 25%. But industrial right now is around 32%. Our total order book, if you look at it, we only look at a 3-year window. We have orders from 3 -- to 3 years. We don't count that. That itself is INR 3,465 crores. And in the short term, which is the order book for the next 12 months or so, it's INR 2,208 crores. So very comfortable on what we need to do in the near term. And we have long-term contracts which we don't count.

Lastly, one clarification. So in the international business, which now the U.S. is 60% of your business, is that majority is from the clean and the mobility businesses?

No, it's across. A lot of the clean is done in the U.S., but the rest of it is done in India. A lot of it is industrial. We don't have rail in the U.S. aero industrial, communications as well as clean -- a big chunk is there because of the subsidies in the U.S. But again, the sub parts of these U.S. build is done in India, okay? So it's a mix.

Even in U.S., we have a very balanced and diversified growth across verticals.

The next question comes from the line of Vipraw Srivastava from PhillipCapital.

Just 2 quick questions. Firstly, on the order book side. So for the last 3 quarters, your order book has been hovering around INR 2,000 crores. This quarter also, it's around INR 2,200 crores. So I mean, in that sense, given that your revenue growth is exceeding order book growth, any reasons for that? Why this order book growth slow or am I missing something?