KUNHAMED BICHA
Chairman & Managing Director
Dear Shareholders,
I am pleased to reach out to you with our 25th Annual Report, that
underscores an important milestone in our journey of manufacturing excellence. This also
marks the completion of the 1st year of operations post our listing. We are
grateful for your steadfast support and commitment, which have been instrumental in our
journey. We are dedicated to upholding and nurturing the confidenceyou have placed in us
as we move forward.
25 YEARS OF MANUFACTURING EXCELLENCE
As a leading player in the Electronics Manufacturing Services (EMS) sector with a
worldwide presence, Avalon Technologies has a strong and distinctive edge that has helped
in carving out a prominent position for itself in the industry. Today, as we mark 25 years
of delivering manufacturing excellence to our growing clientele, we take pride in our
reputation for high-mix, flexible-volume production. This equips us to cater to a wide
array of industries with complex, integrated solutions that demand substantial engineering
expertise. Our operations currently encompass 14 manufacturing sites across India and the
United States, which includes two additional units in India, set to begin operations soon.
These expansions, catering to our growing domestic and export demands, will position us to
advance toward greater horizons of growth and development.
Avalon Technologies excels in its global outreach, with 54% of our revenue originating
from the US. Our US manufacturing presence plays a crucial role as it acts as a gateway to
acquiring customers. This has allowed us to gain a deep understanding of operating in a
globally interconnected economy. Our US Operations functions as our "front end,"
streamlining customer onboarding and serves as a "Beachhead" to expand our
market footprint. Our presence in export markets historically provided us with a
competitive edge; however, it exposed us to regional economic headwinds, such as the
temporary macro-economic challenges we experienced during the Fiscal Year 2023-24.
A REVIEW OF FISCAL YEAR 2023-24
The Fiscal Year 2023-24 brought with it, a combination of challenges for the industry,
particularly in the US economic landscape. Around this time last year, when we anticipated
the destocking by our established US customers, we adopted a more prudent stance for the
Fiscal Year 2023-24. These ongoing difficulties in the US market resulted in a decline in
our US operations, leading to losses that temporarily overshadowed the strong performance
of our Indian operations. The 8% decrease in revenue that we eventually reported in Fiscal
Year 2023-24 was largely attributable to a 16% year-on-year reduction in our US revenue.
There are signs of recovery as our existing US customers have begun restocking at
varying levels. Further, our focused efforts in the Indian market will soon start showing
results. This combined progress is expected to lead to a significant momentum in Fiscal
Year 2024-25. We would like to reiterate that we are seeing our anticipated growth
materialize sooner rather than later.
Our operating leverage was negatively impacted by lower revenues and higher fixed
costs, which further reduced our profitability. Nevertheless, our manufacturing operations
in India, which cater to both our domestic and international clientele accounting for
about 77% of our business, continued to be highly profitable. During the Fiscal Year
2023-24, our Indian operations maintained robust operating margins of 12.7% and Profit
After Tax (PAT) margins of 8.5%.
Notwithstanding the challenging macro environment, Avalon posted an 11% year-on-year
increase in its order book, reaching INR 1,366 crores as at the end of the Financial Year,
which are executable over an average period of 14 months and saw a 58% year-on-year growth
in long-term contracts, totalling INR 949 crores, which provides a healthy visibility for
the next two to three years.
We would also like to share that our focused efforts on inventory management led to a
marginal reduction in
Notwithstanding the challenging macro environment, Avalon posted an 11% year-on-year
increase in its order book, reaching INR 1,366 crores as at the end of the Financial Year,
with fulfilment expected over the next 14 months and saw a 58% year-on-year growth in
long-term contracts, totalling INR 949 crores, which provides a healthy visibility for the
next two to three years.
our absolute inventory levels in the latter half of Fiscal Year 2023-24. We are also on
course to decrease our net working capital days by 10 to 15 days in Fiscal Year 2024-25,
which will add to the overall efficiency of the organization.
Furthermore we are addressing the short-term challenges in the U.S. to enhance our
operational efficiency through two strategic initiatives. Firstly, we are implementing
cost rationalization measures in our US Operations. Optimization of personnel cost
continues to be a key driving factor and the results of the same will be visible in the
coming quarters. Additionally, we successfully transferred 45-50% of production from our
US Plant to our India Plant, including the manufacturing for key US customers that
represented a significant portion of our US revenue. We expect to see continued benefits
from this strategy as we execute the remaining transfers during the Fiscal Year 2024-25.
We strengthened our management team considerably during the Fiscal Year 2023-24. Mr.
Shriram Vijayaraghavan joined as our new Group Chief Operating Officer, bringing valuable
operational experience from his previous leadership roles at major companies. Mr. Venky
Venkatesh, who joined as our new Chief Sales Officer, has three decades of experience in
leading successful global sales teams and securing large contracts in our target
verticals.
On the infrastructure front, we are pleased to report that we have completed a new
plant in Chennai dedicated to export operations and are in the process of starting
production. Additionally, concerning our Brownfield expansion in Chennai to meet the
growing domestic demand, Phase 1 is complete, and Phase 2 is expected to commence in the
second half of Fiscal Year 2024-25.
In summary, we have successfully navigated a challenging year, and we anticipate a
recovery in H1, followed by increased momentum in H2 of Fiscal Year 2024-25. The outlook
for the coming years looks promising, with Fiscal Year 2024-25 being crucial for our
growth trajectory.
OUR ROADMAP FOR GROWTH
The prospects for the future, as evident, are strong, and Avalon is well-positioned to
maximize the opportunities to drive long-term growth and value creation. We have
identified three growth engines for the future and are continually reinforcing the same to
push the bar of our performance going forward.
Our first growth engine is our existing industry leading customers in the US with whom
we maintain long-standing relationships. We believe this will play an important role in
our growth strategy as we forge ahead towards greater scale. Inventory reductions and
macroeconomic uncertainties caused this segment to encounter substantial challenges in the
Fiscal Year 2023-24. We now believe that the inventory destocking phase has bottomed out,
with our US clients entering a re-stocking phase, albeit at different levels. A few of
them have already reached 100% of their original offtake, and we expect that the
transition from de-stocking to re-stocking will become more pronounced in the second half
of Fiscal Year 2024-25. Coupled with our efforts to increase our wallet share of customer
spending, this is already beginning to yield positive results for our Company.
Our second engine of growth is the acquisition of new
We are poised to harness the vast opportunities ahead. With our strong foundation,
strengthened leadership and expanding customer base, we remain focused in growing our
strategic presence in dynamic market segments, forging a path for continuous growth.
customers in the US. Regarding one of our major clean energy customers, we are pleased
to announce that the long-awaited product compliance certification for the home
electrification system has been approved, and as previously conveyed, we expect the
commercial rollout to commence towards the end of the first half of Fiscal Year 2024-25,
with ramp-up in production projected for the second half of the year. We anticipate this
business to gain enhanced scale in Fiscal Year 2025-26, thus paving the way for the
Company to boost its growth momentum. Going forward, we also expect to reap the benefits
of the boost in clean energy manufacturing, which the US customers and their end-users are
set to derive from the Inflation Reduction Act (IRA).
Coming now to the third engine of our growth, our Indian customer base has emerged as
another strong propeller for steering the Company's future performance. From a primarily
export-driven business five years ago, when about 75% of our revenue came from outside
India, Avalon has consciously shifted its focus to the Indian market over the past 18
months. This strategic move augurs well for the Company, given the momentum being
witnessed in the Indian market across all sectors.
Our three growth engines are gaining momentum at different stages, boosting our
confidence and setting the stage for significant revenue growth over the next three years.
While these developments will drive our revenue growth, we also anticipate that the
operational leverage will significantly contribute to our profitability & success. We
expect profit growth to surpass revenue growth, driven by a multitude of factors. These
include our consistent maintenance of industry-leading gross margins by not pursuing
low-margin businesses. We aim to maintain our gross margins, though they may vary with
product mix and scale. Further, most of our costs below material costs are fixed, allowing
operating leverage to flow through as revenue ramps in the Fiscal Year 2024-25. Our
commitment to improve working capital management will help release further cash, aiding
our growth and profitability.
The upcoming years will be crucial for our growth and it is important that we stay
focused on our long-term vision and opportunities, even as we navigate short-term
macroeconomic challenges. The shift from de-stocking to re-stocking in the US market is,
in particular, expected to have a notable positive influence on our growth. We are gearing
up our entire organization and its resources for the decadal growth opportunities that lie
ahead.
KEY CUSTOMER WINS
We are consistently attracting new customers and expanding our clientele across diverse
sectors, including rail, aero, power, clean energy, EVs, industrials, automotive and
medical. With increasing demand from our clients, we are focusing on enhancing our
capabilities.
In the US, we are onboarding two auto-component companies that are leaders in battery
management and motion control systems. Additionally, we have secured significant contracts
with two major industrial companies. These are well-established companies operating for
decades and are market leaders in their domain. Our presence in the aero industry over the
last 8 to 10 years is now yielding significant new business wins. We expanded into cable
harnesses and lighting products in the aerospace sector and have signed a 15-year master
term agreement with one of the leading global aerospace players. We also expect to start
execution of our recent aerospace order wins in the latter half of Fiscal Year 2024-25 and
to scale up in Fiscal Year 2025-26.
Our active focus in the Indian Market helped us in achieving significant new wins in
rail, aero and industrial, defence and EV verticals, with contracts secured from large
multinational companies. We are actively working with our industry leading customers in
the rail segment on anti-collision Kavach systems which we believe holds significant
business potential. Additionally, we have acquired new business from leading companies in
the industrial and energy sectors. With prototype orders already in place, we anticipate
an increase in production during Fiscal Year 2024-25. These new relationships are expected
to contribute substantially to our revenue in the latter part of Fiscal Year 2024-25 &
2025-26. We have also made considerable progress in the defence and communications
sectors, and this is expected to translate into sizeable order bookings in the Fiscal Year
2024-25, with execution slated for Fiscal Year 2025-26.
In summary, the momentum and progress we are seeing in our new wins and our addressable
opportunities are giving us confidence to double our revenues by Fiscal Year 2026-27.
CONCLUDING NOTE
I would like to reiterate our persistent commitment to fostering a business that
prioritizes sustainable and profitable growth over the long term, rather than pursuing
expansion at any cost in the short term.
We are poised to harness the vast opportunities ahead. With our strong foundation,
strengthened leadership and expanding customer base, we remain focused in growing our
strategic presence in dynamic market segments, forging a path for continuous growth.
I would also like to extend my heartfelt gratitude to all the stakeholders involved
– our respected shareholders, whose faith and collaboration are essential to our
progress; our valued customers, whose ongoing patronage is the cornerstone of our success;
and the Governments of India and the United States for creating a conducive business
climate. With your unwavering support, we are committed to achieving our future goals and
collectively creating a more robust and vibrant company.
| Warm regards, |
| KUNHAMED BICHA |
| Chairman & Managing Director |
MESSAGE FROM THE CFO
Dear Shareholders,
I take this opportunity to thank you for your support, especially during the first year
our listing. The Electronics Manufacturing Services (EMS) sector continues to be a key
enabler of global technological advancement, driven by global trends in digitization, the
transition to electric vehicles and supply chain realignments. India's EMS market is
expected to expand its share from 2.2% in 2021 to 7% in 2026.
The Indian EMS sector remains dominated by a handful of specialized companies, among
which Avalon Technologies is uniquely positioned to lead in this evolving sector. Our
integrated hybrid model combines cost-effective manufacturing in India with strategic
operations in the USA and caters to high value global market along with fast-growing
domestic market. With this, Avalon remains well-placed to capitalize on the emerging
opportunities in the sector.
PERFORMANCE REVIEW OF FISCAL YEAR 2023-24
The first year of listing brought in a mix of significant challenges led by
macro-economic conditions in our key market of USA and significant opportunities for
long-term growth for Avalon. Despite these temporary macro-economic challenges, Avalon
held up resiliently and we believe our commitment to manufacturing excellence and
continued focus on execution, positions us well for our future growth.
FINANCIAL HIGHLIGHTS
While our diversified customer base across U.S. and India, coupled with our hybrid
operations, has historically been advantageous, it also exposed us to short-term macro
economic challenges during the Fiscal Year 2023-24. The temporary slowdown and inventory
destocking in the US impacted our overall results, overshadowing the strong performance of
our Indian operations.
Notwithstanding these challenges, we retained all our customers, expanded our order
book by acquiring marquee global customers and grew our presence across various segments.
Despite macroeconomic challenges in the US market during Fiscal Year 2023-24, our focus on
high-growth segments such as industrial, EVs, clean energy and advanced communication
systems helped us sustain momentum. Looking ahead, as the US market is anticipated to
recover in Fiscal Year 2024-25, Avalon is fully prepared to drive sustainable growth
backed by our solid operational foundation and strategic foresight. This year's
performance underscores our commitment to building long-term value for all stakeholders
while navigating industry shifts with agility and confidence. We remain focused on
leveraging our strengths to further our position as a leading player in the global EMS
landscape.
Here are some of the key financial highlights of the Company on a consolidated basis
for the Fiscal Year 2023-24:
• Revenue: Amidst the significant shifts in the US macro environment,
our consolidated revenue from operations decreased by 8.2% YoY to INR 867 crores. Despite
the overall muted revenue, our Indian manufacturing operations continued to deliver robust
performance, contributing to about 77% of the total revenue at INR 670 crores.
• Gross Margins: Our gross margins are industry-leading at 36.3%,
indicating our ability to deliver high-mix products in high margin segments. We maintain
our premium standards and uphold our position as key partners to our customers.
Maintaining gross margins is one of our key value drivers and we are happy to report that
we maintained the same in spite of the challenging economic environment last year.
• EBITDA: Lower revenues combined with higher fixed costs negatively
impacted our operating leverage, leading to lower profits. Consequently, our EBITDA for
the year stood at INR 62 crores, with an EBITDA margin of 7.2%. Nonetheless, our Indian
manufacturing, which serves both our Indian and global customers, remained profitable with
an EBITDA margin of 12.7%.
• PAT: Our consolidated Profit After Tax (PAT) stood at INR 28 crores,
with a PAT margin of 3.2%. Our US manufacturing operations, representing about 23% of our
business reported a post-tax loss of INR 30 crores. However, our Indian manufacturing
achieved a high PAT margin of 8.5%, which represents three-fourths of the manufacturing
operations.
• Cash flow, debt and liquidity: Our cash flow from operations, after
adjustments for working capital changes was INR 17 crores. Our Liquid Cash and
Investments, as at the end of March 2024, stood at INR 118 crores. Of this, INR 50 crores
has been earmarked for debt repayment in our US subsidiary, with the balance cash acting
as reserve and growth capital. We continue to maintain existing working capital lines
amounting to INR 185 crores for our India operations. Our strong cash position and ready
working capital lines provide us with the financial flexibility needed for executing
larger orders and equip us to invest in strategic growth opportunities as and when it
arises.
OPERATIONAL HIGHLIGHTS
The Fiscal Year 2023-24 was marked by several operational achievements and strategic
initiatives that have equipped us to move proactively towards enhanced growth in the
coming years. In a challenging macroeconomic environment, our commitment to operational
excellence and cost optimization enabled us to navigate the year effectively. I would like
to share with you some of the key operational highlights that signified the Company's
deep-rooted resilience and commitment to long-term value creation during the year.
• Strategic Initiatives in the US: We are actively addressing the
short-term challenges in the US, by implementing cost optimization initiatives, and
transfer of production from US Plant to India Plant, which we believe will be more visible
in the upcoming financial year‘s performance.
• Supply Chain Normalization: Led by a normalizing "global supply
chain" and our concerted endeavours, our supply chain challenges has now normalized.
This has allowed us to meet customer demands better, and to concurrently reduce the risk
of supply chain disruptions that previously impacted our operations. Moving forward, we
expect to derive significant benefits from this stability.
• Working Capital Management: Our working capital management showed
marginal improvement during the year. As of March 2024, our Net Working Capital (NWC) days
stood at 161 days, comprising 118 days of inventory, 79 days of receivables, and 36 days
of payables. Our NWC, which has been on a rising trend over couple of years due to global
supply chain challenges has started stabilizing and will show further improvement
(decrease) going forward. This is the result of our focussed efforts to rationalize
operations amid an improving customer demand in the US and normalizing global supply
chain. We aim to reduce our working capital cycle by 10-15 days in the next Fiscal year.
• Leadership Strengthening: As part of our future-driven growth
strategy, we have strengthened our leadership team, making strategic hires at the CXO
level. We completed the hiring of the group Chief Sales Officer (CSO) and the group Chief
Operating Officer (COO) during the year. The CXO level hires are leading to significant
strengthening and structuring of our organization at various levels, which will form the
foundation for the growth engines and make us future-ready.
These notable operational highlights reflect our commitment to enhancing efficiency,
reducing costs, and positioning ourselves for sustained growth. We believe that the
strategic initiatives undertaken during Fiscal Year 2023-24 will pave the way for a
stronger organization in the years ahead.
CLOSING COMMENTS
AsweapproachFiscalYear2024-25,weareencouraged by the positive indicators of future
success. Given the growing demand, expanding order book, strong cash flows, and
comfortable liquidity position, we are optimistic about our performance. With profits
closely linked to production scale and revenue, the outlook for the coming years is
promising. This year shall be a pivotal point that will lay the foundation for long-term
growth over the coming decade.
In conclusion, we believe that our sustained focus on laying a strong foundation for
the future and focussing on profitable growth will steer the growth for Avalon in the
years ahead. Our robust business model, diverse product portfolio, and healthy balance
sheet places us in an ideal space to leverage the emerging opportunities at the back of
our core strengths. We are confident that the strategic initiatives undertaken during the
challenging Fiscal Year 2023-24 will bear fruit in Fiscal Year 2024-25 and beyond.
The path ahead holds promise and anticipation, and we are fully geared to embrace the
possibilities and opportunities of the future. With your trust and confidence in our
vision, strategy, and execution, we remain confident of propelling sustainable growth,
which will deliver superior value to all our stakeholders. Warm regards,
| RM SUBRAMANIAN |
| Chief Financial Officer |
| Avalon Group |