Avalon Technologies earnings beat driven by broad growth, box-build mix and order-book visibility

Investment View and Valuation

Motilal Oswal Financial Services Limited retained its Buy view on Avalon Technologies after a strong 1QFY27 performance that exceeded its estimates. The broker believes Avalon is positioned to sustain strong growth through a rising box-build mix, robust order-book visibility, multiple programmes entering production and expanding customer engagements across geographies.

Motilal Oswal raised its FY27E and FY28E earnings estimates by 8 per cent and 4 per cent, respectively, and set a target price of Rs 2,150 based on 50 times FY28E EPS, implying a 0.9 times PEG ratio.

1QFY27 Financial Performance

Avalon Technologies reported consolidated 1QFY27 revenue of Rs 4,844 million, up 50 per cent year on year and ahead of Motilal Oswal's Rs 4,203 million estimate. Growth was supported by domestic revenue growth of 54 per cent year on year and US revenue growth of 47 per cent.

India manufacturing revenue and EBITDA grew 35 per cent and 71 per cent year on year to Rs 3,461 million and Rs 582 million, respectively. Its EBITDA margin expanded by 350 basis points to 16.7 per cent. US manufacturing revenue rose 2.1 times to Rs 1,383 million, while its operating loss narrowed to Rs 3 million, compared with losses of Rs 45 million in 1QFY26 and Rs 49 million in 4QFY26.

Order Book, Cash Flow and Working Capital

The 1QFY27 end-market mix comprised Clean Energy at 29 per cent, Mobility and Transportation at 25 per cent, Industrials at 32 per cent, Communication at 4 per cent, and Medical and Others at 10 per cent.

The total order book stood at Rs 34,600 million. This included a short-term order book of Rs 22,100 million executable within 14 months, up 23 per cent year on year and flat sequentially, and Rs 12,600 million executable between 14 months and three years.

Operating cash flow was positive at Rs 320 million, compared with Rs 160 million in 4QFY26. Total debt was Rs 1,960 million, cash and investments were Rs 1,710 million, and net debt was Rs 240 million. Net working-capital days improved to 117 from 142 in June 2025, driven by lower inventory and receivables.

Management Guidance and Operating Outlook

Management raised FY27 revenue-growth guidance to 26-30 per cent from 24-27 per cent. It maintained its aspiration to double revenue from Rs 16,032 million in FY26 to about Rs 32,000 million by FY29, as well as its gross-margin guidance of 33-35 per cent.

Management expects US operations to reach steady-state EBITDA break-even by FY27-end, followed by PAT-level break-even. Most future growth is expected to come from India, while US manufacturing is expected to remain at about 20 per cent of consolidated revenue.

Box-build contribution increased from 44.5 per cent in FY22 to 59.9 per cent in 1QFY27. Management stated that such programmes carry superior margins, although profitability improves gradually with volume and procurement efficiencies. About 45-50 per cent of costs below gross margin are fixed or semi-fixed, providing operating-leverage potential.

Rail represented about 15 per cent of revenue and grew 37 per cent year on year, while aerospace represented about 8 per cent and grew 47 per cent.

Prospective Growth Drivers

• Semiconductor equipment and HVDC power infrastructure
• Industrial automation and power electronics
• Railway and aerospace electronics
• Battery energy storage systems and grid modernisation
• Data-centre power, rack and cooling solutions
• Defence electronics
• Expansion in Europe and Southeast Asia

Aerospace cabin sub-assemblies, locomotive engine subsystems and Kavach are approaching commercialisation, while semiconductor equipment and HVDC programmes have begun contributing revenue.

Execution Considerations and Risks

• The timing of large programme ramp-ups remains uncertain.
• Several opportunities remain in pilot, qualification or prototype stages and are not yet fully reflected in revenue.
• New programmes have lower initial profitability, with margins expected to improve gradually as volumes and procurement efficiencies increase.
• Tariff pass-through reduced EBITDA margin by approximately 90 basis points, according to management.