Detailed narrative
Strong Q3 FY25 Performance and Upgraded FY25 Guidance
Avalon Technologies delivered a robust Q3 FY25, with revenues growing by 31.1% year-over-year to ₹281 crores, marking its highest-ever quarterly revenue. This strong performance translated into significant profitability improvements, with EBITDA increasing by 110% year-over-year to ₹34.6 crores and PAT surging by 264.9% to ₹24 crores. Consequently, the company raised its FY25 revenue growth guidance to 22-24% (from 16-20%) and its gross margin guidance to 34-36% (from 33-35%), reflecting strong confidence in its accelerating momentum.
Expanding Margins Driven by Operating Leverage
The company's gross margin percentage improved to 37.3% in Q3 FY25, up 48 basis points from 36.8% in Q3 FY24. This, combined with effective cost management, led to a substantial expansion in EBITDA margin to 12.3% (up 462 basis points YoY) and PAT margin to 8.2% (up 521 basis points YoY). Management attributed this to the benefits of operating leverage becoming evident as revenue grows, given that a significant portion of its cost structure remains fixed, contributing to enhanced profitability.
Robust Order Book and Strategic Capacity Expansion
Avalon's order book grew by 25% year-over-year, reaching ₹1,594 crores as of December 31, 2024, with an average execution period of 12-14 months. Long-term contracts, extending beyond 14 months, also increased by 32% year-over-year to ₹1,111 crores. To support this growth, the Chennai export plant is fully operational, and Phase 1 of the brownfield expansion in Chennai for the domestic market is complete, with Phase 2 expected to begin within 1-2 quarters. The company plans an annual CAPEX of ₹40-45 crores for the foreseeable future, maintaining asset turns of 8-10 times.
Diversified Growth Across Geographies and Verticals
The company highlighted broad-based growth, with India contributing 45% (₹125 crores) and the US 55% (₹156 crores) to Q3 FY25 revenue. India operations remain highly profitable with a 15% EBITDA margin and 10.8% PAT margin. While the US plant reported a net loss of ₹3.4 crores, this is an improvement from ₹14 crores loss in Q1 FY25, and management expects it to turn profitable in 12-18 months. Key growth drivers include industrial (57% YoY), clean energy (53% YoY), and mobility (10% YoY) sectors, with rail business scaling up well in India.
Working Capital Management and Cash Flow Outlook
Net working capital days improved from 161 days in March 2024 to 150 days in December 2024. Despite a temporary increase in trade receivables from 80 days (Sep '24) to 94 days (Dec '24) due to higher sales, management is confident of achieving its target of reducing net working capital days by 10-15 days by FY25 end, noting that these receivables are from large MNCs and were largely collected in early January. Cash flow from operations for 9M FY25 was negative ₹10.6 crores, but is expected to turn positive in coming quarters with increasing sales and operating leverage.
Strategic Approach to US Market and Political Risks
Avalon views its US manufacturing presence as a 'beachhead' and 'insurance policy' against potential political shifts or tariffs, allowing flexibility in production location. While the goal is to move production to India for cost efficiency, the US facility is crucial for prototypes, engineering interactions, and large products where transportation costs are prohibitive. Management noted that their clean energy business is primarily in energy storage (growing 50-70% YoY in the US), not rooftop solar, mitigating concerns about potential policy changes impacting solar.