On Friday, Investec (LON:INVP) updated its outlook on Avalon Technologies Ltd (AVALON:IN), increasing the price target to INR490.00 from INR415.00, while continuing to advise a Sell rating on the stock. The adjustment comes after the company reported a significant 37% year-over-year (YoY) revenue growth in the second quarter, overcoming a series of disappointing quarters marked by declining U.S. revenues due to customer destocking.
The company's U.S. revenues saw a substantial rise of 59% YoY and 34% quarter-over-quarter (QoQ), while revenues from its operations in India increased by 15% YoY and 44% QoQ. Avalon has been strategically shifting its manufacturing base to India, which now accounts for 89% of its sales. This move has allowed the company to maintain tight control over employee costs, which only grew by 3% YoY.
The firm's gross margin expansion and operational leverage have contributed to an 11% EBITDA margin, surpassing Investec's estimate of 8%. Despite these positive developments, the expected ramp-up in the Clean Energy segment is now projected to be delayed until the fiscal year 2026, as contributions from a new customer have yet to materialize.
Investec has raised its earnings per share (EPS) forecast for the fiscal year 2025 by 11%, but the projections for fiscal years 2026 and 2027 have been increased by a modest 5%. This limited increase reflects that the benefits of restocking and margin improvements had already been factored into previous estimates. The firm noted that with valuations at 51 times the fiscal year 2026 earnings and 41 times fiscal year 2027 earnings, the stock's price-earnings (PE) ratio appears to be exceedingly high.
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