From 6% to 18.8% ROCE: Inside the high-efficiency recovery of India’s quietest electronics exporter

Avalon Technologies is growing like a capital-light business.

That is not how manufacturing usually works.

Revenue is up nearly 50%. Profit is scaling faster. Return on capital employed (ROCE) is recovering. And yet, the company is not investing aggressively to support that growth. Capital expenditure remains modest. Asset turns are unusually high. The balance sheet is not stretched.

That combination is rare.

Avalon Technologies Ltd 1-Year Share Price Chart

Because in manufacturing, growth usually comes with a cost. You add capacity, invest in plants, tie up capital and wait for utilisation to catch up. Returns move in cycles. Avalon, at least for now, seems to be doing the opposite.

Which raises a more interesting question than growth itself.

What exactly is driving this kind of capital efficiency?

Growth is strong. But look under the hood

On the surface, the numbers look straightforward.

In Q3 financial year 2026, revenue came in at Rs 418 crore, up 48.7% year on year. Profit after tax stood at Rs 33 crore, up nearly 36%. For the first nine months, revenue has grown 48.7% to Rs 1,123 crore, while profit is up 83% to Rs 72 crore.

This is not a one-quarter spike. The company has now delivered six consecutive quarters of growth.

At the same time, return ratios are improving again and asset turns have moved closer to 9.5 times. Net debt remains negligible.

Growth is strong. Returns are recovering. And capital intensity, at least for now, remains contained.

For a manufacturing business, that is an unusual combination.

A business split across two engines

Avalon operates in electronics manufacturing services (EMS), but not in the conventional sense. It focuses on “box build” systems, assembling fully integrated products rather than supplying components. This increases value addition and improves asset efficiency.

But the more important distinction is geographic.

In Q3 financial year 2026, around 78% of revenue came from India manufacturing and 22% from the United States. For the first nine months, the mix is more global, with 62% of revenue linked to US customers and 38% to India.

The difference shows up in profitability.

India operations reported an EBITDA margin of 16.7% and profit after tax margin of 11.9%. The US business, in contrast, is still scaling and reported an operating loss of Rs 7.8 crore in the quarter.

So the structure is clear.

India generates margins.
The United States generates growth.

The headline numbers are an average of the two.

Returns have improved. But the journey matters

Return on capital employed is improving, but the path to that improvement matters.

A few years ago, the business was far more efficient. Return on capital employed stood at around 24% in financial year 2022, before moderating to 17% in financial year 2023.

Then came a sharp reset.

As the company scaled up, working capital expanded significantly. Inventory built up, receivables stretched and capital got locked into growth. This pushed return on capital employed down to just 6% in financial year 2024.

The business was growing, but efficiency was collapsing.

What we are seeing now is a recovery from that phase.

Working capital is tightening again. Net working capital days have improved from around 150 days to 118 days over the past year. Cash flow from operations turned positive at Rs 51 crore in Q3.

At the same time, asset turns have improved to around 9.5 times, indicating better utilisation of existing assets.

As a result, return on capital employed has moved back up to 13% in financial year 2025 and further to 18.8% in the latest period.

In other words, the business is not just growing. It is extracting more from the same capital base.

The Semicon & Aerospace Pivot: Can Efficiency Survive Complexity?

Until recently, Avalon’s growth was largely driven by scaling existing programs.

That is beginning to change.

The company is now entering segments such as semiconductor equipment, aerospace systems and energy storage. These are longer-cycle businesses with higher complexity and potentially better margins.

But they are also different.

They take longer to scale. They require more upfront investment. And they do not always deliver the same asset efficiency as traditional electronics manufacturing services.

Which means the current model is being stretched into something more complex.

The issue is not growth. It is sustainability

So far, nothing in the numbers suggests a slowdown.

The company has raised its revenue growth guidance for financial year 2026 to around 40%. The order book remains strong, providing visibility over the next few quarters.

This is what a high-growth story looks like.

What is less clear is whether the current level of capital efficiency can sustain.

The present model benefits from high asset turns, modest capital expenditure and operating leverage. Newer segments may not scale in the same way.

Margins are stable, but not entirely internal

Avalon operates within a gross margin band of around 33% to 35%.

But recent quarters have shown that margins are not entirely within the company’s control. Tariffs impacted gross margins by around 100 basis points, even though most of the cost was passed on to customers.

As the business becomes more global and more complex, such external variables may play a larger role.

Margins are holding for now. But the drivers of those margins are beginning to shift.

Returns are improving. The next phase is harder

Return on capital employed has improved sharply, supported by operating leverage and better utilisation of existing assets.

Importantly, this has come without heavy reinvestment. Capital expenditure for the first nine months stood at around Rs 35 crore and management expects annual capex to remain around Rs 50 crore over the next few years.

This supports a capital-light model in the near term.

But this may not hold indefinitely.

As newer businesses scale, capital requirements are likely to increase. Semiconductor equipment, aerospace and energy systems typically involve longer gestation periods and more complex execution.

Returns driven by efficiency are easier to sustain than those driven by expansion.

Ownership is changing

Promoter holding has come down from about 51% to 44% over the past two years, while institutional ownership has steadily increased. Domestic institutional investors now hold over 26%.

That usually signals a shift.

From closely held to more widely owned.

The business is still led by its founder, Kunhamed Bicha, with execution increasingly in the hands of a professional management team.

Valuation reflects the future, not the present

At around 70 times earnings and over 10 times book value, the market is not paying for what Avalon is today.

It is paying for what it could become.

That includes continued high growth, stable margins and successful scaling of newer segments.

The difficulty is that these segments are not yet contributing meaningfully to revenue.

So while the numbers reflect the present, the valuation reflects the future.

And the gap between the two is where the risk lies.

The story is shifting

Avalon has already demonstrated that it can scale a high-growth manufacturing business with improving capital efficiency.

The next phase is more demanding.

It involves expanding into new segments, managing multiple geographies and sustaining returns as the business becomes more complex.

Because the company is no longer being judged only on how fast it grows.

It is being judged on how efficiently that growth holds together.

The question that matters

Avalon now sits between two realities.

One where growth is strong, returns are improving and capital efficiency remains high.

And another where new segments are still evolving, capital intensity may increase and the current model is yet to be tested at scale.

Nothing has broken.

But something has changed.

The question is not whether Avalon can grow.

It is whether it can continue to grow without becoming a more capital-heavy business.

Disclaimer:

Note: We have relied on data from www.Screener.in throughout this article. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information. 

The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only. 

Manvi Aggarwal has been tracking the stock markets for nearly two decades. She spent about eight years as a financial analyst at a value-style fund, managing money for international investors. That’s where she honed her expertise in deep-dive research, looking beyond the obvious to spot value where others didn’t. Now, she brings that same sharp eye to uncovering overlooked and misunderstood investment opportunities in Indian equities. As a columnist for LiveMint and Equitymaster, she breaks down complex financial trends into actionable insights for investors.

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