Avantel Ltd: From Rising Defense Star to a Strategic Exit — Our Investment Journey

In the world of investing, some stories start with great promise and deliver well, while others begin with equal potential but gradually unravel — not due to poor financials at first, but due to subtle signs that become impossible to ignore. Avantel Ltd was one such journey for us.

THE ENTRY: IDENTIFYING A GEM (JULY 2021)

We first entered Avantel in July 2021 at an average price of ₹684 per share, drawn by a combination of strong fundamentals, an expanding defense and space tech portfolio, and government tailwinds via “Make in India” and defence modernisation. The company was focused on satellite communication systems, RF subsystems, and critical communication hardware used by DRDO, ISRO, and the Indian Navy.

From a financial standpoint, Avantel looked solid:

• Debt-to-equity: 0.00 — a debt-free status indicating financial prudence.
• Net profit margin (FY21): ~17.9%
• Return on capital employed (ROCE): 51.75%
• Operating profit margin: ~26%

The market cap back then was modest, and it seemed like a textbook small-cap defence story primed for long-term growth. We built a position steadily and were rewarded handsomely over the next two years.

CORPORATE ACTIONS AND SHAREHOLDER-FRIENDLY MOVES

The stock also had multiple shareholder-friendly corporate actions that fueled momentum:

1.      June 2022: A 1:2 bonus issue (1 share for every 2 held), aimed at rewarding long-term investors and increasing liquidity.

2.      June 2022: A stock split in the ratio of 1:10 — turning every ₹10 share into ten ₹1 shares. This further enhanced liquidity and attracted retail investors.

3.      July 2023: Yet another 1:2 bonus issue, reinforcing management’s commitment to returning value.

These moves, alongside continued earnings growth and margin stability, helped Avantel scale to a market cap of nearly ₹4,000 crore by late 2023.

TURNING POINT: RED FLAGS EMERGE (LATE 2023 – 2024)

However, as 2024 progressed, we started noticing worrying developments.

1. Promoter Actions: Donations and Selling

In early 2024, promoters donated 45 lacs share, valued at over ~₹70 crore, to a private charitable trust (Lakshmee Foundation). While this could be viewed as philanthropy, the size and timing were questionable.

More concerning was the May 2024 open market sale of a 2.07% stake by the entire promoter group — not just an individual. This reduced promoter holding from 40.87% to 38.80%.

Insider Deals Table- From Jan 2021, Promoter keep selling their stake. 46 lacs shares were sold woth Rs. 69 crore.(Excluded the donation part) 2.43% to total market cap.

Now, it’s important to note: promoter selling isn’t inherently bearish, especially if proceeds are being used for personal diversification or philanthropic causes. But in a high-growth company with a ₹2,000 crore valuation, where market expectations are sky-high, this move raised red flags. Promoter confidence is often the emotional anchor for retail and long-term investors.

2. No Investor Communication

Avantel hasn’t been conducting earnings calls or detailed investor briefings, despite its increasing market cap and investor base. The lack of visibility made it difficult to understand management’s long-term vision, expansion plans, or the rationale behind key decisions like stake donation or the sudden share sale.

For us, this marked the beginning of concern about management transparency.

3. Rights Issue Raises Eyebrows

Soon after the promoter stake reduction, Avantel announced a rights issue worth ₹80.9 crore, offering 10 shares for every 121 at ₹40 per share — a significant discount.

This begs the question: why raise funds at a discount when the business is supposedly cash-rich, and the promoters had just offloaded a large chunk of shares? While the official reasoning was greenfield/brownfield expansion and opex needs, the sequence of actions felt disconnected and poorly communicated.

FUNDAMENTALS WOBBLE: CASH FLOW & MARGINS

Despite posting a profit of ₹56.4 crore for FY25, the free cash flow turned negative at -₹0.68crore. Additionally, there were signs of margin contraction in the trailing quarters.

The accrual ratio (net income minus cash flow from operations divided by total assets) was positive at 0.34, suggesting reported profits weren’t fully backed by actual cash inflows.

This indicated potential issues in receivables or working capital management — especially important in a B2G (business-to-government) setup where cash flows can be lumpy and delayed.

OUR RETURNS: A 4X JOURNEY DESPITE A BUMPY END

We entered Avantel in July 2021 at an average price of ₹684 per share. Over time, the stock underwent two bonus issues and one stock split, ultimately adjusting our post-corporate action entry price to ₹30.04. By the time we fully exited in December 2024 — with prices in the ₹162 range — we had generated a total return on investment (ROI) of 433%. Despite concerns in the final phase, Avantel proved to be a high-yielding opportunity for the bulk of our holding period.

EXIT: A DISCIPLINED WALK AWAY (APRIL – DECEMBER 2024)

By April 2024, we had started exiting the stock gradually. Despite the company’s consistent revenue growth, the signals around governance, transparency, and capital allocation strategy became too loud to ignore.

• Promoter intent was unclear.
• Communication was non-existent.
• Corporate actions lacked clarity and coherence.

Our final exit on 13th December 2024 at ₹162/share turned out to be timely. And yes, the last leg of the investment was booked at a loss. It preceded a visible downturn in sentiment and performance. Post our exit, the stock dropped to ₹110, reflecting a broader loss of investor confidence.

It’s never easy to exit a stock you’ve held for years — especially one that gave you strong returns early on. But our investment philosophy is rooted in trust, governance, and long-term visibility, not just earnings and optics.

Key Lessons from the Avantel Journey

1.      Promoter Confidence Matters
When promoters reduce their stake — especially during growth phases — it’s worth probing deeper. It may not always be bearish, but context is everything.

2.      Communication is Key
In the absence of concalls or transparent management commentary, even strong numbers become questionable. Investor trust needs engagement.

3.      Corporate Actions Aren’t Always Shareholder-Friendly
Bonus issues and splits are great — but if followed by delusionary rights issues or stake sales, it hints at weak capital planning.

4.      Cash Flow is King
Profits look good on paper, but negative free cash flow and a high accrual ratio often tell the real story.

5.      Discipline Over Emotion
Selling a stock at a loss after years of conviction is emotionally taxing. But investing is a game of probabilities, not loyalty.

Conclusion

Avantel gave us one of our most rewarding investments — a 433% return over three years. But it also tested our conviction, analytical process, and emotional discipline when signs of trouble emerged.

In hindsight, the exit was both timely and necessary. It reaffirmed our belief that long-term investing is not about holding forever, but about staying aligned with the original thesis — and walking away when that thesis no longer holds.

We hope this breakdown of our Avantel journey offers insights into evaluating not just financial performance, but the softer, often overlooked aspects of investing — like management integrity, capital allocation, and communication clarity.

Disclaimer: This post reflects our personal investment experience and analysis. This is not financial advice. Please consult your financial advisor before making any investment decisions.