Avantel Ltd Q2 FY26: Sharp Profit Decline Raises Concerns Despite Revenue Stability

The stock has reacted negatively to the weak results, declining 3.88% to ₹190.50 on 18 October 2025, reflecting investor disappointment with the sharp deterioration in profitability. Over the past week, shares have fallen 6.48%, though the stock remains up 31.26% year-to-date and has delivered exceptional multi-year returns of 877.93% over three years.

The dramatic profit decline comes despite the company maintaining a sequential revenue growth of 6.76% quarter-on-quarter. However, on a year-on-year basis, net sales fell 28.42% to ₹55.42 crores in Q2 FY26 from ₹77.42 crores in Q2 FY25, indicating significant top-line pressure. More concerning is that the current quarter's profit of ₹4.27 crores represents a 67.3% decline from the previous four-quarter average, suggesting structural challenges rather than temporary headwinds.

Financial Performance: Margin Compression Drives Profit Erosion

Avantel's Q2 FY26 financial performance reveals a troubling trend of margin compression across all key profitability metrics. The operating profit margin excluding other income collapsed to 20.43% from 44.81% in the year-ago quarter, representing a decline of over 2,400 basis points. This dramatic contraction in operating leverage has been the primary driver of the profit decline.

The PAT margin for Q2 FY26 stood at just 7.70%, down sharply from 29.58% in the corresponding quarter last year. On a sequential basis, whilst revenue grew 6.76% from Q1 FY26, net profit jumped 32.20% quarter-on-quarter, providing some relief after the disastrous Q1 performance where profits had plunged 46.88%.

Employee costs rose to ₹12.54 crores in Q2 FY26 from ₹10.09 crores in Q1 FY26, though they remain below the ₹16.08 crores recorded in Q2 FY24. Interest expenses climbed to their highest quarterly level at ₹1.26 crores, up from ₹0.80 crores in the previous quarter, indicating increased borrowing costs. Depreciation also increased to ₹4.76 crores from ₹4.40 crores sequentially.

Operational Challenges: Revenue Volatility and Margin Pressure

The most striking feature of Avantel's recent performance has been the extreme volatility in quarterly revenue and profitability. The company's revenue has swung wildly between ₹41.76 crores (Mar'24) and ₹77.42 crores (Sep'24), making it difficult to establish a clear growth trajectory. This inconsistency raises questions about the sustainability of the business model and the predictability of order flows.

Despite these challenges, Avantel continues to demonstrate strong capital efficiency with a return on equity of 23.79% in the latest quarter and a five-year average ROE of 25.66%. The company's return on capital employed stands at 31.54%, well above most industry peers, reflecting efficient deployment of capital even in a challenging operating environment. These metrics suggest that when business conditions normalise, the company has the operational capability to generate attractive returns.

The balance sheet remains relatively healthy with a debt-to-equity ratio of just 0.14, indicating low financial leverage. Total debt stands at ₹21 crores with net debt of ₹13 crores, providing adequate headroom for future growth investments. Shareholder funds have grown to ₹237.25 crores as of March 2025 from ₹164.12 crores a year earlier, supported by retained earnings despite dividend distributions.

Industry Context: IT Hardware Sector Headwinds

Avantel operates in the IT hardware sector, which has faced headwinds from supply chain disruptions, component shortages, and fluctuating demand patterns. The company's revenue volatility mirrors broader industry challenges, though its margin compression appears more severe than typical sector trends.

Over the past year, Avantel's stock has outperformed the IT hardware sector by 15.11 percentage points, delivering a return of 13.41% compared to the sector's decline of 1.70%. However, this outperformance has come despite deteriorating fundamentals, suggesting that the stock's previous rally may have been driven more by momentum than by underlying business strength.

Peer Comparison: Premium Valuation Despite Weak Momentum

Avantel's valuation metrics appear stretched relative to both its own historical levels and peer group comparisons. With a trailing twelve-month P/E ratio of 96.53x and a price-to-book value of 21.28x, the stock trades at a significant premium to most IT hardware peers.

Whilst Avantel's ROE of 23.79% is significantly higher than most peers and provides some justification for the premium P/BV multiple, the elevated P/E ratio of 96.53x appears difficult to justify given the sharp profit decline and margin compression. The company's EV/EBITDA of 57.05x and EV/Sales of 20.32x also suggest an expensive valuation that leaves little room for disappointment.

The stock's valuation grade has been classified as "Very Expensive" since December 2022, when it transitioned from "Expensive" at a price of ₹21.16. At the current price of ₹190.50, the stock has appreciated substantially, but fundamentals have not kept pace, widening the valuation disconnect.

Valuation Analysis: Premium Difficult to Justify

At ₹190.50, Avantel trades at valuations that appear disconnected from its current earnings trajectory. The trailing P/E of 96.53x implies that investors are paying ₹96.53 for every rupee of annual earnings, a multiple that typically requires strong and consistent growth to justify.

The company's book value per share stands at ₹9.21, meaning the stock trades at 20.7 times its book value. Whilst the strong ROE of 23.79% supports a premium to book value, the current multiple appears excessive, particularly given the deteriorating profit trend and negative financial momentum.

The dividend yield of 0.11% provides virtually no income support for investors, with the company maintaining a conservative dividend payout ratio averaging 8.67% over the past five years. This suggests management is prioritising capital retention for growth, though recent results raise questions about the effectiveness of capital deployment.

Shareholding Pattern: Promoter Stake Declines, Institutional Interest Muted

Avantel's shareholding pattern reveals a gradual decline in promoter holdings and minimal institutional participation, which may reflect concerns about the company's near-term outlook.

Promoter holdings have remained stable at 37.15% in the latest quarter but have declined from 40.06% a year ago, suggesting some stake dilution or secondary market sales. The key promoters are Vidyasagar Abburi (16.98%) and Abburi Siddhartha Sagar (8.50%), with no pledging of shares—a positive indicator of promoter confidence.

Institutional participation remains negligible, with total institutional holdings of just 0.82%. Mutual fund holdings completely exited in Q2 FY26 after standing at 0.38% in March 2025, whilst FII holdings increased marginally to 0.67%. The number of FII investors increased from 24 to 35, though their absolute stake remains minimal. The lack of institutional interest is concerning and may reflect scepticism about the company's ability to sustain its historical growth rates.

Stock Performance: Exceptional Long-Term, Recent Weakness

Avantel's stock performance presents a tale of two narratives: extraordinary multi-year returns overshadowed by recent underperformance and heightened volatility.

The stock has delivered phenomenal returns over longer periods, with a three-year return of 877.93% and a five-year return of 3185.32%, vastly outpacing the Sensex. However, recent momentum has weakened considerably, with the stock declining 6.48% over the past week and generating alpha of -8.24% relative to the Sensex.

The stock currently trades 11.40% below its 52-week high of ₹215.00 but remains 111.01% above its 52-week low of ₹90.28. This wide trading range reflects the extreme volatility that has characterised the stock, with a one-year volatility of 57.04%—more than four times the Sensex volatility of 12.54%.

Investment Thesis: Quality Company, Challenging Phase

Avantel's investment thesis rests on its demonstrated ability to generate strong returns on capital and deliver impressive long-term growth, balanced against near-term headwinds and expensive valuations.

The company has maintained an "Average" quality grade for 22 consecutive quarters since March 2018, reflecting consistent but not exceptional operational performance. The five-year sales CAGR of 32.74% and average ROCE of 38.64% demonstrate strong underlying business fundamentals when operating conditions are favourable.

However, the financial trend turned negative in March 2025 and has remained so for two consecutive quarters, driven by falling profits, declining sales relative to recent averages, and deteriorating interest coverage. The technical trend recently turned bullish on 30 September 2025 at ₹174.35, though this has not been supported by improving fundamentals.

Key Strengths & Risk Factors

Outlook: What to Monitor

The coming quarters will be critical in determining whether the recent weakness represents a temporary setback or a more fundamental deterioration in business quality. Investors should closely monitor Q3 FY26 results for signs of margin recovery and revenue stabilisation.

Avantel Ltd. finds itself at a crossroads. The company has demonstrated its ability to generate exceptional returns over the long term, with strong capital efficiency metrics that distinguish it from many peers. However, the sharp deterioration in recent quarterly performance, combined with stretched valuations and minimal institutional support, suggests that the risk-reward equation has tilted unfavourably. The stock's current rating of "Hold" with a score of 50/100 reflects this balanced but cautious assessment—acknowledging the company's quality whilst recognising the significant near-term challenges and valuation concerns that make fresh investment inadvisable at present.