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  • Oct 10, 2023 - Smallcap Defence Company Declares 2:1 Bonus Issue; Stock Zooms 20%

Smallcap Defence Company Declares 2:1 Bonus Issue; Stock Zooms 20%

Oct 10, 2023

Smallcap Defence Equipment Company Declares 2:1 Bonus Issue; Stock Zooms 20%

In the recent past, more and more geopolitical tensions have dominated headlines.

Be it the Russia-Ukraine war or various revolts outside the US, it seems like the world is becoming more chaotic and unstable.

When nations lose trust with each other, it creates an environment where they are likely to engage in conflict to accomplish their goals.

This could be driven by the need for raw materials, cheaper labour, strategic military positioning, or whatsoever potential reasons.

The latest addition to the growing list of conflicts is Israel vs Hamas.

Last week on Saturday, Palestinian militant group Hamas launched a multi-pronged infiltration into Israel by land, sea and air using paragliders.

Now, if you followed the developments when the Russia-Ukraine war took place, you might have noticed a sharp re-rating in defence stocks.

Whenever there's developments about a conflict, defence stocks are the first one to get impacted.

Overnight, US stocks shot up. Shares of defence equipment and manufacturers including Northrop Gruman Corp, L3Harris Technologies Inc., Huntington Ingalls Industries Inc., Lockheed Martin Corp. and General Dynamics Corp. surged at least 8%.

Similarly in Indian markets, defence stocks got a boost and majority of the stocks were trading in the positive.

table

Avantel stood out from the pack and surged up to 15% in early trade.

Was it because Avantel had something to do with the Israel Hamas war?

Let's find out.

Why Avantel Share Price is Rising

#1 Bonus Issue & Quarterly Results

Post market hours on 9 October 2023, Avantel announced bonus shares in the proportion of 2:1.

Shareholders as on record date will get 2 bonus shares for every 1 share held. The company is yet to finalize the record date.

When a company announces a bonus issue of shares, it's generally seen as a positive move. It suggests the company is confident about its future earnings. This usually creates excitement among investors, who then buy more of the stock, driving its price up.

So, the 15% increase in Avantel's stock price after such an announcement isn't surprising. It's a result of investor confidence and interest in the stock.

The company also posted its quarterly earnings yesterday for the second quarter ended September 2023.

It reported net sales of Rs 540 million (m) compared to Rs 360 m in the year ago quarter while net profit rose to Rs 170 m compared with Rs 70 m in September 2022.

Operating margins shot up to 47% compared with 29% in September 2022 and 22% in June 2023.

Note that the company had also posted strong growth in the first quarter of FY24. So the positive sentiment around it was already building.

#2 Orders, Orders and More Orders!

Avantel is engaged in the business of designing, developing and maintaining wireless and satellite communication products, defence electronics, radar systems and development of network management software applications.

Majority of its customers are from the aerospace and defence sectors.

Today's steep rise could be attributed to the bonus shares announcement, strong Q2 results and because of the positive sentiment around the defence sector.

But if you take a look at the company's share price chart for the past one year, you'll notice that the stock has been going up for quite some time now.

This could be attributed to the overall positive sentiment in the sector and the heavy order book that Avantel is sitting on.

Last month, Avantel received a supply order worth Rs 103.9 m from Material Organisation, which is a department of the Indian Navy.

Before that, it received an order from the Mazagon Dock Shipbuilders for supply and installation of a UHF satcom system.

#3 Focus on Space Technology

Another factor driving the surge in Avantel shares is the recent developments in the space-tech sector.

When the Indian Space Research Organisation (ISRO) launched Aditya L1, India's first dedicated solar space mission, several stocks in the space sector hit their life time highs.

Now within the space sector, satellite launch services are going to be the fastest growing segment with increasing private participation.

With its experienced promoters, established track record, and strong balance sheet, Avantel is well placed to make the most of this opportunity.

Avantel has strong in-house R&D facilities, certified by the Department of Scientific and Industrial Research (DSIR), government of India. Its promoter is also a technocrat with over three decades of experience.

What Next for Avantel?

Given its focus on niche products, established track record and strong R&D facilities, Avantel has a leg-up compared to peers.

A recent report by rating agency ICRA also states that private sector firms are likely to get defence contracts worth Rs 600 billion (bn) in the financial year 2024-2025.

As and when Avantel gets more orders, the revenue visibility is expected to be stronger than ever.

There's also increase in defence budget allocations, which continues to aid the overall positive sentiment in the defence sector.

Apart from positives of defence budget allocations, Avantel continues to thrive from the positive developments in the space sector.

The company's management has said that the Indian National Space Promotion and Authorization Center and Indian Space Association (ISpA) have received great interest in non-government entities participation in the Indian Space technology domain.

Many factors indicate that Avantel could potentially grow rapidly over the next few years.

Surprisingly though, the smallcap stock has not yet received the attention it deserves from foreign investors or domestic mutual funds.

FII holding and mutual fund holding in the company continues to remain nil as of September 2023. Promoter holding stands at 40.1%.

How Avantel Share Price has Performed Recently

In the past five days, Avantel share price is up 14%. In the month gone by, the stock gained 35%.

While in the past one year, Avantel shares are up over 400%.

Today, the stock opened 15% higher at Rs 309 compared to its previous close of Rs 270.

Avantel touched a 52-week high of Rs 324 today and it has a 52-week low of Rs 58.2 on 10 October 2022.

chart

At the current price, the stock trades at a PE multiple of 63x compared to its 5-year average PE of 17x.

It looks even more overvalued on the price to book value front, trading at a P/BV multiple of 19x compared to its 5-year average of 3.1x.

About Avantel

Avantel has an established track record of over two decades in the electronics and telecom equipment business.

This enables the company to offer a unique combination of embedded systems and related software used in the defence sector, as well as RF systems used in the civilian telecom segment.

To know more, check out Avantel's financial factsheet and its latest quarterly results.

Investment in securities market are subject to market risks. Read all the related documents carefully before investing

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Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

Yash Vora

Yash Vora is a financial writer with the Microcap Millionaires team at Equitymaster. He has followed the stock markets right from his early college days. So, Yash has a keen eye for the big market movers. His clear and crisp writeups offer sharp insights on market moving stocks, fund flows, economic data and IPOs. When not looking at stocks, Yash loves a game of table tennis or chess.

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