KAVVERI TELECOM PRODUCTS LIMITED

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ICRA EQUITY RESEARCH SERVICE

KAVVERI TELECOM PRODUCTS LIMITED April 02, 2012 Industry: Telecom

Fundamental and Valuation Grades

ICRA Online has assigned the Fundamental Grade ‘3/5’ and the Valuation Grade ‘B’ to Kavveri Telecom Products Limited. The Fundamental Grade ‘3/5’ assigned to the company implies that it has “good fundamentals”. The Valuation Grade ‘B’ implies that the company is “moderately undervalued” on a relative basis (as on the date of the grading assigned).

Kavveri Telecom Products Limited, headquartered in Bangalore (India), was founded by Mr. Shivkumar Reddy in the year 1996. The company is mainly into design and development of Radio frequency (Rf) products and antennas. It has in-house research and development (R&D) facility driven by 60 member core team. Its key manufacturing facility is located in Bangalore (India). Besides growing organically, the company has followed the strategy of acquiring companies in order to expand its product basket and geographical reach. During the last six years, it has acquired five companies located in Canada, Spain and Mexico. The company also ventured into the In-Building Solution (IBS) business in September 2008, through its 51% owned subsidiary, Kavveri Telecom Infrastructure Limited (KTIL). Under this business model, KTIL provides the infrastructure required for enhancing the indoor coverage in malls, hospitals, hotels etc. on fixed rental to the telecom operators. Henceforth ‘Kavveri’ would refer to Kavveri Telecom Products Limited consolidated with its subsidiaries.

Grading Positives

(1) In-house R&D capabilities; well positioned to gain from the increased focus of the Government of India (GoI) towards indigenization of telecom equipments (2) Healthy operating profitability (3) Overseas expansion, newly started contract manufacturing activities and increased focus on defense sector offer significant diversification and growth opportunities (4) Fast ramp up of newly started In-Building Solution (IBS) business; once mature, the IBS business segment would generate steady free cash flows

Grading Sensitivities

(1) Intensely competitive nature of the industry marked by the presence of large multinational players, cost competitive Chinese players and local players (2) Reduction in demand from key customers could significantly impact the company particularly given its high customer concentration (3) Ability to effectively integrate operations with acquired companies and derive proposed synergies (4) Technology obsolescence risk (5) Unfavorable foreign exchange movement

ICRA Online Grading Matrix

Valuation Assessment

Fu

nd

am

en

tal

Ass

ess

me

nt

A B C D E

5

4

3 3B

2

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Fundamental Grading of ‘3/5’ indicates “good

fundamentals”

Valuation Grading of ‘B’ indicates “moderately

undervalued” on a relative basis

Key Stock Statistics

Current Market Price* (Rs.): 172.7 Shares Outstanding (crore): 2 Market Cap (Rs. crore) 348 52-Week High (Rs.) 191 52-Week Low (Rs.) 118 Free Float (%) 37% Beta 0.9 P/E on 2012-13 EPS Estimate (x) 5.5

*As on April 02, 2012

Shareholding Pattern (December 31, 2011)

Share Price Movement (36 months)

Key Financials (Consolidated)

(Rs. crore) FY10A FY11A FY12E FY13E FY14E

Operating Income 240.4 308.7 430.4 548.1 646.1 EBITDA Margin (%) 23% 22% 20% 21% 22% PAT Margin (%) 11% 13% 12% 11% 12% EPS (Rs.) 25.6 35.7 30.1 31.3 39.1 EPS Growth (%) 184% 40% -16% 4% 25% RoE (%) 34% 25% 20% 18% 19% RoCE (%) 29% 22% 21% 20% 21% P/E (x) 6.8 4.8 5.7 5.5 4.4 P/BV (x) 1.6 1.0 0.9 0.9 0.8 EV/EBITDA (x) 9.1 7.3 6.0 4.4 3.5 Source: Company, ICRA Online Estimates

ICRA Equity Research Service Kavveri Telecom Private Limited

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Summary

In-house capabilities for design and development of antennas and Rf products

Kavveri, founded in the year 1996, has been focused on the design and manufacturing of antennas and Rf products since its

inception. The products developed by the company find their application in wireless communication systems. Besides growing

organically, the company has acquired five overseas companies in the last six years to enhance its product base, technological

capability and geographical reach. Currently, together with its subsidiaries the company holds 45 patents and has nearly 1600

items in its product basket. It has a 60 member core R&D team with nearly 45 people located in India unit. The R&D unit in India is

also recognized by Department of Science and Industrial Research (DSIR), Ministry of Science & Technology, Govt. of India, since

1996. The in-house design and development capability of the company is also reflected in its healthy profit margins.

Endeavour to become global company with Indian operations; however, effective implementation of plans would be

challenging

Kavveri started its operation in India in 1996 and focused on domestic market in the initial stages. With an established track record

of over a decade, the company took acquisition route to broaden its geographical reach. During the last six years it has acquired five

companies located in Canada, Mexico and Spain. These acquisitions have given the company access to North America, Latin

America, and European markets. As a next step, Kavveri plans to shift the manufacturing operation of these overseas subsidiaries

to India in order to enhance its cost competitiveness and increase market share. During FY12, Kavveri has also started doing

contract manufacturing to expand its reach in overseas market. So far this strategy has worked well for the company with its

export sales from India operations increasing from less than Rs 1 crore in FY10 and FY11 to Rs 75-80 crore in 9mFY12. While the

above two strategies should help the company to increase its global footprint, effective implementation of the proposed plans

would be challenging. The company however plans to shift the manufacturing operation of the overseas units to India in phases in

order to mitigate the risk.

Current high customer and sectoral concentration; however diversification plans in place

Currently telecom sector contributes to more than 95% of the company’s total revenue, with the rest coming from the defense/

space sector. Considering the high growth opportunity and healthy profitability offered by defense/space orders, the company has

increased its focus in this sector and plans to increase its share to 15% of the total revenue by FY15. The customer concentration of

the company is also high with the top customer accounting for 42% of consolidated sales in 9m-FY12. However, the company’s

efforts to diversify sectorally and geographically should translate into moderation of customer concentration in the medium term.

Formidable competition and technology obsolescence poses threat

Global antennas and Rf products market is dominated by large multinational players like CommScope Inc., Kathrein, RFS and

Powerwave Technologies among others. The competitive intensity of the industry is further aggravated by the presence of low-cost

Chinese players and local players in respective markets. Additionally, the rapid technology changes associated with the wireless

communication infrastructure equipment industry exposes the market players to technology obsolescence risk. However, Kavveri

mitigates these risks to certain extent by competitively pricing its products, maintaining high quality standards and consistently

investing in R&D efforts.

Potential upside from increased focus of GoI towards indigenization of telecom equipments

The Ministry of Communication and Information Technology (India) released the draft National Telecom Policy (NTP) on 10

October 2011 for inviting comments. The draft policy sets a target of domestic production of telecom equipment to meet 80%

Indian telecom demand with a value addition of 65% by the year 2020. Among other benefits, the draft policy proposes to provide

preferential market access for domestically manufactured telecommunication equipment with special emphasis on Indian products

for which Intellectual Property (IP) rights reside in India. In case of effective implementation of the proposed policy, domestic

telecom product companies with in-house design and development capabilities would be significantly benefitted.

Fast ramp-up of In-Building solution business; however entry of new players could moderate growth

Kavveri ventured into the In-Building Solution business in September 2008, through its 51% owned subsidiary, Kavveri Telecom

Infrastructure Limited (KTIL)1. Under this business model, KTIL provides the infrastructure required for enhancing the indoor

coverage in malls, hospitals, hotels etc. on fixed rental to the telecom operators. Within a short span the company has installed its

1 Remaining 49% in KTIL is held by Mr Shivkumar Reddy and his family members


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equipments in nearly 37 million sq ft of mall/ hotel/ office space and enjoys an average tenancy of almost 2.8 times. During 9m-

FY12, KTIL generated a net profit of almost Rs 2.4 crore on an operating income of Rs 11.6 crore. Although the competition in the

industry is not very intense currently, there is a possibility of entry of new players in the medium term which could moderate the

company’s future growth.

Valuations

The various valuation comparisons suggest that Kavveri is trading at a discount to indices (including Nifty, CNX 500, CNX Mid Cap,

and CNX Small Cap) and its peers (Astra Microwave Products Limited, Shyam Telecom Limited). The discount to the peers is

despite Kavveri demonstrating a significantly better financial performance. Additionally, ICRA Online observes that there is

significant diversification and growth opportunity for the company from overseas expansion, newly started contract

manufacturing activities and IBS business, and increased focus on defense sector. The company also has in-house R&D capabilities

and is well positioned to benefit from the increased focus of the GoI towards indigenization of telecom equipment products.

However, the high competitive intensity of the industry, technology obsolescence risk associated with the business, and the

company’s current high customer concentration poses threat to the growth plans. Considering the above aspects, ICRA Online has

assigned a valuation grade of ‘B’ to Kavveri on a grading scale of ‘A to E,’ which indicates that the company is “moderately

undervalued” on a relative basis.


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Antennas and Rf products

Kavveri, established in the year 1996, has been focused on the design and manufacturing of antennas and Rf products since its

inception. The company started its operation in Bangalore (India) and focused on domestic market in the initial stages. With an

established track record of over a decade, the company acquired entities overseas in order to expand its product base and

geographical reach. Currently, while the company’s sales continue to be concentrated in India, it has gained access to key markets

like Europe, North America and Latin America through its various acquisitions. Its product basket consists of nearly 1600 items

which also includes products for next generation technologies.

Bangalore is the key manufacturing base of the company with a facility admeasuring nearly 1.5 lakh sq ft. The facility is equipped

with modern testing equipments and is adequate to accommodate next three year growth of the company. Kavveri’s customer base

comprises of telecom operators, Original Equipment Manufacturers (OEMs), system integrators, and defence organizations.

Currently, the company’s top customer contributes to more than 40% its total sales.

Table 01: Antennas and Rf products snapshot

Products

Antennas: (Sector, Panel, Patch, Yagi, Omni, Parabolic)

Base Station Antennas for CDMA, GSM, UMTS, AWS, WIFI, WIMAX

In-building Antennas

Customer Premise Equipment (CPE) Antennas Broadband, WiFi, WiMAX

Public Safety Antennas

GPS and Portable Antennas

Air Traffic Control Antennas

Defense and Aerospace Antennas

DBS Antennas

Microwave Antennas RF Products:

Repeaters

BDAs, Power Amplifiers, LNAs

Tower Mount Amplifiers (TMAs), Tower Mount Boosters (TMBs)

Frequency Converters

Base Station and High Rejection Filters

Duplexers, Diplexers, Triplexers, Point of Interconnect

Couplers, Bias Tees, Splitters, Combiners

Isolators and Circulators

Lightning Arrestors

R&D Capability

60 member Core R&D Team with 45 people located in India unit

Plans to expand the team to 75 members

Headed by Director (R&D), Mr. L. Nicholas who has previously served with the R&D team at Indian Space Research Organization

R&D unit in India is also recognized by DSIR, Ministry of Science & Technology, GoI, since 1996

45 patents

Manufacturing facility

Key manufacturing unit in Bangalore (India) - 1.5 lakh sq ft; accredited with ISO 9001:2008 - Equipped with modern testing equipments including Anechoic chamber for antenna testing,

star labs for BS antenna testing, network analyzers, spectrum analyzers, environmental test equipments, power sensors, and digital psophometer among others

- Lead by 260 member operation team; Plans to expand to 350 in near term

Other manufacturing units: 16,000 sq ft and 6,000 sq ft in Canada, and 30,000 sq ft in Mexico & Spain

Key Markets Largest market: India; contributed to 60% of the total sales in 9mFY12

Gained market access to Europe, North America and Latin America through various acquisitions

Key customers Wide customer base including telecom operators, turnkey equipment suppliers, system integrators,

and defence organizations

The top customer currently accounted for ~42% of 9mFY12 consolidated sale

Source: Company


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High sectoral, geographical and customer concentration; however, diversification plan in place Kavveri is currently concentrated in the telecom sector which accounted for to more than 95% of the total revenue in 9mFY12.

However, the concentration is expected to moderate going forward as the company has increased its focus on defence sector

considering the healthy profitability and high growth prospect of the segment2.

On the geographical front, India contributes to majority portion of the company’s revenue (~60% total revenue in 9mFY12).

However, considering the remunerative prices offered in the overseas markets, the company has been trying to increase its global

footprint through acquisitions. The company also plans to shift the manufacturing operation of the acquired entities to India to

become cost competitive and increase share in overseas markets. Besides, during FY12 Kavveri started doing contract

manufacturing which helped in moderating the geographical concentration to an extent.

The customer concentration of the company is high with the top customer accounting for 42% of consolidated sales in 9m-FY12.

However, the top customer concentration has reduced in the past two years. Going forward, the company efforts to diversify

sectorally and geographically should translate into further moderation of customer concentration.

Table 02: Diversification Plan

Current Status (9mFY12) Diversification plan/ efforts Desired result by FY15

Sectoral

Indian defence sector offers high growth opportunity considering the increased focus of the government towards indigenization of the defence products (defence offset clause)

Kavveri has several years of association with Indian defence organization

Profitability on defence order are typically good

Considering above points, the company has increased its focus on defence sector

Geographical

The company has adopted acquisition route to diversify geographically

In last six years it has acquired five entities which gave it market access to Europe, North America and Latin America

As a next step, Kavveri plans to shift the operation of overseas subsidiaries to India so that these subsidiaries become cost competitive and gain market share

Company also started contract manufacturing in FY12, which helped to increase the export sales from <Rs 1 crore in FY10 and FY11 to Rs 75-80 crore in 9mFY12

Customer

The customer concentration has reduced during last two years

The moderation during FY12 was on account of improvement in export sales driven by contract manufacturing revenue

Going forward, the company efforts to diversify sectorally and geographically should translate into moderation of customer concentration.

Source: Company

2 GoI introduced defence offset clause during 2008, which states that any defence contract with a value of more than Rs 300 crore when entered into with a foreign vendor, will have an industrial offset liability of 30-50% of the contract value.


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Endeavour to become global company with Indian operations; however, effective implementation of the plans and

achieving the targeted goal would be challenging

Besides growing organically, Kavveri has followed the strategy of acquiring companies in order to expand its product basket and

geographical reach. During the last six years, the company has acquired five companies. The first four acquired companies, namely

Til-Tek Antennae Inc. (Til-tek), DCI Digital Communications (DCI), Spotwave Wireless Ltd. (Spotwave) and Trackcom Systems

International (Trackcom), are located in Canada and provide access to mainly North America market. In November 2011, the

company acquired the fifth entity, the telecom division of Radiacion Y Microondas S A (RYMSA), having its operations in Spain and

Mexico. This acquisition provides the company with access to Europe and Latin America markets. The various acquisitions have

also enhanced the company’s technological capability and product basket. The recent acquisition of RYMSA’s telecom division has

expanded the company’s product basket from nearly 1200 items to almost 1600 items. Besides acquiring above entities, the

company also acquired Intellectual Property (IP) rights for Base station antennas from PCTel Inc in Q3 of 2007.

Chart 01: Key acquisitions

Source: Company

Q2-2006

Til-Tek

• Acquired Til-tek; 100% holding • Based in Canada • Provided access to North America market • Provided technology for Broad-band base station antennas

Q1-2007

DCI

•Acquired DCI; 100% holding • Based in Canada • Provided access to North America market • Provided access to specialized high precision filters/ combiners

Q3-2007

IP from PCTel

• Acquired IP rights for Cellular base station antennas , Remote Electrical Tilt (RET) and azimuth beam steering technology

• Total 14 patents acquired

Q1-2008

Spotwave

•Acquired Spotwave; 100% holding • Based in Canada • Provided access to to North America market • Provided technology for In-building Wireless repeaters (Intelligent non-engineered adaptive); 27 patents

Q1-2009

Trackcom

•Acquired Trackcom; 67% holding; remaining 33% with promoter of Trackcom •Based in Canada •Provided access to to North America market •Provided technology forpassive and active Rf technology solutions for defence and space sectors

Q4-2011

•Acquired telecom division of RYMSA; ~100% holding; RYMSA brand name can be used for 30 months •Based in Spain and Mexico; Spain division renamed as Kaveri Telecom Espana; Mexico division named as Rymex •Provided access to Europe and Latin America markets; Provided technology for RET and Multipoort Antenna • During Nov'11-Feb'12, RYMSA telecom division generated Euro 4.5 million revenue (a Y-o-Y increase of 111%)


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The revenue generated by various acquired entities is much lower in comparison to that generated by the company’s Indian

operation; during 9mFY12, all the overseas subsidiaries together generated nearly Rs 43.3 crore of revenue as compared to Rs

248.3 crore generated by Indian operations (excluding revenue from rental based In-building solution business). One of the

constraints in expanding the revenue base of these entities is their high cost of manufacturing due to which they are out-bid by the

low cost Chinese players in many orders. Therefore, the company intends to shift the manufacturing operation of its overseas

subsidiaries to India. As the labour cost in India is much lower than that in the respective locations of the subsidiaries, there is

significant scope of cost saving through the implementation of the plan. This should enhance the cost competitiveness of the

acquired entities which in turn should translate into increase in their market share and improvement in margins.

In order to capitalize on the low cost advantage provided by India and drive export revenue growth, Kavveri India also

started executing contract manufacturing orders during FY12. So far this strategy has worked well for the company with its export

sales from India operations increasing from less than Rs 1 crore in FY10 and FY11 to Rs 75-80 crore in 9mFY12. The company also

has nearly USD 19 million (~ Rs 95 crore) of contract manufacturing export orders which has to be executed in next 12 months.

Overall, the dual strategy of enhancing the market position of its overseas subsidiaries by making them cost competitive and

tapping the contract manufacturing market should help the company to realize its objective of becoming a global company with

Indian operations.

In order to implement the aforementioned plans, the company has to significantly ramp up its manufacturing capacity in India.

While the space and equipment available in the Bangalore manufacturing unit is adequate to accommodate the new activities, the

company would have to recruit additional skilled workers in order to increase its manufacturing capacity. Accordingly, the

company plans to increase the operation work force in India from 260 currently to almost 350 in the near term. Besides the

recruitment of competent staff, providing adequate level of training would be a key execution/ operational challenge for the

company. Failing to meet these challenges effectively, the company’s manufacturing efficiency and its products’ quality could be

adversely impacted. The company also faces other key risks like - risk of labour unrest at the various subsidiaries, and risk of

drying up of orders and idling of resources in India on account of increased competition from the Chinese players or due to weak

economic scenario. However, Kavveri plans to mitigate the risks by shifting the manufacturing operation of the overseas units to

India in phases. In Phase 1, the company would only bring those orders to India which are economically unviable to be executed in

the subsidiaries due to their high cost. Subsequently, higher volume orders would be shifted followed by medium volume orders.

The company would continue to manufacture low volume orders locally.

Formidable competition poses threat

In India as well as globally, antennas and Rf product market is dominated by large multinational players like CommScope Inc.,

Kathrein-Werke KG, Radio Frequency Systems (RFS, owned by Alcatel-Lucent), Powerwave Technologies Inc, and Tyco Electronics

among others. While the operating cost of the multinational players is much higher than Kavveri, they have competitive advantage

on account of their established brand names in global market, wider range of product offerings, global tie-ups with turnkey

equipment suppliers, and ability to invest heavily on R&D activities. Additionally Kavveri faces competition from low-cost Chinese

players and local players in respective markets. Kavveri however, maintains high quality standards and competitively prices its

products in order to compete in Indian and global market.

Technology obsolescence risk

The wireless communication infrastructure equipment industry is extremely competitive and characterized by rapid technology

changes, new product developments, rapid product obsolescence, evolving industry standards and significant price erosion over

the life of a product. The situation is further aggravated by the presence of strong multinational players in the industry which have

significant financial and technical capability to invest on R&D of new products. Therefore, Kavveri is exposed to the risk of the

competitors developing new technologies and introducing enhanced products in the market that would offer superior price or

performance feature. However comfort can be drawn from the fact that in the past Kavveri has consistently moved up the

technology curve through in-house R&D efforts and acquiring companies/ technologies. The company has also developed wide

range of product for next generation technologies.


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Outlook for global wireless infrastructure equipment demand remains positive; however actual growth in various markets would depend on local factors Despite significant economic headwinds, the demand for higher data rates has compelled telecom operators worldwide to invest in

new equipment, driving growth in infrastructure gear sales in 2011. India was however an exception where various factors like –

price war among operators, slow pick-up in demand for 3G services and uncertainty in the sector on account of 2G scam –

contributed towards the moderation in investment by telecom operators.

Going forward, worldwide wireless infrastructure equipment market is projected to grow with a CAGR of almost 6% for the next

four years. Across the globe - from the developed economies of North America, Europe, and North Asia, to the developing regions of

Latin America, Africa, and South Asia - carriers are upgrading their wireless networks. The carriers in the developed nations are

focusing on investing in incremental network upgrades to 3.5G, 3.75G, and 3.9G technologies. But several operators have

commenced trials and are beginning to deploy and commercially operate 4G LTE networks. Service providers in many of the

emerging markets are also upgrading their 2.5G networks to 3.5G technologies and offering new data-centric services to customers.

However, actual growth in various markets would depend on local factors like changes in policy framework, rate of acceptance of

new technologies by customers, competitive intensity in the industry, availability of funds at competitive rate, and overall

economic environment among others. With respect to India specifically, while 3G/ 4G rollouts and rural expansion are expected to

be key demand drivers for wireless infrastructure equipments, policy related issues and uncertainties prevailing in the industry

could delay operators’ capital expenditure plan.

Potential upside from increased focus of GoI towards indigenization of telecom equipments

The Ministry of Communication and Information Technology (India) released the draft National Telecom Policy (NTP) on 10

October 2011 for inviting comments. The draft policy sets a target of domestic production of telecom equipment to meet 80%

Indian telecom demand with a value addition of 65% by the year 2020. It proposes to provide preferential market access for

domestically manufactured telecommunication equipment with special emphasis on Indian products for which Intellectual

Property Rights reside in India. The draft also proposes to provide soft credit to Indian product manufacturers for domestic

deployment and exports. In case of effective implementation of the proposed policy, domestic telecom product companies with in-

house design and development capabilities would be significantly benefitted. However, in our earnings estimate, we have not

factored in growth impact due to implementation of the policy.


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In-Building Solution Business

Kavveri Telecom Products Limited ventured into the IBS business in September 2008, through its 51% owned subsidiary, Kavveri

Telecom Infrastructure Limited (KTIL)3.

IBS: the lease based business model

Considering relatively high loss of signals within enclosed areas, mobile service providers require IBS to provide coverage and

capacity to their subscribers inside building. Traditionally, in India mobile service providers have been handling the in-building

connectivity themselves. However, off-late the ‘neutral host’ model is gaining momentum, where a third party (Neutral Host

Provider, NHP) invests in the infrastructure and leases it out to various telecom operators. The NHP offers end-to-end solution

from acquiring the right of way for in-premise, to planning, deploying, and maintaining the telecom solutions infrastructure. The

operator is benefitted from this model as it does not have to incur the capex and can focus on its core competency of acquiring and

retaining customers. Additionally, the plug-and-play model significantly reduces the operator’s time to market and also reduces its

cost as the resources are shared by various operators.

The business model offers healthy returns for the NHPs. Assuming initial capital expenditure of Rs. 16/ sq ft, equipment life of 20

years, rental of 8 paisa/ tenant/ month for 2G service, and escalation of 5% after every 3 years, the business would generate almost

18% return on investment once the average occupancy ratio (indicating average number of tenants per mall) crosses 3 times. The

threat of a telecom operator terminating the lease term with the NHP is low, as the NHP typically enters into exclusive contract

with premise owners thereby creating its monopoly in the premise.

KTIL: Fast ramp-up of operation

KTIL has been focused in rental-based IBS business in India since its inception. In a short span of 3.5 years the company has

installed its equipments in nearly 37 million sq ft of mall/ hotel/ office space and enjoys an average tenancy of almost 2.8 times.

Additionally, around 13 million sq ft is space is under development for which tenants has been already tied up (average tenancy:

~2.7-2.8 times). The company has entered into long term service agreements with leading telecom operators like RCom, Airtel,

Vodafone, Idea, Aircel, TTSL etc. During 9m-FY12, KTIL generated a net profit of almost Rs 2.4 crore on an operating income of Rs

11.6 crore.

Chart 02: Key IBS projects

Source: Company

3 Remaining 49% in KTIL is held by Mr Shivkumar Reddy and his family members

Malls

• Mantri Square Mall,

Bangalore

• Express Avenue Mall,

Chennai

•Ampa Mall, Chennai

•Forum Mall, Kolkata

•Mani Square Mall, Kolkata

Hotels

• Hotel E-Inn, Bangalore

•Hotel Park, Mumbai &

Hyderabad

•Hotel Marriott, Bangalore

& Pune

•Hotel Hyatt, Pune &

Chennai

•Hotel Leela, Chennai

Hospital

•Seven Hills Hospital,

Mumbai

•Fortis Hospital, Bangalore

& Kolkata

•Jayadeva Hospital,

Bangalore

•AMRI Hospital, Kolkata

•Sarvodaya Hospital, Delhi

•Narayana Hrudayalaya,

Bangalore

Corporate Offices

•L&T Info city, Bangalore

•Salarpuria Info Zone,

Bangalore

•Ferns ICON, Bangalore

•IRIS Tech Park, Gurgaon


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Kavveri’s vertically integrated operation provides competitive advantage

Kavveri’s antenna/ Rf product manufacturing operation complements the group’s IBS business. While KTIL focuses on installation

and maintenance of the infrastructure, most of the equipments required are procured from the parent company, Kavveri Telecom

Products Limited. The vertically integrated set-up helps in faster turnaround of sites and savings in operational cost. Additionally

there is frequent exchange of ideas between the product team and installation/ maintenance team which helps in continuous

product improvement and reduction in capital cost.

Future growth plans

Going forward, the rollout of 3G/ 4G services in India is expected to provide significant fillip to IBS business. This is on account of

three key reasons: (1) The expansion of data from 3G/ 4G services would require increasing amount of bandwidth (2) The high

end 3G/ 4G services is expected to increase the focus of the operators towards Quality of Service (QoS) (3) As the spectrum

allocated for 3G/ 4G services in India is in the higher frequency range, it would be difficult for signals to penetrate a building from

outside; therefore IBS would be critical to provide coverage and capacity to customers.

KTIL plans to invest nearly Rs 40 crore annually for the development of the sites during the next three years. Considering the

capital intensive nature of the business, the promoters’ ability to arrange for adequate funds at regular intervals would remain to

be a critical factor for a future liquidity profile of the group. The near to medium term funding risk is however mitigated to large

extent by the fresh equity funding of almost Rs 65 crore received by Kavveri during FY12, current low gearing level of the group,

and the fresh term loan sanction of almost Rs 45 crore recently received by KTIL.

Current low competitive intensity; however, threat of new entrant exists

Currently IBS business in India is not very competitive, marked by the presence of only few serious players like Ubico Networks,

GTL Infrastructure, Viom Networks and Kavveri. However, as the business offers healthy return on investment, there is a

possibility of new players entering the market in the medium term. The potential new entrants in the IBS business are telecom

tower infrastructure providers, system Integrators, wireless infrastructure equipment suppliers, real estate developers, hoteliers,

and mall management companies among others. However, there exist entry barriers, like high technical intensity and high capital

intensity of the business, which would provide certain degree of protection to the incumbents.


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Financial Profile

Sales growth in the past mainly driven by India sales; going forward, growth expected to be broadbased

Chart 03: Sales growth trend (FY09–FY14E)

Source: Company; ICRA Online estimates

The consolidated revenue of Kavveri grew with a CAGR of 53% from FY07 to FY11. The growth has been mainly driven by growth

in India sales which in turn was on account of Kavveri’s broadened product portfolio and overall growth in demand of wireless

infrastructure equipment in India. Revenue growth during FY10 and FY11 was despite Kavveri reducing its focus on the trading of

cables, connectors and other low value added items.

The growth momentum continued during FY12, with the standalone company sales recording a Y-o-Y growth of almost 38% during

the first nine months of the year. The growth is largely backed by strong traction witnessed in the newly started contract

manufacturing activity.

Going forward, the growth momentum of the company is expected to continue. The future growth would be driven by

following factors (in decreasing order of priority):

1) Fresh acquisitions: RYMSA – telecom division, acquired in November’2011, would contribute significantly

towards FY13 growth as this would be the first full year operation of the entity under Kavveri management (only

5 months revenue of RYMSA – telecom would be accounted in FY12 consolidated revenue). RYMSA currently has

confirmed orders of Euro 12 million in its books. For our earnings estimate, we have not considered any new

acquisition during the next two years.

2) Shifting of manufacturing from overseas subsidiaries to India: This will allow the company to tap the markets

which were earlier impenetrable because of the low price points offered by Chinese competitors.

3) Contract manufacturing: The company currently has nearly USD 19 million contract manufacturing export orders

in hand which has to be executed in next 12 months.

4) India sales to be driven by defence order: The company has increased its focus in the defence/ space sector and

expects it to contribute to almost 15% of the total sales by FY15. This segment should drive India sales of the

company. In our earnings estimate, we have not factored in growth impact due to GoI increased focus towards

indigenization of telecom equipments.

5) IBS: This business segment is also expected to grow rapidly, considering the company’s plan to invest ~Rs 40

crore annually. However, as IBS is not a major top-line contributor by nature of the business, its share in the total

revenue would remain low going forward.


12

Operating margins expected to remain in the range of 20-22% in medium term; EPS growth impacted by equity dilution

Chart 04: OPBDITA and EPS growth trend (FY09–FY14E)

Source: Company; ICRA Online estimates

During FY10, the operating margin of the company improved significantly on account of change in its sales mix – the company

reduced its exposure in low margin traded items like cables, connectors etc after incurring losses in trading activity during FY09 .

Going forward, although the company intends to improve its profit margins by shifting the manufacturing operations of overseas

subsidiaries to India, we do not expect any significant improvement on margins due to this in the medium term. This is because we

expect the positive impact of higher economy of scale and lower cost of operation in India to be offset by the initial cost associated

with setting up of process. Additionally, the improvement in the margin would be gradual as the manufacturing operation from

abroad would be shifted in phases to India. We also believe that sustainable operating margin from contract manufacturing activity

would be lower than indigenous product sales. Therefore the company’s presence in contract manufacturing segment would drag

down its profitability to a certain extent. However, increasing proportion of IBS services income should have a positive impact on

the company’s operating profitability margin. Overall, we expect the OPBDITA margin of the company to remain in the range of 20-

22% in the medium term. The expected return on capital employed (ROCE) is also in the range of 20-21% for the forecasted

period.

The equity base of the company has expanded from 1.4 crore shares as on 31st March 2011 to nearly 2 crore shares as on 31st

December, 2011. Therefore despite an estimated increase of almost 25% in net profits during FY12, the EPS of the company is

expected to decline by almost 17% during the year. However, in the subsequent years the EPS growth should be back on track.

Exposed to foreign currency fluctuation risk

As export from India is expected to increase going forward, the company’s exposure on foreign currency exposure would also

increase. The company has a policy of not hedging its receivables. Any adverse movement in foreign currency movement can have

material impact on the company’s net earning level. We have however not factored any impact due to currency movements in our

projections.

Healthy capital structure; no significant funding/ liquidity concern in the medium term

The company has funded its working capital requirements and capital expenditure plan in the past through a mix of debt and

equity; net debt addition of nearly Rs 77.5 crore and fresh equity infusion of nearly Rs 95 crore during the period April’08 -

March’11. On account of adequate equity funds received in the past, the company’s gearing level is moderate at nearly 0.8 times as

on 31st March 2011. Further during FY2012, the company received Rs 65 crore of additional equity funds through successful

qualified institutions placement (QIP) of approximately ~Rs. 40 crore (shares issued at Rs 135/ share), and conversion of warrants

into equity (shares issued at Rs 113/ share). Therefore, the gearing level of the company is estimated to have further moderated to

almost 0.5 times as on 31st March 2012 (ICRA Online estimates).

As for the capex plans of the group, while IBS business would require to spend almost Rs 40 crore annually on infrastructure

development, the manufacturing operations of the company does not require any significant capex in the medium term as the

capacity was recently enhanced in FY09 and FY10. For the capital expenditure in IBS business, the company has already received

debt sanction of Rs 45 crore from bank. Additionally, considering the fresh equity funding of almost Rs 65 crore received by


13

Kavveri during the FY12 and current low gearing level of the group we do not foresee any significant funding or liquidity concern in

the medium term.


14

Company Profile

Kavveri, founded by Mr. Shivkumar Reddy in the year 1996, is mainly into design, development and marketing of Rf products and

antennas. The company has in-house research and development facility driven by 60 member core R&D team. Its key

manufacturing facility is located in Bangalore, India. During FY12, the company also started contract manufacturing activity which

has helped in its export sales growth. During last six years, Kavveri has acquired five companies in order to broad base its product

portfolio and expand its geographical reach. The company has also ventured into the In-Building Solution business in September

2008, through its 51% owned subsidiary, KTIL. This is a capital intensive business model requiring significant upfront expenditure

by KTIL on infrastructure development. At consolidated level the company has generated a PAT of Rs 39 crore on an Operating

Income of Rs 309 crore during FY11.

Table 03: Company Fact Sheet

Name of the Company Kavveri Telecom Products Limited (Kavveri)

Year of Incorporation 1996

Corporate Status Public Limited Company

Registered Office Kavveri Telecom Products Limited, Kavveri Industrial Complex, Ist main, 2nd Stage, Arakere

Mico Layout, Banerghatta Road, Bangalore – 560076

Auditors S Janardhan & Associates

Board of Directors Director Name

C. Shivkumar Reddy

Mrs. R H Kasturi

Mr. L Nicholas

Mr. L. R. Venugopal

Mr. B. S. Shankarnarayanan

Mr. C. V. Jagadish

Designation

Chairman & Managing Director

Director (HR and Admin)

Director (R&D)

Independent Director



Key subsidiaries/ associate

companies

Subsidiaries

Eaicom India Private Limited [100% subsidiary]

Kavveri Technologies Inc. Canada [KTIC, 100% subsidiary]

Kavveri Telecom Infrastructure Limited [KTIL, 51% subsidiary]

Til-Tek, Canada [100% held by KTIC]

DCI Digital Communication, Canada [100% held by KTIC]

Spotwave Wireless Inc. [100% held by KTIC]

Trackcom Systems International Inc. [67% held by KTIC]

Kavveri Realty 5 Inc. [100% held by KTIC]

Kavveri Telecom Espana [KTE, 100% subsidiary]

Rymex [99.99% held by KTE]

Source: Company

Corporate Governance

Kavveri is managed by a 6-member Board, which includes 3 independent directors. While the promoter family is closely involved

in running the business, the company has a professional management structure. The promoter group holds 32.3% equity stake in

the company and the rest is widely held and includes institutional investors. The company has constituted various committees,

which include the Audit committee, the Remuneration Committee and the Investors’ Grievance Committee.


15

Valuation Grading

In assessing a company's valuation, various parameters are looked at including

the company's earnings and growth prospects, its ability to generate free cash

flows, and its capacity to generate returns from the capital invested. The

valuation is also benchmarked against an appropriate peer set or index. The

opinion on a company's relative valuation is expressed using the five-point scale.

While assessing a company's relative valuation, the historical price volatility

exhibited by the stock, besides its liquidity, is also taken into account. The extent

of overvaluation or undervaluation is adjusted for the relative volatility

displayed by the stock.

Relative Valuation: Index Comparison

Chart 05: Comparison with Indices (Price movement) Chart 06: Comparison with Indices (Trailing PE)

Source: Bloomberg Source: Bloomberg

Table 04: Index Comparison

ICRA Online estimates

Nifty CNX 500 CNX Small Cap CNX Mid Cap Kavveri

FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E

Price/Earnings 15.1 13.1 14.8 12.4 12.4 9.1 14.6 12.1 5.7 5.5

EV/EBITDA 10.1 8.9 10.4 8.8 8.3 6.8 11.9 10.0 6.0 4.4

Price /Sales 1.6 1.5 1.3 1.2 0.8 0.7 0.9 0.8 0.7 0.6

Price /Book Value

2.4 2.1 2.2 1.9 1.4 1.2 1.6 1.5 0.9 0.9

Price/Cash Flow

10.7 9.1 10.5 8.7 6.7 5.6 11.5 8.7 4.8 4.6

Source: Bloomberg, ICRA Online estimates

*ICRA estimates based on share price as on April 02, 2012 NSE; # Bloomberg consensus estimates as on April 02, 2012

Kavveri has been trading at a discount to Nifty, CNX 500, CNX Small Cap, and CNX Mid Cap indices. While the discount to Nifty, CNX

500 and CNX Mid Cap can be partly justified considering the moderate scale of operation of the company, discount to CNX Small

Cap is untenable particularly given the strong growth and profitability demonstrated by the company in the past. Additionally, the

company has concrete plan in place to drive its future growth.

Valuation

Grade

Grade Implication

A Significantly undervalued

B Moderately undervalued

C Fairly valued

D Moderately overvalued

E Significantly overvalued


16

Relative Valuation: Historical Comparison

Chart 07: Forward PE curve Vs 3 Year Forward PE Mean Chart 08: Forward PE Band

Source: Bloomberg, ICRA Online Estimates Source: Bloomberg, ICRA Online Estimates

The three year mean of the company’s forward PE is nearly 3.4 times. The company has been consistently trading above the

average PE band since Q2 of FY11. It should be noted that the forward PE graph of the company has shown consistent upward

trend during the last three years.

Relative Valuation: Peer Comparison

Chart 9: Comparison with Peers (Price Movement) Chart 10: Comparison with Peers (EPS trend)

Source: Bloomberg Source: Annual reports; www.moneycontrol.com

Table 05: Comparison with Peers (Financial)

Company Market Cap (Rs Cr.)

Operating Income (Rs Cr)

EBITDA (Rs Cr)

PAT (Rs Cr)

EBITDA% PAT% ROCE% RONW% EPS (Rs)

Astra 301 161 44 19 27% 12% 10% 13% 2.3

Shyam 32 677 10 4 2% 1% 8% 8% 3.4

Kavveri 348 309 69 39 22% 13% 22% 25% 35.7

Source: Annual reports; www.moneycontro.com Market cap as on April 2, 2012; Other data pertains to FY11

http://www.moneycontro.com/


17

Chart 11: Comparison with Peers (Trailing PE)

There are only two companies in the listed universe which can

be compared with Kavveri. These are Astra Microwave

Products Limited (Astra) and Shyam Telecom Limited (Shyam,

part of Shyam Group). As seen from Table 05, Astra is a closer

comparison with respect to market cap, scale of operation and

profitability indicators. The key difference between Kavveri

and Astra is that while Kavveri is concentrated in telecom

sector, Astra mainly caters to defense sector. Chart 10, 11 and

Table 05 together shows that Kavveri has been trading at a

significant discount to the listed peers despite demonstrating a

significantly better financial performance. Additionally from

Chart 9 we see that during the last 3 years Kavveri stock has

appreciated considerably as compared to its peers.

Source: Bloomberg

Valuation Grade

The various valuation comparisons shown above suggest that Kavveri is trading at a discount to various indices, and its peers. The

discount to the peers is despite Kavveri demonstrating a significantly better financial performance. Additionally, ICRA Online

observes that there is significant diversification and growth opportunity for the company from overseas expansion, newly started

contract manufacturing activities and IBS business, and increased focus on defense sector. The company also has in-house R&D

capabilities and is well positioned to benefit from the increased focus of GoI towards indigenization of telecom equipment

products. However, the high competitive intensity of the industry, technology obsolescence risk associated with the business, and

the company’s current high customer concentration poses threat to the growth plans. Considering the above aspects, ICRA Online

has assigned a valuation grade of ‘B’ to Kavveri on a grading scale of ‘A to E,’ which indicates that the company is “moderately

undervalued” on a relative basis.


18

Annexure 1: P&L Estimates (Consolidated)

Rs Crore FY10A FY11A FY12E FY13E FY14E

Net Sales 237.1 301.7 430.4 548.1 646.1

Other Related Income 3.3 7.0 0.0 0.0 0.0

Operating Income 240.4 308.7 430.4 548.1 646.1

EBITDA 55.8 69.2 85.1 115.5 142.9

Depreciation 6.0 7.2 9.6 12.0 14.4

EBIT 51.6 65.1 85.5 104.1 129.1

Interest Expenses 12.7 13.5 17.1 20.4 24.7

Other Income 3.0 5.9 10.0 0.6 0.6

PBT 38.8 51.5 68.4 83.7 104.4

PAT 25.8 39.3 51.3 62.8 78.3

Minority Interest 0.0 0.6 0.0 0.0 0.0

PAT (Concern Share) 25.8 38.7 51.3 62.8 78.3

No of shares (Cr) (basic) 1.0 1.1 1.7 2.0 2.0

DPS (basic) 2.0 2.2 1.8 1.5 1.5

EPS (basic) 25.6 35.7 30.1 31.3 39.1

CEPS (basic) 29.6 39.0 34.0 35.8 44.8

Source: ICRA Online Estimates

Note 1: Amounts are presented in Rs. Crore; EBITDA: Earnings Before Interest, Tax, Depreciation and Amortization; EBIT: Earnings

Before Interest and Tax; PBT: Profit Before Tax; PAT: Profit After Tax; DPS: Dividend Per Share; EPS: Earnings Per Share; CEPS: Cash

Earnings Per Share


19

Annexure 2: Balance Sheet Estimates (Consolidated)

Assets (Rs Crore) FY10A FY11A FY12E FY13E FY14E

Net Fixed Assets 111.4 153.2 188.6 221.6 252.2

Capital Work-in-Progress 38.4 24.0 24.0 24.0 24.0

Total Net Fixed Assets 149.8 177.2 212.6 245.7 276.2

Other Long-Term Investments 0.0 0.0 0.0 0.0 0.0

Cash and Bank Balances 11.9 7.6 10.0 10.0 10.0

Receivables 111.6 100.3 139.9 178.1 209.9

Inventories 39.7 72.2 103.0 131.2 154.7

Loans & Advances 64.5 81.7 110.5 120.8 142.4

Other Current Assets 11.8 13.2 0.0 0.0 0.0

Total Assets 389.4 452.2 576.1 685.7 793.2

Liabilities (Rs Crore) FY10A FY11A FY12E FY13E FY14E

Net Worth 108.4 203.6 316.8 376.5 451.8

Minority Interest 0.4 1.1 1.1 1.1 1.1

Total Debt 173.0 157.5 169.6 213.2 240.3

Deferred Tax Liability 8.9 9.1 9.1 9.1 9.1

Trade Creditors 33.2 17.1 24.6 30.8 35.9

Other Current Liabilities and

Prov. 65.5 63.8 55.0 55.0 55.0

Total Liabilities 389.4 452.2 576.1 685.7 793.2


20

Annexure 3: Cash Flow Estimates (Consolidated)

Cash Flows (Rs Crore) FY10A FY11A FY12E FY13E FY14E

PBT 38.8 51.5 68.4 83.7 104.4

Taxes Paid 9.1 12.1 17.1 20.9 26.1

Depreciation 6.0 7.2 9.6 12.0 14.4

Change in net working capital (96.8) (57.8) (88.8) (70.4) (71.9)

Cash flow from operating activities (61.1) (11.2) (27.9) 4.4 20.8

Investments 0.0 0.0 0.0 0.0 0.0

Capital Expenditure (79.5) (34.7) (43.8) (45.0) (45.0)

Cash flow from investing activities (79.5) (34.7) (43.8) (45.0) (45.0)

Equity Raised / (Buyback) 37.5 57.5 64.9 0.0 0.0

Loans Raised / (Repaid) 99.2 (15.4) 12.0 43.6 27.2

Others (Including Extra-ordinaries) 0.0 (0.7) 0.0 0.0 0.0

Dividend (0.8) (2.0) (2.8) (3.0) (3.0)

Cash Flow from Financing activities 135.8 39.3 74.1 40.6 24.2

Cumulative cash flow (4.8) (6.6) 2.4 (0.0) 0.0

Opening Cash Balance 14.4 11.9 7.6 10.0 10.0

Closing Cash Balance 9.6 5.4 10.0 10.0 10.0


21

Annexure 4: Key Financial Ratios (Consolidated)

Key Financial Ratios FY10A FY11A FY12E FY13E FY14E

Profitability Indicators

Sales Growth 16% 22% 43% 27% 18%

EBITDA Growth 89% 24% 23% 36% 24%

EPS Growth 184% 40% -16% 4% 25%

Cash EPS Growth 188% 32% -13% 5% 25%

Profitability Indicators

EBITDA Margin 23.2% 22.4% 19.8% 21.1% 22.1%

EBIT Margin 21.4% 21.1% 19.9% 19.0% 20.0%

PAT Margin 10.7% 12.7% 11.9% 11.5% 12.1%

RoE 33.9% 25.3% 19.7% 18.1% 18.9%

ROCE 28.8% 21.8% 20.9% 19.9% 20.6%

Liquidity Ratios

Debtor Days 165 121 119 119 119

Inventory Days 122 104 109 111 112

Net Working Capital/ Sales 0.5 0.6 0.6 0.6 0.6

Capitalization Ratios

Total Debt/ Equity 1.6 0.8 0.5 0.6 0.5

Interest Coverage 4.4 5.1 5.0 5.7 5.8

Total Debt/EBITDA 3.1 2.3 2.0 1.8 1.7

Valuation Ratios

Price/Sales 0.73 0.65 0.68 0.63 0.54

Price/Earnings 6.8 4.8 5.7 5.5 4.4

Price/Book Value 1.6 1.0 0.9 0.9 0.8

EV/EBITDA 9.1 7.3 6.0 4.4 3.5

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