ICRA assigns fundamental grade of 3/5 to Kavveri Telecom

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

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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