KAVVERI TELECOM PRODUCTS LTD.

CMP Rs.89, Maintain Buy, with reduced Target Price of Rs.185
Kavveri Telecom (KT) is a leading telecom products manufacturer, providing world class, hardware products and solutions for the telecom industry. With over 150 man-years of R&D experience, Kavveri Telecom is uniquely positioned to offer an array of world class products and solutions to meet all hardware requirements of telecom manufacturers, telecom service providers and telecom users.
KT has delivered disappointing performance for the quarter ended March 2008. However, its overall FY08 numbers appeared to be excellent with its Revenues growing by 195% & APAT growing by 168%.
Highlights of its performance for the quarter and year ended March 2008 are as follows:-
KT's standalone Revenues for Q4FY08 were Rs. 386.7 mn as against Rs. 233.8 mn for the corresponding quarter of FY07, a growth of 654 bps on a yearly basis.
Its EBITDA for Q4FY08 was Rs. 44 mn as against Rs. 32.2 mn during Q4FY07, a growth of 36% on a yearly basis; however its EBITDA margins declined from 13.8% for Q4FY07 to 11.4% for Q4FY08. Its expenses for the quarter included acquisition expenses worth Rs. 8 mn which are charged off to P&L account in FY08 itself.
Its APAT stood at Rs. 31.1 mn for Q4FY08 as against Rs. 19.2 mn for Q4FY07, a growth of 61.7% on a yearly basis. While the quarterly numbers did not include any provision for taxation, its full year numbers reflected a tax provision of Rs.40mn for FY08.
On the consolidated basis, for the full year ended FY08, KT reported Revenues, EBITDA and APAT of Rs. 1579 mn, Rs. 198 mn, and Rs. 123.6 mn as against Rs. 535.7mn, Rs. 67.5 mn and 46.2 mn respectively for FY07. Its EBITDA and APAT margins were at 12.5% and 7.8% for FY08 on a consolidated basis as against 12.6% and 8.6% respectively for FY07.

OUTLOOK & VALUATION

KT's performance during Q4FY08 was disappointing & below our expectations. A delay in execution of an order worth Rs. 150 mn due to late arrival of raw-materials from China was the main reason for the same. However, the business outlook for the company remains robust in the coming years on the back of new players entering into telecom markets, expected product (base station Antenna's) approval from vendors like Idea & Vodafone, company's strong market positioning and continuing strong growth in the Indian telecom space.

At the current market price of Rs.89, KT trades at 5.2x FY09E & 3.8x FY10E consolidated earnings of Rs.17 & Rs.23 respectively, which we believe is quite attractive. We maintain our "BUY" rating on the stock with a reduced price target of Rs.185 (8x FY10E consolidated earnings).