CD Equisearch Pvt Ltd - Business Standardbsmedia.business-standard.com/_media/bs/data/market...2 2...

CD Equisearch Pvt Ltd Aug 8, 2016

Equities Derivatives Commodities Distribution of Mutual Funds Distribution of Life Insurance

D-Link (India) Ltd

No. of shares (m) 35.50

Mkt cap (Rs crs/$m) 316/47.3

Current price (Rs/$) 89/1.3

Price target (Rs/$) 123/1.8

52 W H/L (Rs.) 234/88

Book Value (Rs/$) 43.4/0.6

Beta 1.7

Daily volume (avg. monthly) 108700

P/BV (FY17e/18e) 1.9/1.6

EV/EBITDA (FY17e/18e) 9.3/7.0

P/E (FY17e/18e) 15.5/11.5

EPS growth (FY16/17e/18e) 0.8/-5.3/34.6

OPM (FY16/17e/18e) 4.8/4.2/4.9

ROE (FY16/17e/18e) 15.0/12.6/15.1

ROCE(FY16/17e/18e) 15.0/12.8/15.2

D/E ratio (FY16/17e/18e) -/-/-

BSE Code 533146 NSE Code DLINKINDIA

Bloomberg DLINK IN

Reuters DLIL.BO

Shareholding pattern %

Promoters 51.0

MFs / Banks / FIs 9.0

Foreign Institutions 0.1 .3 Govt. Holding 0.0

Public & others 39.8

Total 100.0

As on Jun 30, 2016

Recommendation

BUY

Analyst

KISHAN GUPTA, CFA, FRM

Phone: + 91 (33) 4488 0043

E- mail: [email protected]

Consolidated (Rs crs)

FY14

FY15

FY16

FY17e FY18e

Income from operations 487.58 625.32 700.74 749.95 839.77

Other Income 1.12 1.56 1.39 1.06 2.06

EBITDA (other income included) 22.87 34.58 35.02 32.75 43.49

Profit after tax & EO items

13.57 21.33 21.50 20.37 27.42

EPS(Rs) 4.52 6.01 6.06 5.74 7.72

EPS growth (%) 10.2 32.8 0.8 -5.3 34.6

Company Brief D-link (India), a subsidiary of D-Link Holding Mauritius Inc, markets and

distributes networking products. It offers IT network infrastructure solutions -

switching, security, wireless, IP surveillance, storage and structured cabling.

Quarterly Highlights � D-Link India has seen deterioration of sorts for its income from operations

not only declined by an appalling 12% last quarter (the first reduction in

seventeen quarters) after two quarters of sub 7% growth, but also hit the

lowest reading since the third quarter of FY15. Abysmal income also

weighed heavily on margins - OPMs shriveled by a daunting 320 bps to

1.2% (ten quarters mean: 4.6%; median: 4.7%). Material margins shrunk by

50 bps to 15.5% - 16.9% in Q4FY16.

� Other expenses rose fiercely to Rs 15.58 crs ($2.3m) compared to Rs 12.32

crs ($1.8m) in the same period a year before. Even infinitesimal

depreciation and financial expenses could not preclude a massive drop in

post tax earnings- Rs 0.97 crs ($0.1m) compared to Rs 4.83 crs($0.7m); eerie

though is the drastic slump in business from the fourth quarter of last fiscal

when post tax earnings stood at Rs 6.28 crs ($0.9m).

� It plans to deepen its pursuits by expanding in wireless AC solutions (with

cloud services), thus buttressing its growth in consumer market. A plethora

of its smart home products - smart plug; audio extender; wireless sensors;

home monitors - aims to automate homes by capitalizing on the fast

growing Internet of Things movement.

� Intense competition in IT services industry arising from both local and

MNC IT companies having large presence in low cost technologies pinched

margins of large and diversified players. Thanks to low margin telecom

orders, D-link's OPMs, for instance, slipped to an abysmal 3.5% in Q2of last

fiscal - the lowest in eight quarters. Other key business risks include risk of

obsolescence and currency fluctuations. Continuous investments in cutting

edge technologies helps ward off the former - for technical know-how D-

link India kowtow its parent company, while the latter is best addressed by

a prudent hedging policy.

� The stock currently trades at 15.5x FY17e EPS of Rs 5.74 and 11.5x FY18e

EPS of Rs 7.72. Regardless of the current stress in earnings, the current

valuation would incite defensive investors – for a turnaround is expected

by next fiscal. We retain our buy rating on the stock with revised target of

Rs 123 (DCF value: Rs 115; Rs 8 per share for TeamF1 Networks) over a

period of 9-12 months.

2

2

CD Equisearch Pvt Ltd


[

Outlook & Recommendation

Indian networking industry

Indian IT networking industry has seen opportunities proliferate over the years thanks to fast rise in internet subscribers,

larger IT infrastructure and steady growth in mid market segment. Rise in enterprise spending, increasing penetration of

broadband and roll out of 3G/4G networks would further fuel the growth. The country has recently witnessed growing

demand for dual band wi-fi, smart routers and 3G/4G connectivity.

D-link India reckons the networking industry would get a leg up from financial inclusion plans of Indian government - e-

governance; surveillance -as well as from its smart cities mission. 'Digital India’ has already opened up avenues for

strengthening the broadband infrastructure and creating identity solutions, payment systems, web or mobile based delivery

structures, etc. It posits that education, government, e-commerce and hospitality sectors would galvanize the growth of

Indian LAN market, while higher off take from SMB and increased w-fi hotspot demand from various Indian cities would

drive growth of WLAN market.

Indian businesses are rushing to Tier II/Tier III cities for tapping internet related opportunities and for setting up delivery

centers, precipitating demand for IT and network infrastructure services. Demand for cloud services has been buttressed by

Indian companies' scramble for the SaaS (software as a service) model delivered by cloud providers - which is diminishing

need for setting up own IT infrastructure and also lesser companies are opting for traditional software licensing model.

Financials & valuation

Underpinned by Indian enterprises' proclivity to move away from data center buildouts to public cloud, Cloud system

infrastructure services (IaaS) would remain the fastest growing segment in public cloud services in 2016 - projected to reach

$448.9m from 338.9m in 2015 - according to Gartner Inc. Thanks to enterprises' zeal to develop and build applications in

public cloud - for both cloud native and non-cloud native applications- Gartner posits the cloud application infrastructure

services (PaaS) to surge by 31.7% to 82.1m in 2016; overall the public cloud services market to grow by 30.4% to $1.26bn in

2016 (see chart).

Despite all talk (babble) of smart cities projects and Digital India, D-Link India has barely seen resuscitation of orders from

Indian government. Its revenue growth slid to a meagre 12.1% last fiscal. Margins pummeled too not least due to intense

competition from both local and MNC players. Though networking orders may not come with metronomic regularity, D-

Link's revenue loss manifests both market stress and loss of market share.

Pending full blown recovery in enterprise spending, ramp up in smart cities projects and indigenization of IP surveillance

and other key products, D-Link could jostle to ward off market stressors (in the medium term though) - after the eccentric

drop in revenues in Q1, its revenues are now estimated to rise by 9.4% on average over the next two years. Its margin gains

would be held hostage to fructification of indigenization of networking products / processes and foray in big IT networking

projects.

3

3



Yet D-link would gain from its parent's technical knowhow and envious distribution infrastructure - 18 branch offices, 90

business distributors, 500 dealers and 5000 resellers - thus benefitting from non-linearity of sorts (positive asymmetry- small

loss of business but large possible gains to a given change in business outlook). It partnered with MOXA (already a partner

for network solution for large business enterprises) to provide technology solutions for smart cities projects. Further it

barely struggles to flog its new products in the wireless AC line up which has made HD media streaming, file downloads,

VoIP calls, gaming etc much more convenient - its wireless AC routers support dual band.

The stock currently trades at 15.5x FY17e EPS of Rs 5.74 and 11.5x FY18e EPS of Rs 7.72. Beset by a turbulent Q1, D-Link’s

earnings could fail to stage a formidable turnaround in the current fiscal (-5.3% estimated). Yet investors still count its

structural factors - high market shares in WLAN (30.5%) and switch category and inexorable expansion of service

infrastructure - as most pressing. Notwithstanding detrimental effect of near term stressors, dramatic deterioration in its

business prospects appears indefensible. We therefore retain our buy rating on the stock with revised target of Rs 123 (DCF

value: Rs 115; Rs 8 per share for TeamF1 Networks; previous target: Rs 250) over a period of 9-12 months (For more info

refer to our Aug 2015 report).

Figures in Rs crs FY17e FY18e FY19e FY20e FY21e

Net profit 20.4 27.4 32.4 40.3 46.1

Depreciation 1.5 1.6 1.7 1.9 2.0

Interest (1-tax rate) 0.2 0.2 0.3 0.3 0.3

Capex -0.9 -1.4 -1.4 -1.9 -1.8

(Increase) Decrease in working capital -3.2 -9.4 -12.4 -18.3 -21.0

FCFF 18.1 18.5 20.7 22.3 25.6

Terminal value in FY21 555

PV of FCFF (FY17- FY21) (A) 76 16.7 15.3 15.2 14.5 14.8

PV of terminal value (B) 322

Cash & cash equivalents (C ) 12

Value of equity (A+B+C) 410

Intrinsic value per share (Rs) 115 Terminal growth: 7.5%; wacc: 12.5%

4

4



Cross Sectional Analysis

Company Equity* CMP Mcap*

Op.

inc. Profit* OPM NPM

Int

cov. ROE

Mcap

/ OI P/BV P/E EV/EBITDA DER

HCL Info 44.6 40 896 4882 -223 -2.2 -4.6 -0.4 -43.4 0.2 2.2 -4.0 -60.5 2.3

D-Link 7.1 89 316 680 18 4.1 2.6 58.5 15.0 0.5 2.1 17.9 10.4 -

Redington 80.0 102 4088 37493 437 2.1 1.2 4.1 17.1 0.1 1.5 9.4 6.9 0.8

*figures in crores; calculations on ttm basis; ROE for last fiscal; networth adjusted for goodwill Companies not truly comparable due to product dissimilarity

[

All dollar values in the write up stated at current exchange rates

5

5



Financials

Quarterly Results -Standalone Figures in Rs crs

Q1FY17 Q1FY16 % chg. FY16 FY15 % chg.

Income from operations 152.63 173.46 -12.0 700.74 625.32 12.1

Other Income 0.19 0.29 -36.6 1.39 1.56 -11.0

Total Income 152.81 173.75 -12.1 702.13 626.88 12.0

Total Expenditure 150.86 165.93 -9.1 667.11 592.30 12.6

PBIDT (other income included) 1.95 7.82 -75.1 35.02 34.58 1.3

Interest 0.16 0.05 244.0 0.36 0.46 -21.3

Depreciation 0.31 0.39 -21.0 1.47 1.71 -14.1

PBT 1.49 7.39 -79.9 33.19 32.41 2.4

Tax 0.51 2.56 -79.9 11.69 11.08 5.5

PAT 0.97 4.83 -79.9 21.50 21.33 0.8

Extraordinary Item - - - - - -

Adjusted Net Profit 0.97 4.83 -79.9 21.50 21.33 0.8 EPS (F.V. 2) 0.27 1.36 -79.9 6.06 6.01 0.8

Income Statement Figures in Rs crs

FY14 FY15 FY16 FY17e FY18e

Income from operations 487.58 625.32 700.74 749.95 839.77

Growth (%) 37.9 28.2 12.1 7.0 12.0

Other Income 1.12 1.56 1.39 1.06 2.06

Total Income 488.70 626.88 702.13 751.01 841.83

Total Expenditure 465.83 592.30 667.11 718.25 798.34

EBITDA (other income included) 22.87 34.58 35.02 32.75 43.49

Interest 0.82 0.46 0.36 0.37 0.34

EBDT 22.05 34.12 34.66 32.38 43.16

Depreciation 1.68 1.71 1.47 1.52 1.61

Tax 6.79 11.08 11.69 10.49 14.13

Net profit 13.58 21.33 21.50 20.37 27.42

Extraordinary item 0.01 0.00 0.00 0.00 0.00

Adjusted Net Profit 13.57 21.33 21.50 20.37 27.42

EPS (Rs.) 4.52 6.01 6.06 5.74 7.72

6

6



Balance Sheet Figures in Rs crs


SOURCES OF FUNDS

Share Capital 6.00 7.10 7.10 7.10 7.10

Reserves 93.70 127.37 145.88 162.82 186.39

Total Shareholders Funds 99.70 134.47 152.98 169.92 193.49

Long term debt - - - - -

Total Liabilities 99.70 134.47 152.98 169.92 193.49

APPLICATION OF FUNDS

Gross Block 25.88 27.07 27.05 27.90 29.25

Less: Accumulated Depreciation 6.00 7.57 8.69 10.21 11.82

Net Block 19.88 19.50 18.36 17.69 17.43

Capital Work in Progress 0.00 0.00 0.00 0.00 0.00

Investments 0.00 16.50 21.50 33.50 46.50

Current Assets, Loans & Advances

Inventory 63.17 78.12 99.70 109.67 122.83

Sundry Debtors 94.53 140.82 170.92 188.02 210.58

Cash and Bank 3.13 0.17 6.82 9.15 11.28

Other Assets 4.25 1.05 4.39 4.14 4.50

Total CA & LA 165.07 220.16 281.83 310.97 349.19

Current liabilities 85.17 119.92 168.31 192.09 218.65

Provisions 2.43 5.40 4.60 4.86 5.69

Total Current Liabilities 87.60 125.32 172.91 196.94 224.34

Net Current Assets 77.47 94.84 108.92 114.03 124.85

Net Deferred Tax (net of liability) -0.69 1.59 3.47 3.32 3.24

Other Assets (Net of liabilities) 3.04 2.04 0.74 1.38 1.47

Total Assets 99.70 134.47 152.98 169.92 193.49

7

7



Cash Flow Statement Figures in Rs crs


Net Income (a) 13.58 21.33 21.50 20.37 27.42

Non cash exp. & others (b) 1.11 0.17 -3.65 0.63 -0.36

Depreciation 1.68 1.71 1.47 1.52 1.61

Profit / loss on sale of assets & inv -0.02 -0.10 -0.66 - -

Interest & dividend income -1.09 -0.66 -0.16 -1.04 -2.0

Deferred tax 0.28 -2.28 -1.88 0.15 0.1

Others 0.25 1.50 -2.42 - -

(Increase) / decrease in NWC (c) -15.12 -20.44 -1.44 -3.85 -9.20

Inventory -18.94 -14.95 -21.58 -9.97 -13.16

Debtors -13.30 -47.76 -29.83 -17.09 -22.56

Other assets -2.69 3.98 -2.60 -0.08 -0.54

Other liabilities 19.81 38.29 52.57 23.29 27.06

Operating cash flow -CFO (a+b+c) -0.44 1.06 16.41 17.15 17.86

Capex -1.03 -1.43 -0.32 -0.85 -1.35

Investments 1.52 0.10 -4.35 -12.00 -13.00

Interest & dividend income 1.09 0.66 0.16 1.04 2.04

Unpaid dividend accounts -0.01 -0.02 -0.01 - -

Investing cash flow -CFI (d) 1.58 -0.69 -4.52 -11.81 -12.31

Net borrowings 3.50 -1.23 -2.27 - -

Dividends & cdt -1.76 -2.11 -2.99 -2.99 -3.42

Financing cash flow -CFF (e) 1.75 -3.34 -5.27 -2.99 -3.42

Net change (a+b+c+d+e) 2.88 -2.97 6.63 2.34 2.14

8

8



Key Financial Ratios


Growth Ratios

Revenue (%) 37.9 28.2 12.1 7.0 12.0

EBIDTA (%) 14.0 51.2 1.3 -6.5 32.8

Net Profit (%) 10.2 57.2 0.8 -5.3 34.6

EPS (%) 10.2 32.8 0.8 -5.3 34.6

Margins

Operating Profit Margin (%) 4.5 5.3 4.8 4.2 4.9

Gross Profit Margin (%) 4.5 5.5 4.9 4.3 5.1

Net Profit Margin (%) 2.8 3.4 3.1 2.7 3.3

Return

ROCE (%) 14.8 18.0 15.0 12.8 15.2

RONW (%) 14.4 18.2 15.0 12.6 15.1

Valuations

Market Cap / OI 0.2 0.9 0.6 0.4 0.4

EV/EBIDTA 3.8 16.9 11.6 9.3 7.0

P/E 6.4 27.4 19.5 15.5 11.5

P/BV 0.9 4.3 2.7 1.9 1.6

Other Ratios

Interest Coverage 25.8 71.5 92.7 83.3 124.7

Debt-Equity Ratio 0.0 0.0 0.0 0.0 0.0

Current Ratio 1.9 1.8 1.6 1.6 1.6

Turnover Ratios

Fixed Asset Turnover 24.1 31.8 37.0 41.6 47.8

Total Asset Turnover 5.2 5.3 4.9 4.6 4.6

Debtors Turnover 5.5 5.3 4.5 4.2 4.2

Inventory Turnover 8.7 8.4 7.5 6.9 6.9

Creditors Turnover 6.6 6.1 4.8 4.1 4.0

WC Ratios

Debtor Days 65.9 68.7 81.2 87.3 86.6

Inventory Days 42.1 43.5 48.6 53.2 53.2

Creditor Days 55.1 59.9 76.1 89.3 92.0

Cash Conversion Cycle 52.9 52.3 53.8 51.2 47.8

Cash Flows

CFO/EBITDA 0.0 0.0 0.5 0.5 0.4

FCFF 1.7 0.7 17.1 17.6 18.8

FCFE 4.6 -0.9 14.6 17.3 18.6

9

9



Cumulative Financial Data

Figures in Rs crs FY10-12 FY13-15 FY16-18

Income from operations 484 1467 2290

Operating profit 21 74 107

EBIT 26 72 107

PBT 26 71 106

PAT 18 47 69

Dividends 6 7 10

OPM (%) 4.4 5.1 4.7

NPM (%) 3.7 3.2 3.0

Interest coverage 100.2 49.6 99.4

ROE (%) 8.3 14.8 14.1

ROCE (%) 8.4 15.0 14.1

Debt-equity ratio* 0.0 0.0 0.0

Fixed asset turnover 14.4 23.8 41.3

Debtors turnover 4.5 5.2 4.3

Inventory turnover 5.1 7.7 7.2

Creditors turnover 5.9 5.9 4.4

Debtors days 80.4 70.4 84.0

Inventory days 72.2 47.2 50.4

Creditor days 61.9 62.4 82.5

Cash conversion cycle 90.7 55.3 51.9

Dividend payout ratio (%) 33.2 14.5 14.8

FY07-09 implies three years ending fiscal 09; *as on terminal year

After growing its income from operations (cumulative) at a brisk pace in FY13 -15 period (sales trebled), D-Link

struggled to put spin to its business last fiscal for its revenues grew by an awful 12% - the slowest pace in five years.

Despite slothful material margins - 17.8% vs 25.1% in FY10-12 period, OPMs in the aforesaid period held off well (5.1%

vs 4.4%). Cumulative profit after tax also advanced vertiginously to Rs 47 crs ($7.1m) compared to Rs 18 crs ($2.7m) in

FY10-12 period.

Thanks to its drab business structure - a trading enterprise- runaway margin gains seems elusive not least due to its

overreliance on its parent D-Link Corporation for technical knowhow. Tellingly, it imported nearly two-thirds of the

total traded goods (forex volatility prone) from its group firms last fiscal. Partial hedging through forward contracts has

seldom helped- it was long just $10m at the end of last fiscal, barely covering a fifth of the total imports; the

corresponding figures for FY13 and FY14 were 5% and 10%.

Helped by its asset light model and efficient working capital management - cash conversion cycle dived to 55 days in

FY13-15 period from 90.7 days in FY10-12 period- return on capital escaped sandbagging. Trade related working capital

stresses have alleviated too over the years - manifested by falling Working capital / sales ratio. Yet scrappy rollout of the

ambitious (also overhyped) Digital India and Smart Cities projects and intense local competition risk buffeting D-Link's

business growth to sub 10% over the next two years.

.

10

10



Financial Summary – US dollar denominated

million $ FY14 FY15 FY16 FY17e FY18e

Equity capital 1.0 1.1 1.1 1.1 1.1

Shareholders funds 16.6 21.5 23.1 25.5 29.0

Total debt 0.6 0.4 0.0 0.0 0.0

Net fixed assets (incl CWIP) 3.3 3.1 2.8 2.7 2.6

Investments 0.0 2.6 3.2 5.0 7.0

Net current assets 12.9 15.2 16.4 17.1 18.7

Total assets 16.6 21.5 23.1 25.5 29.0

Revenues 80.6 102.3 107.0 112.4 125.8

EBITDA 3.8 5.7 5.3 4.9 6.5

EBDT 3.6 5.6 5.3 4.9 6.5

PBT 3.4 5.3 5.1 4.6 6.2

Profit after tax 2.2 3.5 3.3 3.1 4.1

EPS($) 0.07 0.10 0.09 0.09 0.12

Book value ($) 0.55 0.61 0.65 0.72 0.82

Operating cash flow -0.1 0.2 2.5 2.6 2.7

Investing cash flow 0.3 -0.1 -0.7 -1.8 -1.8

Financing cash flow 0.3 -0.5 -0.8 -0.4 -0.5

income statement figures translated at average rates; balance sheet and cash flow at year end rates; projections at current rates All dollar denominated figures are adjusted for extraordinary items.

11

11



Disclosure& Disclaimer CD Equisearch Private Limited (hereinafter referred to as ‘CD Equi’) is a Member registered with National Stock Exchange of India Limited,

Bombay Stock Exchange Limited and Metropolitan Stock Exchange of India Limited (Formerly known as MCX Stock Exchange Limited). CD

Equi is also registered as Depository Participant with CDSL and AMFI registered Mutual Fund Advisor. The associates of CD Equi are

engaged in activities relating to NBFC-ND - Financing and Investment, Commodity Broking, Real Estate, etc.

CD Equi is registered under SEBI (Research Analysts) Regulations, 2014 with SEBI Registration no INH300002274. Further, CD Equi hereby

declares that –

• No disciplinary action has been taken against CD Equi by any of the regulatory authorities.

• CD Equi/its associates/research analysts do not have any financial interest/beneficial interest of more than one percent/material

conflict of interest in the subject company(s) (kindly disclose if otherwise).

• CD Equi/its associates/research analysts have not received any compensation from the subject company(s) during the past twelve

months.

• CD Equi/its research analysts has not served as an officer, director or employee of company covered by analysts and has not been

engaged in market making activity of the company covered by analysts.

This document is solely for the personal information of the recipient and must not be singularly used as the basis of any investment decision.

Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such

investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in

this document (including the merits and risks involved) and should consult their own advisors to determine the merits and risks of such an

investment.

Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading

volume, as opposed to focusing on a company's fundamentals and as such, may not match with a report on a company's fundamentals.

The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources

believed to be true but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general

guidance only. CD Equi or any of its affiliates/group companies shall not be in any way responsible for any loss or damage that may arise to

any person from any inadvertent error in the information contained in this report. CD Equi has not independently verified all the information

contained within this document. Accordingly, we cannot testify nor make any representation or warranty, express or implied, to the accuracy,

contents or data contained within this document.

While, CD Equi endeavors to update on a reasonable basis the information discussed in this material, there may be regulatory compliance or

other reasons that prevent us from doing so.

This document is being supplied to you solely for your information and its contents, information or data may not be reproduced, redistributed

or passed on, directly or indirectly. Neither, CD Equi nor its directors, employees or affiliates shall be liable for any loss or damage that may

arise from or in connection with the use of this information.

CD Equisearch Private Limited (CIN: U67120WB1995PTC071521)

Registered Office: 37, Shakespeare Sarani, 1st Floor, Kolkata – 700 017; Phone: +91(33) 4488 0000; Fax: +91(33) 2289 2557 Corporate Office: 10,

Vasawani Mansion, 2nd Floor, Dinshaw Wachha Road, Churchgate, Mumbai – 400 020. Phone: +91(22) 2283 0652/0653; Fax: +91(22) 2283, 2276

Website: www.cdequi.com; Email: [email protected]

buy: >20% accumulate: >10% to ≤20% hold: ≥-10% to ≤10% reduce: ≥-20% to <-10% sell: <-20%

CD Equisearch Pvt Ltd - Business Standardbsmedia.business-standard.com/_media/bs/data/market...2 2...

Documents

Transcript of CD Equisearch Pvt Ltd - Business Standardbsmedia.business-standard.com/_media/bs/data/market...2 2...