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.
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CD Equisearch Pvt Ltd Aug 8, 2016
Equities Derivatives Commodities Distribution of Mutual Funds Distribution of Life Insurance
*figures in crores; calculations on ttm basis; ROE for last fiscal; networth adjusted for goodwill Companies not truly comparable due to product dissimilarity
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All dollar values in the write up stated at current exchange rates
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CD Equisearch Pvt Ltd
Equities Derivatives Commodities Distribution of Mutual Funds Distribution of Life Insurance
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
Equities Derivatives Commodities Distribution of Mutual Funds Distribution of Life Insurance
Key Financial Ratios
FY14 FY15 FY16 FY17e FY18e
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
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CD Equisearch Pvt Ltd
Equities Derivatives Commodities Distribution of Mutual Funds Distribution of Life Insurance
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.
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CD Equisearch Pvt Ltd
Equities Derivatives Commodities Distribution of Mutual Funds Distribution of Life Insurance
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.
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CD Equisearch Pvt Ltd
Equities Derivatives Commodities Distribution of Mutual Funds Distribution of Life Insurance
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