Nano Nivesh

March 20, 2013

D-Link India (DLILIM)

Karan Mittal karan.mittal@icicisecurities.com Anil Shenoy anil.shenoy@icicisecurities.com

D-Link (India) Ltd is part of D-Link Corporation Taiwan and is one of the largest networking companies in India. The company is engaged in the marketing and distribution of networking products of its ultimate parent in India and Saarc countries. D-Link Holding Mauritius Inc, a 100% subsidiary of D-Link Corporation Taiwan, holds a 60.37% stake in DLink (India) Ltd.

Price

Highlights:
Strong lineage: The company boasts of a strong lineage from its parent D-Link Corporation Taiwan, which has global recognition with a presence in 67 countries with a wide range of products catering to various sectors including telecom, retail, health care, education, enterprise, government, etc. The parent is a global leader in terms of port shipments of networking products and by its virtue D-Link India does not face technology obsolescence risk. Management performance: Post appointment of Tushar Sighat as CEO in 2011, the company moved from flattish growth seen in FY09-11 to a high growth trajectory. On the back of aggressive marketing and customer servicing measures, the company posted a topline growth of 73% in FY12 and 68% in 9MFY13. Strong distribution network: D-Link distributes its products through two national distributors viz. Redington and Ingram Micro. The company boasts of a strong distribution network with 17 branch offices in India, 22 RMA centres, 85 business distributors and over 200 SI partners. Topline to grow at 32% CAGR (FY12-15E): The growth potential of the internet industry, a strong product portfolio and distributor network and recently demonstrated ability to expand its market share augur well for D-Link. We expect the company to post revenue CAGR of 32.1% in FY12-15E. The EPS has grown at 56.8% CAGR in FY11-13 (annualised 9MFY13 EPS). We expect D-Link to continue posting robust growth at EPS CAGR of 41.6% over FY12-15E. The stock is trading at an attractive valuation of 4.0x FY15E EPS. Riding on the imminent broadband boom and strong product offerings, the stock holds immense upside potential. We have valued the stock at 6x FY15E EPS to arrive at a fair value of | 40.

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Recommendation

Buy

Fair Value

| 40

Key risksBusiness specific

Competition risk from across the globe: With renowned names in the networking products and IT services space, especially overseas, the company faces competition not only from Indian companies but increasingly from multinational IT vendors. Though the company operates at low price levels, excessive competition could lead to pricing pressure.

Company specific
Foreign exchange risks: The company faces foreign exchange risks as it sources all its active networking products from its parent in Taiwan.

ICICI Securities Ltd | Retail Equity Research

Description
D-Link (India) Ltd is part of D-Link Corporation Taiwan and is one of the largest networking companies in India. The company is engaged in the marketing and distribution of networking products of its ultimate parent in India and Saarc countries. D-Link (India) Ltd has a nationwide reach, a robust product portfolio and a track record of consistently delivering high quality, efficient and reliable networking products, solutions and services.

Stock data
Market Capitalisation (| crore) 52 Week High / Low (|) Promoter Holding (%) FII Holding (%) DII Holding (%) Dividend Yield (%) 12M / 6M stock return (%) Debt (| crore) Cash and Cash Equivalent (| crore) Enterprise Value (| crore) 3 Year Revenue CAGR (%) (FY09-12) 3 Year EBITDA CAGR (%) (FY09-12) 3 Year PAT CAGR (%) (FY09-12) 80.6 38 /19 60.4 0.2 1.5 33.0 / 2.3 5.3 76.5 19.0 43.0 13.2

History and track record

Incorporated in May 2008, as a part of the demerger between the erstwhile D-Link and Smart Link, D-Link is a company that markets and distributes branded active networking products of its parent D-Link Corporation, Taiwan in India. The company also has a presence in passive networking products, which it sources from local vendors. Recently, D-Link ventured into the high margin solution business as well D-Link Corporation, the ultimate parent of D-Link India, is an established player in the networking products market with market leadership as per port shipments in WLAN standalone access points with ~30% market share. It is in third position in ethernet switches with a market share of ~17% The company posted a flat performance post demerger in FY0911. However, post the change in management with Tushar Sighat taking over as the CEO, the company has posted growth of 73% in FY12 and 68% in 9MFY13 D-Link sells a wide range of products in India including active networking products like switches, modems, network cards along with passive products like cables, adaptors, connectors etc. Also, with cloud based technologies, the portfolio of products of the company has significantly enhanced value

Valuation table
FY12 P/E 11.4 Target P/E 17.0 EV / EBITDA 6.8 P/BV 1.0 RoNW 9.1 RoCE 12.2 Source: ICICIdirect.com Research FY13E 7.0 10.4 4.2 0.9 13.2 19.1 FY14E 5.1 7.6 3.1 0.8 15.6 22.5 FY15E 4.0 6.0 2.4 0.7 16.6 24.0

Quarterly performance
Sales EBITDA EBITDA Margin (%) Depreciation Interest Other Income PAT EPS (|) Q4FY12 71.7 4.8 6.8 0.4 0.2 0.0 3.0 1.0 Q1FY13 76.9 4.4 5.8 0.4 0.0 0.0 2.8 0.9 Q2FY13 87.4 3.5 4.0 0.4 0.0 0.1 2.1 0.7 Q3FY13 90.3 5.6 6.2 0.4 0.0 0.1 3.6 1.2

Earning estimates
| crore Net Sales EBITDA EBITDA margin (%) PAT EPS FY11 129.2 5.0 3.9 4.6 1.5 FY12 223.1 11.0 4.9 7.0 2.3 FY13E 348.7 18.3 5.3 11.5 3.8 FY14E 431.5 24.6 5.7 15.9 5.3 FY15E 514.5 30.7 6.0 20.0 6.7

Source: ICICIdirect.com Research

Shareholding trend (%)

Key Shareholders Promoter group DII FII Non-institutional Q4FY12 60.4 0.0 0.2 39.5 Q1FY12 60.4 0.2 39.5 Q2FY13 60.4 0.2 39.5 Q3FY13 60.4 0.2 39.5

Source: Company, ICICIdirect.com Research

Source: ICICIdirect.com Research

Technical Chart (Monthly Bar chart)

Technical View
Share price of D-Link India has been in a short-term uptrend from January 2012 trough of | 15. After almost doubling from | 15 to | 38 by November 2012, it has been correcting over the past few months, thereby retracing the rally around 50%. Strong bounce during early March from the level of | 25 suggests buying support near important retracement levels and signals that the next up leg may have commenced with a short-term hurdle around | 37. From a longer perspective, the stock is seen forming a bottoming formation over the past two years in the price range of | 37-15 levels. A strong break-out above | 37 on a sustainable basis would signal a major shift in long term trend opening up further upsides towards all-time highs of | 53 over the next several months.

Source: Reliable Software, ICICIdirect.com Research

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Growth since change in management and strategy

Post the demerger, the company had reported flat revenue in FY09-11 largely due to lack of direction and low focus. Post appointment of Tushar Sighat as CEO in 2011, who has experience of 20 years in the industry, D-Link got catapulted to a higher growth trajectory. On the back of aggressive marketing and customer satisfaction by taking steps like ensuring a presence at the lowest price point, augmenting the distribution network and superior customer servicing, D-Link managed to outpace its peers and gain significant market share. The benefits followed shortly, with a sharp traction in financials and topline growth of 73% in FY12 and 68% in 9MFY13. D-Link India has 17 branch offices in India, 22 return merchandise authorisation (RMA) centres with a strong distribution network including two national distributors, viz. Redington and Ingram Micro along with 85 business distributors and over 200 system integrator (SI) partners. Total 70% of the revenues come from active networking products while passive products form 30% of revenue. Also, with the help of cloud based technologies, the company has forayed into providing solutions including IP surveillance, which would be a further driver of growth at better margins.

Strong lineage to capitalise on low internet penetration

The company boasts of a strong lineage with its parent, which is present across the product range used for internet access. It caters to both wireless (including 2G, 3G and 4G) and wireline technologies, through products like routers, switches, hubs, WLAN equipment, 3G and 4G dongles, cloud cameras, etc. Other cloud based products like IP surveillance system also come in its repertoire. D-Link Corp Taiwan is ranked among global leaders by port shipment of networking products. It has global recognition with a presence in 67 countries with products catering to various sectors including telecom, retail, health care, education, enterprise, government, etc. By virtue of its parents leadership position and strong R&D, DLink India has access to latest networking products and does not face technology obsolescence risk. The broadband penetration in India still remains one of the lowest in the world with just 1.5 crore broadband users (wireline) in India. The Government of India has been formulating policies to increase penetration of broadband internet in the country and NTP 2011 envisages 60 crore broadband users by the end of 2020. Imminent BWA launch would also drive broadband growth in the country. Digital cable operators, whose subscriber base is expected to reach 7.5 crore by 2016, would be bundling broadband connection with cable TV services providing further growth potential for internet penetration. The company has already tied up with BSNL (the leading broadband provider) and digital cable operators. DLink is well set to capitalise on the internet boom with its wide product range and strong association with ISPs. Moreover, recently it has got empanelment with the government as a solution provider wherein its products would now be eligible for use in government establishments. Currently, D-Link India has the highest market share in India in networking products in terms of port shipments. However, due to the pricing difference between the company and its competitors, revenue wise, the company comes in second.

No debt + margin expansion + cheap valuation = Attractive bet

D-Link is a debt free company and has a strong MNC parent. The growth potential of the internet industry, a strong product portfolio and distributor network and recently demonstrated ability to expand its market share augur well for D-Link We expect the company to post revenue CAGR of 32.1% in FY1215E. Also, the increasing share of high margin passive products business and cloud based solutions would result in overall margins, which are expected to expand to 6.0% in FY15 from 4.9% in FY12. The EPS would grow at 56.8% CAGR from FY11-13 (annualised 9MFY13 EPS). We expect D-Link to continue posting robust EPS growth at a CAGR of 41.6% over FY12-15E. The stock is trading at an attractive valuation of 4.0x FY15E EPS. Riding on the imminent broadband boom and strong product offerings, the stock holds immense upside potential. We have valued the stock at 6x FY15E EPS to arrive at fair value of | 40. However, on a cautionary note, though the upside seems lucrative, still considering the various impediments faced by small cap stocks, we believe this should be looked at as a medium to long term investment, which has inherent risks of higher price volatility.

ICICI Securities Ltd | Retail Equity Research

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Financial summary
Profit and loss statement
(Year-end March) Total operating Income Growth (%) Raw Material Expenses Employee Expenses Administrative Expenses Changes in inventories Total Operating Expenditure EBITDA Growth (%) Depreciation Interest Other Income PBT Total Tax PAT Growth (%) EPS (|) FY12 223.1 72.6 191.6 13.2 22.0 -14.7 212.1 11.0 118.3 1.6 0.2 0.8 10.1 3.0 7.0 53.8 2.3 FY13E 348.7 56.3 289.7 15.5 30.0 (4.8) 330.4 18.3 66.2 1.6 0.0 0.3 16.9 5.4 11.5 63.3 3.8 FY14E 431.5 23.7 350.0 19.4 37.5 0.0 406.9 24.6 34.1 1.7 0.0 0.5 23.4 7.5 15.9 38.2 5.3 (| Crore) FY15E 514.5 19.2 416.2 22.6 45.0 0.0 483.8 30.7 24.9 1.8 0.0 0.5 29.4 9.4 20.0 25.9 6.7

Cash flow statement

(Year-end March) Profit after Tax Add: Depreciation (Inc)/dec in Current Assets Inc/(dec) in CL and Provisions Interest Paid CF from operating activities (Inc)/dec in Fixed Assets Others CF from investing activities Dividend paid & dividend tax Interest Paid CF from financing activities Net Cash flow Opening Cash Closing Cash FY12 7.0 1.6 -31.8 27.3 0.2 4.3 -0.6 0.2 -0.4 -1.4 -0.2 -1.6 2.3 3.1 5.3 FY13E 11.5 1.6 -41.2 29.0 0.0 0.9 -1.0 0.2 -0.8 -1.4 0.0 -1.4 -1.3 5.3 4.1 FY14E 15.9 1.7 -32.9 17.9 0.0 2.6 -1.2 0.2 -1.0 -1.4 0.0 -1.4 0.2 4.1 4.3 (| Crore) FY15E 20.0 1.8 -33.0 18.0 0.0 6.7 -1.4 0.2 -1.2 -1.4 0.0 -1.4 4.2 4.3 8.5

Source: Company, ICICIdirect.com Research

Source: Company, ICICIdirect.com Research,

Balance sheet
(Year-end March) Liabilities Equity Capital Reserve and Surplus Total Shareholders funds Deferred tax liability Other Non Current Liabilities Total Liabilities Assets Gross Block Less: Acc Depreciation Net Block Capital WIP Total Fixed Assets Inventory Debtors Loans and Advances Cash Total Current Assets Creditors Provisions Other current liabilities Total Current Liabilities Net Current Assets Application of Funds 24.6 3.0 21.6 0.0 21.6 42.0 47.9 7.5 5.3 102.6 44.1 2.0 0.4 46.5 56.1 77.7 25.6 4.7 21.0 0.0 21.0 60.1 66.8 11.6 4.1 142.6 71.5 3.3 0.7 75.5 67.1 88.0 26.8 6.3 20.5 0.0 20.5 74.4 82.6 14.4 4.3 175.7 88.5 4.1 0.8 93.4 82.3 102.8 28.2 8.1 20.1 0.0 20.1 88.7 98.6 17.2 8.5 212.9 105.6 4.9 1.0 111.5 101.5 121.6 FY12 6.0 71.1 77.1 0.6 0.0 77.7 FY13E 6.0 81.2 87.2 0.8 0.0 88.0 FY14E 6.0 95.7 101.7 1.1 0.0 102.8 (| Crore) FY15E 6.0 114.3 120.3 1.3 0.0 121.6

Key ratios
(Year-end March) Per share data (|) EPS Cash EPS BV DPS Cash Per Share Operating Ratios (%) EBITDA Margin PBT / Total Operating income PAT Margin Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio FY12 2.3 2.9 25.7 0.4 1.8 4.9 4.5 3.2 68.7 78.3 72.1 9.1 12.2 13.0 11.4 6.8 0.3 0.4 1.0 0.0 0.0 2.2 1.3 FY13E 3.8 4.4 29.1 0.4 1.4 5.3 4.9 3.3 63.0 70.0 75.0 13.2 19.1 19.9 7.0 4.2 0.2 0.2 0.9 0.0 0.0 1.9 1.1 FY14E 5.3 5.9 33.9 0.4 1.4 5.7 5.4 3.7 63.0 70.0 75.0 15.6 22.5 23.2 5.1 3.1 0.2 0.2 0.8 0.0 0.0 1.9 1.1 FY15E 6.7 7.3 40.1 0.4 2.8 6.0 5.7 3.9 63.0 70.0 75.0 16.6 24.0 25.6 4.0 2.4 0.1 0.2 0.7 0.0 0.0 1.9 1.1

Source: Company, ICICIdirect.com Research

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

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Annexure

The parent company has a global presence with a well entrenched distribution network

Strong linkages across sectors ranging from telecom, hospitality, government, educations, enterprise, health care and retail

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In India, the company operates through two National distributors; Ingram Micro and Redington

D-Link has a wide product range to cater to all segments in internet access

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RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: > 10%/ 15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;

Pankaj Pandey

Head Research ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai 400 093 research@icicidirect.com

pankaj.pandey@icicisecurities.com

ANALYST CERTIFICATION
We /I, Karan Mittal MBA, Anil ShenoyMBA research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

Disclosures:
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