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ICICI Securities Ltd|Retail Equity Research

Nano NiveshMarch 20, 2013

Key risks-

Business specificCompetition risk from across the globe: With renowned names in the networking products and IT services space, especiallyoverseas, 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 specificForeign exchange risks: The company faces foreign exchange risks as it sources all its active networking products from itsparent in Taiwan.

D-Link India (DLILIM)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 parentin India and Saarc countries. D-Link Holding Mauritius Inc, a 100%

subsidiary of D-Link Corporation Taiwan, holds a 60.37% stake in D-

Link (India) Ltd.

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 productsthrough 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 ofthe internet industry, a strong product portfolio and distributornetwork 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 (annualised9MFY13 EPS). We expect D-Link to continue posting robustgrowth at EPS CAGR of 41.6% over FY12-15E. The stock is tradingat an attractive valuation of 4.0x FY15E EPS. Riding on theimminent broadband boom and strong product offerings, thestock holds immense upside potential. We have valued the stockat 6x FY15E EPS to arrive at a fair value of | 40.

Price

| 27

Recommendation

Buy

Fair Value

| 40

Karan Mittal

[email protected]

Anil [email protected]


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ICICI Securities Ltd|Retail Equity Research Page 2

DescriptionD-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.

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 companyalso 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 anestablished 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 FY09-11. 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 activenetworking products like switches, modems, network cards

along with passive products like cables, adaptors, connectors

etc. Also, with cloud based technologies, the portfolio ofproducts of the company has significantly enhanced value

Earning estimates| crore FY11 FY12 FY13E FY14E FY15E

Net Sales 129.2 223.1 348.7 431.5 514.5

EBITDA 5.0 11.0 18.3 24.6 30.7

EBITDA margin (%) 3.9 4.9 5.3 5.7 6.0

PAT 4.6 7.0 11.5 15.9 20.0

EPS 1.5 2.3 3.8 5.3 6.7

Source: Company, ICICIdirect.com Research

Technical Chart (Monthly Bar chart)

Source: Reliable Software, ICICIdirect.com Research

Stock dataMarket Capitalisation (| crore) 80.6

52 Week High / Low (|) 38 /19

Promoter Holding (%) 60.4

FII Holding (%) 0.2

DII Holding (%) -

Dividend Yield (%) 1.5

12M / 6M stock return (%) 33.0 / 2.3

Debt (| crore) -

Cash and Cash Equivalent (| crore) 5.3

Enterprise Value (| crore) 76.5

3 Year Revenue CAGR (%) (FY09-12) 19.0

3 Year EBITDA CAGR (%) (FY09-12) 43.0

3 Year PAT CAGR (%) (FY09-12) 13.2

Valuation tableFY12 FY13E FY14E FY15E

P/E 11.4 7.0 5.1 4.0

Target P/E 17.0 10.4 7.6 6.0

EV / EBITDA 6.8 4.2 3.1 2.4

P/BV 1.0 0.9 0.8 0.7

RoNW 9.1 13.2 15.6 16.6

RoCE 12.2 19.1 22.5 24.0

Source: ICICIdirect.com Research

Quarterly performanceQ4FY12 Q1FY13 Q2FY13 Q3FY13

Sales 71.7 76.9 87.4 90.3

EBITDA 4.8 4.4 3.5 5.6

EBITDA Margin (%) 6.8 5.8 4.0 6.2

Depreciation 0.4 0.4 0.4 0.4

Interest 0.2 0.0 0.0 0.0

Other Income 0.0 0.0 0.1 0.1PAT 3.0 2.8 2.1 3.6

EPS (|) 1.0 0.9 0.7 1.2 Source: ICICIdirect.com Research

Shareholding trend (%)Key Shareholders Q4FY12 Q1FY12 Q2FY13 Q3FY13

Promoter group 60.4 60.4 60.4 60.4

DII 0.0 - - -

FII 0.2 0.2 0.2 0.2

Non-institutional 39.5 39.5 39.5 39.5

Source: ICICIdirect.com Research

Technical ViewShare 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 trendopening up further upsides towards all-time highs of | 53 over

the next several months.


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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 gainsignificant 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 usedfor 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, D-

Link 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 cableoperators, 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. D-

Link 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 betD-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 FY12-

15E. 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 variousimpediments 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.


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Financial summary

Profit and loss statement

(| Crore)

(Year-end March) FY12 FY13E FY14E FY15E

Total operating Income 223.1 348.7 431.5 514.5

Growth (%) 72.6 56.3 23.7 19.2

Raw Material Expenses 191.6 289.7 350.0 416.2

Employee Expenses 13.2 15.5 19.4 22.6

Administrative Expenses 22.0 30.0 37.5 45.0

Changes in inventories -14.7 (4.8) 0.0 0.0

Total Operating Expenditure 212.1 330.4 406.9 483.8

EBITDA 11.0 18.3 24.6 30.7

Growth (%) 118.3 66.2 34.1 24.9

Depreciation 1.6 1.6 1.7 1.8

Interest 0.2 0.0 0.0 0.0

Other Income 0.8 0.3 0.5 0.5

PBT 10.1 16.9 23.4 29.4Total Tax 3.0 5.4 7.5 9.4

PAT 7.0 11.5 15.9 20.0

Growth (%) 53.8 63.3 38.2 25.9

EPS (|) 2.3 3.8 5.3 6.7 Source: Company, ICICIdirect.com Research,

Cash flow statement

(| Crore)


Profit after Tax 7.0 11.5 15.9 20.0

Add: Depreciation 1.6 1.6 1.7 1.8

(Inc)/dec in Current Assets -31.8 -41.2 -32.9 -33.0

Inc/(dec) in CL and Provisions 27.3 29.0 17.9 18.0

Interest Paid 0.2 0.0 0.0 0.0

CF from operating activities 4.3 0.9 2.6 6.7

(Inc)/dec in Fixed Assets -0.6 -1.0 -1.2 -1.4

Others 0.2 0.2 0.2 0.2

CF from investing activities -0.4 -0.8 -1.0 -1.2

Dividend paid & dividend tax -1.4 -1.4 -1.4 -1.4

Interest Paid -0.2 0.0 0.0 0.0

CF from financing activities -1.6 -1.4 -1.4 -1.4

Net Cash flow 2.3 -1.3 0.2 4.2Opening Cash 3.1 5.3 4.1 4.3

Closing Cash 5.3 4.1 4.3 8.5 Source: Company, ICICIdirect.com Research

Balance sheet

(| Crore)


Liabilities

Equity Capital 6.0 6.0 6.0 6.0

Reserve and Surplus 71.1 81.2 95.7 114.3Total Shareholders funds 77.1 87.2 101.7 120.3

Deferred tax liability 0.6 0.8 1.1 1.3

Other Non Current Liabilities 0.0 0.0 0.0 0.0

Total Liabilities 77.7 88.0 102.8 121.6

Assets

Gross Block 24.6 25.6 26.8 28.2

Less: Acc Depreciation 3.0 4.7 6.3 8.1

Net Block 21.6 21.0 20.5 20.1

Capital WIP 0.0 0.0 0.0 0.0

Total Fixed Assets 21.6 21.0 20.5 20.1

Inventory 42.0 60.1 74.4 88.7

Debtors 47.9 66.8 82.6 98.6

Loans and Advances 7.5 11.6 14.4 17.2

Cash 5.3 4.1 4.3 8.5

Total Current Assets 102.6 142.6 175.7 212.9

Creditors 44.1 71.5 88.5 105.6

Provisions 2.0 3.3 4.1 4.9

Other current liabilities 0.4 0.7 0.8 1.0

Total Current Liabilities 46.5 75.5 93.4 111.5

Net Current Assets 56.1 67.1 82.3 101.5

Application of Funds 77.7 88.0 102.8 121.6

Source: Company, ICICIdirect.com Research

Key ratios


Per share data (|)

EPS 2.3 3.8 5.3 6.7

Cash EPS 2.9 4.4 5.9 7.3

BV 25.7 29.1 33.9 40.1DPS 0.4 0.4 0.4 0.4

Cash Per Share 1.8 1.4 1.4 2.8

Operating Ratios (%)

EBITDA Margin 4.9 5.3 5.7 6.0

PBT / Total Operating income 4.5 4.9 5.4 5.7

PAT Margin 3.2 3.3 3.7 3.9

Inventory days 68.7 63.0 63.0 63.0

Debtor days 78.3 70.0 70.0 70.0

Creditor days 72.1 75.0 75.0 75.0

Return Ratios (%)

RoE 9.1 13.2 15.6 16.6

RoCE 12.2 19.1 22.5 24.0

RoIC 13.0 19.9 23.2 25.6

Valuation Ratios (x)

P/E 11.4 7.0 5.1 4.0

EV / EBITDA 6.8 4.2 3.1 2.4

EV / Net Sales 0.3 0.2 0.2 0.1

Market Cap / Sales 0.4 0.2 0.2 0.2

Price to Book Value 1.0 0.9 0.8 0.7

Solvency Ratios

Debt/EBITDA 0.0 0.0 0.0 0.0

Debt / Equity 0.0 0.0 0.0 0.0

Current Ratio 2.2 1.9 1.9 1.9

Quick Ratio 1.3 1.1 1.1 1.1 Source: Company, ICICIdirect.com 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, healthcare and retail


6/7


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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ICICI Securities Ltd Retail Equity Research Page 7

ATING RATIONALEICICIdirect.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 [email protected] Research Desk,ICICI Securities Limited,1st Floor, Akruti Trade Centre,Road No. 7, MIDC,Andheri (East)

Mumbai 400 093

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