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D-LINK INDIA: Too High a Price Tag?

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DQI Bureau
New Update

Fact Sheet

D-Link India



L-5, Verna Electronics City


Verna Plateau


Goa 403722


Tel.: 0832 783393/783394


Fax: 0832 783395


Proposed Listing (Stock Exchanges): Mumbai Stock Exchange, National Stock
Exchange and Bangalore Stock Exchange



Book Building (No of shares): 1,234,230


Public Issue (No of shares): 152,374


Face Value: Rs 10 per share


Issue Price: Bid price Rs 300 per share (Premium of Rs 290 per
share)



Public Issue Opens: March 14, 2000


Public Issue Closes: March 19, 2000


Website: www.dlink-india.com











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The stock market goes through phases of extreme optimism followed by longer

phases of extreme pessimism. Of late, a number of top-quality shares have been

quoting at very low multiples. In such a scenario, where even the shares of

established companies with proven track record are available at rock bottom

prices, it becomes a challenging task for a company to raise funds through the

primary market. The pricing becomes a key factor for the issue to sail through

turbulent seas. The company has come out with book building issue of 1,234,230

equity shares of Rs 10 each at a premium of Rs 290 per share, which will be

followed by the public issue of 152,374 equity shares.

Background: Headstart

D-Link India was formed in March 1993 as Smart-Link Network for setting up a

manufacturing unit of telecom products. D-Link Corp, Taiwan invested in the

company after successful completion of the setting-up of the factory in Goa. The

name of the company was changed to D-Link India after financial participation by

Taiwan-based D-Link Corp. D-Link became a public company in July 1998.

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D-Link has grown impressively since inception to take a top position in the

areas of its activities, which include networking, Internetworking and

structured cabling products. The company has set up two manufacturing units in

Goa and has offices spread across the country. It has also set up a software

center in Mumbai and Bangalore with specialization in embedded software.

D-Link was formed by KR Naik, 59, who has over 26 years of experience in the

networking industry. Naik has a post-graduate degree in industrial engineering

from Jhunjunwala College, Mumbai and has done business management from Jamnalal

Bajaj, Mumbai. He started his career with IBM and started his own business in

the field of networking cards and personal computers before forming D-Link. He

is currently the managing director of the company and holds 45% stake in the

company whereas D-Link Corp holds 44% stake in the company.

The performance of the company has been impressive with revenues growing from

Rs 8.44 crore in the year ended March 1996 to Rs 93.9 crore in March 2000. Net

profit too has risen impressively from Rs 26 lakh in March 1996 to Rs 8.35 crore

in March 2000.

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Operations: Well positioned

D-Link is engaged in the manufacture of networking products, Internetworking

products, structured cabling products and marketing of Cisco range of products.

The company has strong presence in the LAN/WAN market and has two manufacturing

plants with two SMT lines at Goa. The ISO-9002 certified plant has a capacity of

50,000 NICs, 10,000 hubs and switches and 40,000 modems monthly. The company

achieved total revenues of Rs 93.9 crore in the year ended March 2000, which

were higher by 126% over the previous year.

Currently, networking products constitute the major part of the overall

revenues and these stood at 55% of the total revenues in the year ended March

2000.

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Internetworking products contribution to March 2000 revenues stood at 28% and

the company’s product range in this segment include external, internal, USB

and cable modems, ISDN terminal adapters, routers and modems and leased line

routers. The company has 50% market share in modems.

D-Link’s software division, started in February 2000, has a VLSI design

department and protocol and embedded software programming division. The software

division was formed to complement the R&D activities of the company for the

launch of new products. The total employee strength of the company is 200 and

the company has structured ESOP plan for its employees. 2% of the post issue

equity has been set aside for employees, which follows the practice of many

progressive companies in India today.

D-Link distributes its products through 21 territory distributors, 300

dealers and 3,000 resellers across the country. The company also has offices in

Mumbai, Delhi, Bangalore, Kolkata, Chennai, Pune, Secunderabad, Ahmedabad,

Lucknow, Chandigarh and Indore. The wide distribution network has helped the

company to move into the top league of networking vendors in a short period of

time. However, more than 70% of the company’s sales are through distributors,

which increases the risk. Moreover, D-Link depends on its parent company for 60%

of its raw materials requirement whereas more than 85% of the total raw

materials are imported thereby exposing the company to currency risk.

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D-Link had a subsidiary in Singapore–D-Link International, which was merged

with D-Link from April 2000. D-Link has also formed a software subsidiary called

D-Link Infotech despite having software operations division. It also has joint

ventures with Lanner Electronics and Sapphire Networks. Moreover, Naik has

floated a company Virtual Computers, for distribution of D-Link non-branded

products and computer maintenance.

Raising funds for expansion

D-Link is tapping the primary market with an initial public offering of

1,523,740 equity shares out of which 1,371,366 equity shares are being offered

through the book building issue and the balance will be offered to the public.

The company has fixed a minimum bid price of Rs 300 per share translating into a

premium of Rs 290 per share. D-Link plans to raise Rs 45.71 crore through the

IPO, which will be spent in various expansion plans of the company. The funds

will be utilized for investment in the software division, expansion of the

manufacturing facility at Goa and set-up of a fiber optic product and structured

cabling facility. Out of this, major investment of Rs 29.09 crore will be in the

software division whereas Rs 14.3 crore will be spent on the expansion of the

networking division. The total project cost is estimated at Rs 55 crore with Rs

45.71 crore to be raised through the IPO and the balance will be met through

internal accruals.

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Post-issue, the company’s equity capital will increase from Rs 4.57 crore

to Rs 6.09 crore. Currently, D-Link Corp holds 45% stake whereas other promoters

including Naik hold less then 45% stake in the company. Post issue, both D-Link

Corp’s and the other promoters’ stake will decline to 34%. The company has

set up an employee stock option trust, which will hold 2% of equity, public will

hold 25%, with the balance 4% being held by other investors.

The VoIP and home emphasis

Having established a mark within six years of commencement of operations,

D-Link now plans to enter new and emerging technology areas. The major new areas

underlined by the company are Clarent VoIP products, digital home division

products and new range of products in its existing segment of networking,

Internetworking and structured cabling. We however believe that D-Link will face

tremendous competition from established players such as Cisco and Lucent, who

have huge R&D and marketing budgets.

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Financials

(All figures in Rs crore)

 

1998

1999

2000

2001*

Revenues

17.64

41.88

84.76@

80.08

Other

Income

0.22

0.08

0.67

0.17

OPM

(%)

4.71

9.86

10.92

16.86

Operating

Profit

0.83

4.13

9.26

13.5

Profit

After Tax

0.33

3.2

6.88

10.53

Equity

Capital

2.5

3.06

4.14

6.09**

EPS (Rs)

1.32

10.45

16.61

34.58#

D-Link’s software division was formed in February 2000 and the company has

drawn up impressive plans to increase its focus in this segment. More than 50%

of the funds raised from the proposed IPO will be used to invest in the software

development facility. Going ahead, the software division will focus on the

internal R&D needs to develop and introduce new products. The division will

also meet the R&D needs of D-Link and its parent company in the area of core

and application programming related to VLSI designing, broadband access, VoIP,

multimedia, graphic designing, Internet and customer relationship management. At

a later stage, the company also has plans to enter the software services arena

with focus on areas such as healthcare, insurance, finance, entertainment and

media. The software division will be based in Mhape, New Mumbai, Bangalore and

Goa. The marketing of the software services will be carried through the proposed

marketing offices to be set up in the US and UK.

Financial performance: Improving



Project Cost

(Rs crore)

Particulars

Amount

Software division

29.09

Expansion of

networking products

14.3

Fiber optic

products

2.02

Structured cabling

0.82

Preliminary

expenses

4.7

Working capital

margin

4.07

Total

55

Although the company’s revenues grew by 96% to touch Rs 81.68 crore in

March 2000, the increase was largely due to the revenues from traded products,

which rose 220% during the year. Revenues from manufactured products rose

marginally by 22% to Rs 32 crore. The company’s operating margins were less

than 10% in March 1999, which increased to 11% in the year ended March 2000. The

company merged its Singapore based subsidiary D-Link International from April

2000. During the half-year ended September 2000, the total revenues, including

that of the merged subsidiary, stood at Rs 80.07 crore, which were 188% higher

than the corresponding period of previous year. While revenues from manufactured

products were Rs 54.75 crore that from traded products stood at Rs 25.32 crore.

Net profit in H1 stood at Rs 10.53 crore compared to Rs 3.12 crore in the

corresponding previous half.

Investment potential: Little room for gains

D-Link is offering its shares at Rs 300 per share, which discounts its

annualized March 2001 EPS of Rs 35 by nine times. The company operates in a very

competitive environment, which is evident from the low operating margins since

its inception. The company’s closest listed competitor is Bangalore-based

Mro-Tek, which is engaged in the networking products in LAN/WAN and modems.

Mro-Tek came out with a public issue through the book-building route at a price

of Rs 95 per share last year. However, it is currently traded at Rs 37, a

whopping 200% below its offer price. While Mro-Tek has higher revenues than

D-Link, the latter has an edge over Mro-Tek thanks to its established

manufacturing units and association with D-Link Corp.

Means of Finance

Particulars

Amount

Public

issue

45.71

Internal

accruals

9.29

Total

Funds

55

We believe that D-Link will face stiff competition from domestic and global

players in the networking arena thereby squeezing its margins. With the possible

slowdown in the US market, global players are expected to focus on emerging

markets to push their sales, which might affect D-Link’s growth prospects in

the high-end segment in the immediate term and medium segment in the longer

term. Moreover, the company’s foray into software segment will take some time

to get established considering the current state of the industry, where even the

existing players are finding it difficult to sustain growth achieved in the

past. However, we believe that the software division for internal R&D

activity is a major positive in the dynamic industry. Some of the other

strengths of the company are its brand positioning. Weighing the pros and cons,

we feel that the pricing of the issue is bit on the higher side and a lower

price would have made the issue attractive. The prevailing sentiments might

limit any appreciation on listing and therefore investors would do well to stay

out of the issue.

Sushanto Mitra is the founder

of Technology Capital Partners

The views reflected here are of the author and not of this publication. No

liability is accepted for losses based on the information presented here.

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