D-LINK INDIA: Too High a Price Tag?

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

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.

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.

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.

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.

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.

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.

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.