Company Update Rating matrix Rating : Buy Target : 140 Target Period : 18-24 months Potential Upside : 34% What s Changed? Target Changed from 150 to 140 EPS FY18E Changed from 11.4 to 9.5 EPS FY19E Introduced at 11.7 Rating Unchanged Key Financials FY16 FY17 FY18E FY19E Net Sales 721.3 715.9 788.8 919.0 EBITDA 38.1 26.8 47.5 60.6 PAT 24.4 17.6 31.3 39.9 EPS (in ) 6.9 5.0 8.8 11.2 Valuation summary FY16 FY17 FY18E FY19E P/E 15.3 21.1 11.9 9.3 Target P/E 20.4 28.3 15.9 12.5 EV / EBITDA 9.4 14.2 7.6 5.7 P/BV 2.4 2.1 1.8 1.6 RoNW 15.6 10.1 15.5 16.7 RoCE 24.2 14.8 22.9 25.3 Price Chart 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Research Analyst 300 250 200 150 100 0 Apr-15 Sep-15 Feb-16 Jul-16 Dec-16 May-17 Price (R.H.S) Bhupendra Tiwary Bhupendra.tiwary@icicisecurities.com Sneha Agarwal sneha.agarwal@icicisecurities.com Nifty (L.H.S) 50 May 16, 2017 D-Link India (DLILIM) 105 Hit on technologically obsolete inventory in Q4FY17 D-Link reported 15.6% YoY decline in total revenues to 154.8 crore as the company took a corrective action of doing away with technologically obsolete inventory in the ongoing shift from 3G to 4G in India. It is a one-time impact. Sales should recover in the coming quarters The hit on the inventory resulted in an increase in inventory as a percentage of sales to 89.8% vs. the average run-rate of 82-83% leading to a loss at the EBITDA level to the tune of 1.7 crore Losses at the operating level dragged down overall profitability, hence resulting in a PAT loss of 1.3 crore FY17 impacted by one offs, FY18, FY19 to be better The management took a conscious call of deferring some sales with a longer credit cycle in Q1FY17, impacting revenues in Q1. In the current quarter, the company took a hit on the technologically obsolete inventory in the ongoing shift from 3G to 4G in India, resulting in 15.6% YoY decline in total revenues to 154.8 crore. It is a one-time impact. Sales should recover in coming quarters. It continues to see good traction in both its active and passive product portfolio, which constitutes about 65% & 35% of total revenues, respectively. With the inventory hit, the company is well prepared with updated inventory matching the 4G needs. D-Link has also prepared itself for the GST regime, which will lead to added benefits owing to input tax credits it receives on its imports. D-link is expected to benefit from the government s vision of pan-india internet connectivity and its contribution in the upcoming smart city projects. We expect topline to grow at 13.3% CAGR over FY17-19E to 919.0 crore. Deal with Reliance Jio to boost TeamF1 performance The company had acquired TeamF1 Networks, which is in the business of providing services in relation to the Network Security Software, test new applications/enhancements and provide maintenance support for existing applications. TeamF1 had entered announced its partnership with Reliance Jio for delivering a state-of-the-art home gateway solution, joint reference solutions for seamless connected-home experience for Media, Television (IPTV, STB), Telephone (VoIP), gaming and internet, which will lead to incremental revenues for the subsidiary. We expect revenues from the subsidiary to grow at 7.0% CAGR in FY17-19E to 22.1 crore. There could be an upside risk to our estimates depending upon further deal wins. The segment has a better margin profile and is accretive to overall margins of the company. Available at inexpensive valuations; maintain BUY; target price 140 D-Link is well prepared for GST. We remain bullish on the company s fundamental performance as it would be a vital contributor to the government s vision of pan-india internet connectivity owing to its wide product portfolio. The recent alliance with Reliance Jio would also result in incremental benefits considering the aggression being shown by Jio in the Indian telecom space, We have rolled our valuations to FY19E and expect D-Link to post revenue, EBITDA and PAT growth of 13.3%, 50.4% and 50.3% CAGR in FY17-19E to 919.0 crore, 60.6 crore and 39.9 crore by FY19E, respectively. The stock continues to be available at an attractive valuation of 8.8x FY19E EPS. We value the stock at 12.5x FY19E EPS of 11.2 and arrive at a revised target price of 140. We maintain BUY recommendation on the stock. ICICI Securities Ltd Retail Equity Research
Variance analysis Q4FY17 Q4FY16 Q3FY17 YoY (%) QoQ (%) Comments Revenue 154.8 183.3 187.1-15.6-17.3 Corrective action taken by the company to take a hit on technologically obsolete inventory led to losses in revenues Other Income 0.3 0.8 1.2-61.5-72.6 Raw Material Expenses 119.5 154.8 168.1-22.8-28.9 Employee Expenses 6.5 7.5 8.2-13.6-21.1 Administrative Expenses 11.0 14.4 11.9-23.6-7.4 Marketing Expenses 0.0 0.0 0.0 NA NA Changes in inventories of traded good 19.4-2.0-14.2-1,084.2-236.4 Other expenses 0.0-0.6 0.0-100.0 NA EBITDA -1.7 9.2 13.2-118.4-112.8 Lower operating leverage along to inventory losses led to losses at the EBITDA level EBITDA Margin (%) -1.1 5.0 7.0-611 bps -813 bps Depreciation 0.3 0.3 0.3-10.4-2.0 Interest 0.1 0.2 0.1-19.4-1.1 Total Tax -0.5 3.3 4.8-113.8-109.4 PAT -1.3 6.3 9.1-121.2-114.7 Change in estimates FY18E FY19E () Old New % Change Introduced Comments Revenue 913.4 788.8-13.6 919.0 We believe the major benefits from Smart Cities and Digital India initiative will flow in from H2FY18E onwards. Hence, we have tweaked revenue estimates in H1 leading to decline in estimates EBITDA 58.3 47.5-18.6 60.6 EBITDA Margin (%) 6.4 6.0-36 bps 6.6 PAT 40.6 31.3-22.8 39.9 EPS ( ) 11.4 8.8-22.5 11.2 ICICI Securities Ltd Retail Equity Research Page 2
Financial summary Profit and loss statement Total operating Income 721.3 715.9 788.8 919.0 Growth (%) 12.6-0.7 10.2 16.5 Raw Material Expenses 604.5 566.4 634.2 738.2 Employee Expenses 43.4 42.3 32.3 37.7 Administrative Expenses 53.3 51.7 56.8 63.7 Changes in inventories -17.9 28.7 0.0 0.0 Total Operating Expenditure 683.3 689.2 741.3 858.4 EBITDA 38.1 26.8 47.5 60.6 Growth (%) 12.5-29.6 77.3 27.6 Depreciation 1.7 1.5 1.7 1.7 Interest 0.4 0.5 0.8 0.8 Other Income 1.5 2.2 2.0 1.9 PBT 37.5 27.0 47.0 60.0 Total Tax 13.1 9.3 15.7 20.2 PAT 24.4 17.6 31.3 39.9 Growth (%) 11.5-27.6 77.7 27.2 EPS ( ) 6.9 5.0 8.8 11.2 Cash flow statement (Year-end March) FY16 FY17E FY18E FY19E Profit after Tax 24.4 17.6 31.3 39.9 Add: Depreciation 1.7 1.5 1.7 1.7 Add: Interest Paid 0.4 0.5 0.8 0.8 (Inc)/dec in Current Assets -55.4 48.9-20.1-31.8 Inc/(dec) in CL and Provisions 50.7-89.0 8.9 15.9 CF from operating activities 21.7-20.4 22.6 26.4 (Inc)/dec in Fixed Assets -1.0-0.9-1.0-1.0 Others -6.7 4.8-12.0-12.0 CF from investing activities -7.8 3.9-13.0-13.0 Dividend paid & dividend tax -3.0-3.0-3.0-3.0 Interest Paid 0.4 0.5 0.8 0.8 Others (3.0) 13.4 (6.6) (6.6) CF from financing activities -5.6 11.0-8.8-8.8 Net Cash flow 8.3-5.5 0.8 4.6 Opening Cash 0.9 9.2 3.7 4.5 Closing Cash 9.2 3.7 4.5 9.1 Balance sheet Liabilities Equity Capital 7.1 7.1 7.1 7.1 Reserve and Surplus 149.3 166.9 195.3 232.2 Total Shareholders funds 156.4 174.0 202.4 239.3 Total Debt 0.0 11.5 6.5 1.5 Deferred tax liability 0.0 0.0 0.0 0.0 Other Non Current Liabilities 0.1 0.1 0.1 0.1 Total Liabilities 156.4 185.6 209.0 240.9 Assets Gross Block 27.7 28.6 29.6 30.6 Less: Acc Depreciation 8.5 10.0 11.7 13.4 Net Block 19.2 18.6 17.9 17.2 Capital WIP 0.0 0.0 0.0 0.0 Total Fixed Assets 19.2 18.6 17.9 17.2 Goodwill on consolidation 15.3 15.3 15.3 15.3 Investments 5.0-12.0 24.0 Inventory 99.7 69.4 76.4 89.1 Debtors 171.7 154.3 166.6 184.4 Loans and Advances 8.5 7.6 8.4 9.8 Cash 9.2 3.7 4.5 9.1 Other current assets 0.4 0.1 0.1 0.1 Total Current Assets 289.5 235.1 256.1 292.5 Creditors 164.4 82.2 90.5 105.5 Provisions 6.9 1.7 1.9 2.2 Other current liabilities 5.1 3.6 3.9 4.6 Total Current Liabilities 176.5 87.5 96.4 112.3 Net Current Assets 113.1 147.7 159.7 180.2 Other Non-Current assets 3.8 4.0 4.0 4.0 Application of Funds 156.4 185.6 209.0 240.9 Key ratios Per share data ( ) EPS 6.9 5.0 8.8 11.2 Cash EPS 7.3 5.4 9.3 11.7 BV 44.0 49.0 57.0 67.4 DPS 0.8 0.8 0.8 0.8 Cash Per Share 2.4 2.8 3.3 3.8 Operating Ratios (%) EBITDA Margin 5.3 3.7 6.0 6.6 EBIT / Total Operating income 5.0 3.5 5.8 6.4 PAT Margin 3.4 2.5 4.0 4.3 Inventory days 50.4 35.4 35.4 35.4 Debtor days 86.9 78.7 77.1 73.3 Creditor days 83.2 41.9 41.9 41.9 Return Ratios (%) RoE 15.6 10.1 15.5 16.7 RoCE 24.2 14.8 22.9 25.3 RoIC 28.4 15.2 25.9 29.8 Valuation Ratios (x) P/E 15.3 21.1 11.9 9.3 EV / EBITDA 9.4 14.2 7.6 5.7 EV / Net Sales 0.5 0.5 0.5 0.4 Market Cap / Sales 0.5 0.5 0.5 0.4 Price to Book Value 2.4 2.1 1.8 1.6 Solvency Ratios Debt/EBITDA 0.0 0.4 0.1 0.0 Debt / Equity 0.0 0.1 0.0 0.0 Current Ratio 1.6 2.8 2.7 2.6 Quick Ratio 1.1 1.9 1.9 1.8 ICICI Securities Ltd Retail Equity Research Page 3
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 pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 400 093 research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 4
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