D-Link (India): Average

Score: Average

Suresh Krishnamurthy

AN INVESTMENT can be considered in the book-building offer of D-Link (India) Ltd at just above the bid price of Rs 300.

At this price, the offer valuation would be at around 10 times the per share earnings, calculated on the basis of the post-offer equity and the annualised net profit for the half year ended September 2000. Considering the company's fundamentals, the near-term growth prospects of the networking industry and the state of competition in the industry, a price-to-earnings ratio of around 10 appears appropriate.

The stock is suitable for investors with a risk profile higher than the market average. Trends in the technology industry fluctuate and it is especially more in the hardware sector. The growth in the hardware sector is also hostage to a number of factors such as government policies, rupee depreciation and the overall growth rate in the economy. These tend to peg the risk profile of hardware equipment manufacturing companies a little higher. The higher growth rates expected for the networking industry in the next few years and the track record of D-Link in the past couple of years may temper the risks to a reasonable degree.

Still, the risks involved in an investment need to be considered as higher than the market average. An investment in this stock is suitable for investors seeking to diversify their exposure to the technology sector. However, they have to consider an investment with a term perspective of at least a year.

The stock's strength is its position in the networking industry. The company has made substantial progress in establishing itself as a premier supplier of networking products such as network interface cards, hubs, switches and routers. The alliance with D-Link Corporation of Taiwan, which has helped it expand its product profile, is another positive factor.

Above all, the networking industry, according to a report of IDC -- a market research organisation -- is likely to grow at a fast rate of around 30 per cent in 2001-2002. Besides, even in the later years, with the pick-up in the telecommunications industry, the demand for networking products is likely to remain robust.

On the other hand, the competition in the industry is also likely to remain intense. This has implications for the company's profitability. As of now, the company has a net profit ratio of around 13 per cent. Even this appears high and is sustainable only if the software division starts contributing to the bottomline significantly. However, as things stand, the contribution of the software division cannot be taken for granted.

In this backdrop, a price-to-earnings multiple that is higher than 10 would put the valuation of the stock at a level which will require the investors to stay invested for a longer period of time to see reasonable returns which, in turn, will increase the risk profile.

What the company says: The offer is to finance the company's expansion project, primarily involving the setting up of a software division and an additional line for manufacturing networking products.

The project cost is Rs 55 crore and the company is offering close to 15.23 lakh shares through the book-building and public offer. The cut-off price for the bid is Rs 300. The post-offer equity would be Rs 6.09 crore.

D-Link (India) reported revenues of Rs 81.68 crore and profits of Rs 6.87 crore for the year ended March 2000. Networking products accounted for 54.7 per cent of the total revenues, internetworking products -- 28 per cent, structured cabling products -- 7.4 per cent and Cisco range of products -- 9.9 per cent.

In the six months ended September 2000, D-Link (India) reported revenues of Rs 80.07 crore and profits of Rs 10.54 crore. In addition to expanding the product range that the company had in 1999-2000, the product range itself has been expanded during the year to include Clarent VoIP products and Digital Home Division products. D-Link India has also started its software development activity at Goa in February 2000 and is in the process of setting up centers at Bangalore and New Mumbai.

D-Link Corporation of Taiwan and D-Link Asia Investment Pvt Ltd together held 45 per cent of the company's equity prior to the public offer. Post-offer, their stake will come down to 34 per cent.

Bid opened :February 20

Bid closes :February 27

Reserve price :Rs 300

Fixed price issue: Opens March 14

Closes : March 19

Lead Manager :Tata Finance Merchant Bankers

Promoters :K. R. Naik, D-Link Corporation (Taiwan)