RJio tie-up adds another growth engine to D-Link

D-Link India, the market leader in modems, wireless LAN, routers and switches space, recently announced its tie-up with Reliance Jio (RJio) to launch fixed line digital services. D-Link via its subsidiary, TeamF1 Networks, will provide home gateway solutions to RJio users, enabling them to connect various devices such as their VoIP (voice over internet protocol) phones, personal computers, printers, among others. VoIP phones use VoIP technologies for placing and transmitting telephone calls over an IP-based network such as internet. Though it may take some time for the deal to be implemented, it is a key positive for both the companies and would be another growth engine for D-Link.

D-Link is also going to reap the benefit of digital wave in the country. Its leading position, coupled with diminishing share of unorganised peers (after demonetisation) will enable the company to tap the potential benefits of digitisation. D-Link is also looking to participate in the Smart City project. It can also participate in government’s digital initiatives such as e-governance and virtual surveillance, amongst others.

All these should add to D-Link’s already impressive financial performance in recent times. The company has clocked a compounded annual growth rate (CAGR) of 27 per cent over financial year (FY) 2013 to FY16 and similar growth in operating profit. This trend is likely to remain healthy, going forward. Analysts at ICICI Securities say the company can post an 11 per cent revenue growth, 15 per cent earnings before interest, tax, depreciation and amortisation or Ebitda growth and 20 per cent earnings growth during the period of FY16-18. 

Owned by Taiwan-based D-Link Corporation, the company has a strong, debt-free balance sheet, healthy return ratios (return on equity of 16 per cent) and has maintained its dividend payout at 12-13 per cent in recent years. It acquired TeamF1 Networks, which provides embedded software engineering solutions and services, in 2014. The acquired company has research and development capabilities and specialises in networking and security domains. The acquisition has already started creating value for D-Link by generating improved revenue growth.

Most analysts are positive on the company’s scrip given the presence of multiple growth catalysts. High competitive intensity, particularly from Chinese and local unorganised vendors, is a key downside risk. D-Link’s successful track record so far though provides comfort. The stock is currently trading at 13 times the FY18 estimated earnings and analysts say it could trade at about 17 times given the company's strong prospects.