A Smart Grab - Smartlink Network Systems

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Certain companies might not bring a unique proposition, but it is other factors around that make them attractive. Smartlink Network Systems (Smartlink), is one such example where other factors such as decent financial performance, revival in IT spend in India, market share, cash and liquid investment of Rs 33 per share and low valuations, make it a smart buy at Rs 64.

Smartlink is the result of demerger of D-Link that took place in 2008, wherein D-Link continued its active networking products business, while Smartlink focus would be copper and fibre cable products. Smartlink is a networking product company that helps in connecting computers and making internet reach everywhere. Today Smartlink has three segments, viz. Digilink, which handles copper and fibre cable products, Digisol, which Smartlink recently entered to provide active networking products such as switching, routing, wireless, etc, and Digicare, which provides support and services. Besides, Smartlink also does contract manufacturing for some companies, which forms part of Digicare. Nearly 90 per cent of the revenues come from Digilink, while balance is from Digicare. Digisol isn’t contributing to sales. Though Smartlink has two other segments (i.e. Digisol and Digicare), it’s Digilink that'll continue to drive its revenues growth.

Though Smartlink’s has got plain vanilla products and networking products market is clogged with many players including unorganised ones, Smartlink ranked number two has still managed an 18-20 per cent market share, which is commendable where number one player’s share being 25 per cent. Secondly, computer penetration is still low at 7 per cent in India. This penetration can only increase going forward creating a direct demand for networking products. Besides overall revival in IT in India, a lot of investment is flowing in IT infrastructure. A welcome sign for Smartlink, translating into direct demand its products.

That apart, Smartlink is also focusing on new areas such as solutions for data centres, product range for fibre to home solutions and residential cabling solutions. Besides, with IT and telecommunications converging wired and wireless networks would only increase going forward. All this will create more demand for Smartlink’s products and help it drive its future growth.

The other two factors that make Smartlink attractive are its consistently dividend history and high dividend yield of almost 4 per cent on dividend per share of Rs 2.5 (face value Rs 2), while Smartlink is comfortably sitting on huge cash and liquid investments to the tune of Rs 97.91 crore (Rs 33 per share), which makes up for almost 51 per cent of the total market cap.

On financial front, during Q1FY11 Smartlink’s revenues increased 30 per cent to Rs 42.48 crore (Rs 32.59 crore), while profits increased 22 per cent to Rs 4.04 crore (Rs 3.32 crore). On trailing twelve months profits Smartlink is available at PE of 10x and EV/EBITDA of 3.97x. But if we adjust liquid investments of Rs 97.91 crore then Smartlink valuations dip further to PE of 5x and EV/EBITDA of over 2x making it attractive grab with one year target of Rs 90.