Rating Rationale
June 02, 2020 | Mumbai
D-Link India Limited
Rating Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.10 Crore
Long Term Rating CRISIL A/Stable (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its rating on the long-term bank facility of D-Link India Limited (D-Link) at 'CRISIL A/Stable'.
 
D-Link's operations, which were impacted since the last week of March 2020 on account of outbreak of coronavirus and the resultant country wide lockdown, have started to improve since May 2020 with easing of logistic challenges and dealers starting operations with permission from local administrators.
 
However, with most offices and public places remaining shut and orders from the project segment (smart city and office networking projects) getting deferred, overall demand in fiscal 2021 is expected to remain subdued even while demand for routers and internet connectivity related products is expected to improve. Consequently, revenue is expected to decline by 12-14% in fiscal 2021. Profitability however is expected remain steady at 5.5-6.0% supported by lower raw material cost and lower discounts being offered.
 
Despite lower cash inflow, company's liquidity should remain adequate to manage its fixed expenses. The company had around Rs 30 crore in the form of unutilised bank lines and surplus cash as on March 31, 2020. Liquidity should also benefit from the flexible credit period that the company enjoys from its parent (D-Link Corporation) which will allow it to delay payments if required. Company's debt free balance sheet should further help cushion any business shock.

The rating continues to reflect D-Link's established market position and strong distribution network across India, and healthy financial risk profile. These strengths are partially offset by exposure to intense competition, parent company's weak business profile and exposure to input price and currency volatility.

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of D-Link and its wholly-owned subsidiary, Team F1 Networks Private Limited (Team F1). Goodwill, as a result of acquisition of Team F1, has been amortised over five years from the effective date of acquisition in 2014.

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths: 
* Established market position and strong distribution network:
D-Link is the market leader in shipment of switches and wireless local area network products, with a share of around 30% and 40%, respectively. During the year fiscal 2019, D-Link introduced a series of high-end products for its enterprise business including unmanaged long term POE/POE plus switches, new generation layer 3 stackable managed switches with advance hardware and software enhancements for better performance, flexibility and easy management and industrial grade switches.
 
* Healthy financial risk profile:
Networth is estimated at Rs 220 crore as on March 31, 2020 which is expected to increase over the medium term with steady accretion to reserves, while debt was nil. Return on capital employed, is estimated at 22-24% in fiscal 2020. In the absence of any debt funded capex financial risk profile should remain healthy over the medium term.
 
Weaknesses:
* Exposure to intense competition and risks inherent in the networking industry:
D-Link mainly operates in the home and small and medium enterprises segments of the networking industry, where profitability is lower than that in the institutional sales segment. The latter is dominated by CISCO India. Profitability in the retail segment is constrained by intense competition and commoditised nature of products.
 
* Susceptible to input price and currency volatility:
Price of copper, the key input for manufacturing cables, is an open market commodity traded globally on exchanges. Copper price has been volatile in the past. Further, currency volatility also impacts profitability as the company imports its products. Complete and immediate pass on of cost increases is difficult given the intense competition. Hence, operating margin will remain susceptible to any adverse fluctuation in raw material prices and currency. D-Link hedges the currency exposure upto 2 months by entering into forward contracts.
 
* Weak parent performance:
Revenues of parent, D-Link Corporation have decreased from NTD 30.3 billion in calendar year 2014 to NTD 17.00 billion in calendar year 2020, while networth has reduced from NTD 15.9 billion to NTD 9.6 billion due to mounting losses. However, cash surpluses have been at NTD 2.9 billion with total debt at NTD 0.9 billion on March 31, 2020. Despite parent's weak performance, CRISIL believes that it will not depend on D-Link India for financial support.
Liquidity Adequate

Liquidity is adequate. In the absence of capex plans and repayment obligations, cash accrual, expected at Rs 20-30 crore each in fiscals 2020 and 2021 will support liquidity. Company also had around Rs 30 crore in the form of unutilised bank lines and surplus cash as on March 31, 2020 which should be adequate to fund company's fixed expenses. Cash surplus is also expected to remain healthy over the medium term.

Outlook: Stable

CRISIL believes D-Link will benefit from its established market position and strong distribution network over the medium term. Furthermore, while near term pressures will persist due to the ongoing lockdowns an improvement in cash accrual and absence of debt funded capex should help sustain the healthy financial risk profile over the medium term.

Rating Sensitivity factors
Upward factors
* Revenue growth of 15-16% over the medium term while sustaining healthy operating margin above 6%
* Reduction in gross current assets below 120 days resulting in stronger cash generation
 
Downward factors
* Significant decline in revenues by over 20% and deterioration of operating margin to below 4%, most likely due to further deterioration in business conditions including due to prolonged lockdown affecting the company's cash flows
* Increase in gearing due to stretch in working capital or capex to more than 0.50 times
About the Company

Incorporated in 2008, D-Link is a step-down subsidiary of D-Link Corp and markets networking products of the parent and also procure from third party vendors. Product profile comprises network switches, wireless local area networks, routers, modems, storage devices, and cameras. In 2010, D-Link began marketing structured cabling products procured from third party vendors.
 
In January 2014, D-Link acquired Team F1, a company that specialises in providing network and security software for embedded devices. The consideration for the acquisition was in the form of D-Link's equity shares, which resulted in D-Link Corp's equity stake in D-Link reducing to 51% from 60%.
 
D-Link Corp, set up in 1986, is a multinational company that designs, markets, and manufactures networking equipment, with presence across over 100 countries.

Key Financial Indicators
Particulars Unit 2019 2018
Revenue Rs. Cr. 716 659
Profit after tax Rs. Cr. 23 10
PAT margin % 3.3 1.5
Adjusted Gearing Times 0.00 0.00
Interest coverage Times 494.81 33.68
 
Year to date financials
Particulars Unit 9M-20 9M-19
Revenue Rs crore 576 519
Profit after tax Rs crore 26 17
PAT margin % 4.6 3.2
Interest coverage Times 86.5 632.7

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs crore) Rating assigned with Outlook
NA Cash Credit & Working Capital demand loan NA NA NA 10 CRISIL A/Stable
 
Annexure - List of entities consolidated
Names of Entities Consolidated Extent of Consolidation Rationale for Consolidation
Team F1 Networks Private Limited Fully common management, similar line of business, business and financial linkages, and common promoters
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  10.00  CRISIL A/Stable      23-08-19  CRISIL A/Stable  27-09-18  CRISIL A/Negative  08-09-17  CRISIL A/Stable  CRISIL A/Stable 
                    30-03-17  CRISIL A/Stable   
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit & Working Capital demand loan 10 CRISIL A/Stable Cash Credit & Working Capital demand loan 10 CRISIL A/Stable
Total 10 -- Total 10 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
CRISILs Criteria for Consolidation
Criteria for notching down standalone ratings of companies based on support extended to parent

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