'Our topline will rise 25 per cent in FY05'

Q&A/K R Naik, CMD, D-Link India

D-Link India is a network company dealing in local area network (LAN), wide area network (WAN), wireless, digital home, and voice over Internet protocol (VoIP ) products.

The company has ramped up its manufacturing capabilities and is planning to enter the high-margin enterprise business segment. It has teamed up with Sify to offer wireless products for setting up wireless fidelity (Wi-Fi) hotspots.

The company posted a net profit of Rs. 8.02 crore for the third quarter ended December 31, 2003, against a profit of Rs. 3.97 crore in the corresponding period the previous year, an increase of 102 per cent.

Total income for the quarter went up by 27.36 per cent to Rs. 52.92 crore against Rs. 41.55 crore. The scrip is quoting at Rs 179.50 on the BSE at a P/E of 17x.

D-Link's December quarter results were impressive. What do you attribute the performance to?

We attribute our performance to the resurgence in IT spending "� companies were postponing their IT spending for the past two years. With the economy picking up, they have increased their IT expenditure.

D-Link is well-positioned with the right products to capitalise on this uptake in the economy. Falling PC prices and the subsequent rise in PC penetration have led to an increase in demand. This along with the recognition the company received in various parameters helped it grow its business.

Other income has shot up by over 600 per cent on a y-o-y basis and 150 per cent on a nine-month basis. What is the reason for this?

The reason behind the growth in other income is better utilisation of the company's surplus funds. Foreign exchange gains by way of efficient treasury operations and forecasting scenarios one quarter in advance to adjust procurement plans accordingly were instrumental in the gains. Job-work income also contributed to the other income component.

Revenue from the software segment has slumped by 59 per cent y-o-y in the quarter while profitability has fallen over 93 per cent. How do you explain this?

D-Link India has diverted its software manpower resources towards developing its own intellectual property rights (IPRs), reducing the revenue from direct software business.

The IPRs will help us design, develop and manufacture products of higher margins when they will be commercialised.

We have developed products like Internet phones which are doing well in India and abroad. We have also introduced our own routers and structured cabling and fibre optic products.

How big an opportunity is the enterprise segment for D-Link?

The enterprise segment is very big. We have stopped dealing with Cisco last November after developing our own arsenal of enterprise products like core routers and switches.

We now compete in all big tenders on a 1:1 basis and take on Cisco in the segment. We are capable of catering to entire orders in the enterprise segment as a result of our R&D work in the area.

How is the company's foray into Wi-Fi working out?

D-Link is a strong player in the Wi-Fi space. It is the number two brand worldwide. It has strategic technology tie-ups and is a pioneer in the wireless space.

The company has tied up with Internet service providers (ISPs) like Sify to provide wireless products for setting up Wi-Fi hotspots.

We have bagged sizeable orders for wireless products from the hospitality industry, educational segment and government establishments. We have also tied up with major laptop vendors to bundle our wireless products along with our laptops.

The company has entered into a venture with Mercuries Data Systems (MDS) of Taiwan to manufacture and sell ATM machines in India. What is the progress on this front?

We are looking at job-work and rental incomes from the joint venture with allocation of space for manufacturing facility.

The new company, Mercury Link Systems, will manufacture ATM products at D-Link's state-of the-art plant in Goa. The plant has a capacity to manufacture 10,000 machines per year. Mercury Link will target a market share of 15-25 per cent in the next two years.

What are the challenges D-Link is facing?

Offering the right technology products to the market in a major challenge. India is a highly demanding market "� it needs the latest features packed in the appropriate technology which must be scalable and economical.

How is the company's margin position? What is the trend going forward?

Our margin position has shown an upward trend due to better sales of high margin products, switches and VoIP, wireless and structured-cabling products.

Sales have shown a shift towards greater margin products as we have been focusing to cater to the enterprise segment.

Last year about 10 per cent of our turnover was from Cisco products which have been replaced this year by our own routers and switches. This has led to high margin growth for the company. Our order position is also good.

What is your view on margins and billing rates going forward?

D-Link is a leader in the fast growing small and medium enterprise (SME) segment and is looking at consolidating its position in the enterprise segment by offering a single vendor solution.

As the enterprise business is a higher-margin one, we expect its beneficial effects to reflect in the company's prospects in the future. We don't see any erosion in margins and billing rates going forward.

Are there any capex plans?

The surplus funds which the company has could be channelised in new businesses for which the capex plans could be $2-10 million.

What is your forecast on the topline and bottomline going forward?

D-Link's products are well positioned. We will continue our performance going forward and post growth which would be greater than the industry growth rate in the coming quarters. On a conservative basis, our topline should appreciate by 25 per cent in FY05.