Smartlink --- Cash for free

Stock Opportunities Untested - but worth a good look
1

Just a quick note

Company has 300-360 cr of cash against a market cap of 130 crores. Thats a huge discount.

Why is the discount unjustified. The management has been shareholder friendly.

Consistent dividend payout.

Promoter took no non compete fee. All the money back to the company.

Dividend of 30 rs + 2 rs general dividend. This is by far the largest payout in % ge terms to actual money received.

Mr K R Naik increased stake from 62 % to 67.3% last year before the slump sale utilizing total creeping acquisition.

The company is planning on continuing the residual business.

The management seems to be very shareholder friendly and has a good track record. So a 60% discount to cash is a very attractive proposition.

Downside could be limited but as and when Company gets going with its new plans and i expect the company to stick to its dividend payout style.

Reading more on the company. The current buy decision is purely on the clarity of promoter intentions.

Disclosure : As i have a decent exposure at the stock its obvious to have a positive bias :slight_smile: ā€¦

2

A good contradictory statement from one of the readers.

Nooresh Bhai,

)- Smartlink, had started off manufacturing Active Network Devices and then formed a J.V to venture more into the Passive business. They have not been able to growth sales in that segment since then. If the founder was so bullish on the same segment, he could have alteast managed some level of growth in this segment.

)- The management sold off a cash cow and is tryin to justify its decision. A business which was growing at a decent rate and had enough scope and demand.

)- With higher peneteration of Internet Suscribers and more and more stress on network related devices , valuing the business at jus 5x times revenues is not justified.

-Most of the inventory lying on the balance sheet is to be attributed to the active product segment, which is approx. 34mn out of total 55mn

-When you say a 360crore Investment on the books, it is in a way idle money. Since the split of this business to Schneider, I doubt whether the company has come out with major investment plans or any other happenings to accelatarate active biz devices.

)- Also a Rs.350cr cash on the books would earn not more than 450cr at a CAGR of 7% 5 years, whereas a bullish entrepreneur could easily utilise this tech boom to first turn around the other business and then may be sell of the money making business at better valuations.

-Risking 90% of Revenues for magnifying 10% revenues with major money sitting on the balance sheet indicates poor management, as it exposes the Co. and makes it a lot more vulnerable.

)- A 2buck dividend with the high promoter stake indicates whose filling the pockets regularly, going by the old school thought of growth companies looking for more and more capex in the intial years.

-Also, chances of a special divedend would be even more scary and highly unlikely in this fiscal year, considering, they might need more funding inorder to make up for the losses and turning around.And if they do that, it is a clear signal to the investor about the myopic promoter vision

)- With the following observations and many other loop holes, like constant gross block for a company looking to expand its manufacturing capabilty, declaring constant dividends, maintaing constant levels of OPM,GPM,NPMā€¦ the company has indeed done everthing by the book (to cook it).:)):))

Anyways, I had an contradicting view, so I thought would share it.

Happy Investing!!

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3

Another comment which changes the stock from value to growth

Nooresh,

Nice write up. I have been tracking this stock for last four months. The continuing business of the company ( active networks) has seen a three fold jump in turnover from Rs5+ cr in q1 2012 to Rs. 15+ crs in q2 2012. The turnover run rate is now over Rs 80+ cr. on an annualized basis. The operating margins have been negative because of huge personnel cost ( quarterly run rate of over Rs. 6 cr almost same as was the case before selling the passive network business. Ccomparable business like d-link has just over rs 3.5 cr personnel cost for three times revenue) because of a strategy of putting in people in place before brand gets traction. Time will only tell whether this will work but Q2 results are very encouraging. The mother board business looks like has taken off very well and the companyĆ¢s sales promotion scheme is currently on for sales of over 100000 mother board this quarter. If the company is able to achieve this number one can see another significant jump in topline on q on q basis in this quarter. The total motherboard market in india is about 4 million this year and sales of this business are driven by is ex-ceo of Gigabyte india which is current number 1 player in the Indian market. Incidently Gigabyte India was set up by Mr Naik in 90Ć¢s and he was Chairman of that company for a long time before Gigabyte took 100% control of it . If the company achieved 100000 quarterly sales in q3, it will have roughly 10% marketshare in the indian market as per my crude estimate and i think it will be amongst the top 3 players. That would be a phenomenal achievement for a brand in less than 6 months of launch. So while currently smartlink is value play soon it could be a growth play.

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4

hi hitbahi/donald,

any views on it?

5

Smartlink looks like a cigar butt investment where u are getting 1 rupee worth of stock for around 30-35 paise. If and when the current business starts generating profits, significant upsides would open up.

There seem to be three other bargains currently

1). Piramal Healthcare ā€“ a lot has been discussed about it.

2). JB Chemicals here also the company is sitting on huge chunk of cash. Nooresh, if u can have a look at the charts, is there a possibility of double bottom once stock price crosses 84-85 levels (and a subsequent change in the trend?)

3). Microsec Securities-- company came with an IPO at a price of around 118, cmp around 26-27 and investments etc amount to much higher levels as compared to current market cap. Here also there seems to be possibility of a double bottom formation once stock price crosses 33-34 levels. (thats two queries for nooresh)

6

Hi Hitesh, What isdouble bottom formation?

7

Disclosure: Long the stock.

I was only able to find out two instances of dirt on Mr Naik (via www.watchoutinvestors.com) - a must see for all small/mid cap investors. Charges were misleading investors on share buybacks in 2007 and late payments of dividends in 2006. While not alarming, I am concerned about the first charge (I read this as trying to prime the price up for a possible share pledge).

The motherboad business, as mentioned above by Nooresh, is a BIG thing as it speaks of the capability of this company to deliver OEM volumes.

I have been following their tablet PC plans with keen interest and think there is enough market potential for a small yet focused player. I will definitely be making it to the AGM this year for first hand due diligence.

The key risk here is irrational capex. It cost JetKing (another tablet PC manufacturer) about Rs10 million to set up a manufacturing plant (~100K capacity) so there is some downside protection ie capex will be scaleable based on output/sales plans. Worst case, ie their plans fail, they spend between Rs5 - 15/sh as capex and write it off (being draconian here as PPE will have salvage value).

The key question is if they are going the OEM route for tablets (which I think is the best to start with) before going into developing an own brand. Partnerships with telco operators will play a vital role here and, as of today, Smartlink is very small fish.

As an example, Micromax (of the 2012 Asia cup, which we would like to forget) started out as an IT hardware reseller (based out of Nehru place, Delhi) and was able to leverage their channel partner goodwill very successfully. 15 years of channel partner relationships that Smartlink has is invaluable, especially if their plans is to grab tier-2/3 cities with a sub 10K tablet. It is possible, but will take a time to cement this business (2-3 years minimum).

I think there is a very small chance (<<1%) that Naik would delist the company if the shares continue to trade at sub Rs50 levels for a year. They do not need debt or equity at this point and if the market continues to undervalue the shares, he can buy minority shareholders out. He is already sitting on a pre-tax special dividend earning of Rs 61cr vs a float of Rs 43cr (at todayā€™s price). IE he could technically take out the minority holders at a market price of Rs 63 or less without borrowing. Obviously we would not tender it in at this price but it gives me more comfort on the downside.

Valuations: Base business (Digisol and Digicare) should deliver a run-rate EPS of 1/sh (80-100cr revenues, 5% net margins normalised) = Rs 10-15/sh (depending on your multiple assigned). Add cash/Share of Rs 118.

Next data point: May 2012 for FY12 annual results and AGM.

8

Disclosure: Long, added to positions on dips.

The stock has moved 13% from March to today. This stock trades differently, ramping up ahead of quarterly results in anticipation of that special dividend, while staying in a range of 50-55.

Whatā€™s changed since Mar-12:

The promoter shareholding is now 72.15% and has been increasing steadily via creeping acquisitions in the past few weeks (averaging 0.05% every week) consistently.

http://www.moneycontrol.com/company-notices/smartlinknetworksystems/notices/SNS01#SNS01

At the current pace, they will hit the 75% threshold by Mar-13 and should fall within SEBI guidelines of the max 5% acquisition in any fiscal without triggering an open offer (I am verifying the data as I post this, will update if there is a change otherwise).

At the current price, you also get an annual dividend of 2/-, yielding a respectable 3.8%.

Given Mr Naikā€™s past commitment to minority shareholders (no non-compete fee and brand transfer @ Re 1/-, as detailed in posts above) which was preceded by a similar creeping acquisition, Iā€™m sixth sensing an event round the corner. My expectation is a second special dividend or a delisting offer.

Hence Smartlink is worth a trade going long (3 month view).

The way the stock trades, there is significant support @ 45 levels. On the upside, fair value is subjective (my estimate is 120/-) however a ramp up to 100/- is entirely possible given the past price action.

Risk/Reward: -13% downside vs. 100%+ upside.

9

i was holding smartlink and exited from the stock recently. I feel though the stock is a safe bet as mentioned above but the upside in the stock price can come thru increase at the earnings front which is not happening. Also there is intense competition in the business the company operates in.

10

Disclosure:

Whatā€™s changed since Mar-12:

http://www.moneycontrol.com/company-notices/smartlinknetworksystems/notices/SNS01#SNS01

11

From the Annual report 2014-15

Smartlink has revamped its strategies which are now more customized to the ā€˜Make in Indiaā€™ campaign which is reflected in the packaging of its products. Local manufacturing is a sure win-win formula as it would require designing and manufacturing for India by India.

Manufacturing in India will enable Smartlink to make significant savings. There will also be a significant reduction in lead time for deliveries to the customer, especially in the case of complex engineering or high-tech products. This will allow Smartlink to be far more responsive and flexible to changing customer needs. Also, servicing of locally manufactured products will be much convenient because it is easy to understand technology that has gone in manufacturing local productsā€¦

The new 4G compatible and high speed routers, cater to the demand for faster and seamless connectivity, while the 3G Wi-Fi dongle, Mi-Fi
routers and Powerbank Routers are the perfect fit being connected on the go and sharing internet with colleagues and family for both
professionals and students alikeā€¦

ā€¦ DIGISOL had also introduced CCTV surveillance, to increase its reach in the analogue field, as it already was present in the digital space with IP Surveillance.

DIGISOL sees this as a major business line in the future and will be investing in a clear strategy with a focused team, to grow and spread its wings further in this field. With the current product line catering to all sizes of the market and DIGISOLā€™s advent into the HD space, the CCTV product line will see a significant growth in both innovation
and timely market requirementā€¦

ā€¦Price cutting led to severe erosion in margins and with the market showing a major shift from desktops to laptops and tablets, the prospects for motherboard manufacturers were indeed grim. Smartlink
saw the writing on the wall and decided to exit the motherboard business sold under Digilite Brandā€¦

My observations:

Management has finally exited the low/no margin motherboard business and is scaling down the tablet, powerunit businesses. The result is showing in the results. Though topline is down sharply profitability is up.

Company is now gearing to make use of opportunities provided by the
governmentā€™s Make in India initiative. Major thrust will be on the
networking business with company hiring actress Sonakshi Sinha as brand ambassador for the router and other networking business.

As for financials, management is still very niggardly with dividends. However investments from the sale of networking business to Schneider some years ago is showing good appreciation.

Value of investments up from Rs 283 cr to Rs 318 cr in one year. Provisions including statutory dues like employeesā€™ PF, etc is Rs 8 cr. In addition company is holding cash equivalents more than Rs 52 cr.

SO THE COMPANY WITH MARKETCAP OF RS 274 CR IS STILL A CASH BARGAIN DESPITE THE STOCK PRICE RUNNING UP.

Remains to be seen how fast the company can achieve profitability at the operating level. This will take the stock price to stratospheric levels.

Management is also reported to be negotiating with state governments to set up manufacturing facilities. If land is allotted at low prices, then the cash hoard will surely help in scaling up operations further.

disclosure: core holding

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12

An early sign of business revival? Interesting CAā€¦

Smartlink Network Systems Ltd has informed BSE regarding a Press Release dated July 16, 2015 titled ā€œDIGISOL announces Sonakshi Sinha as Brand Ambassador for its Wireless and Networking Productsā€.

http://www.bseindia.com/corporates/anndet_new.aspx?newsid=1d1bd7fa-388e-4ba8-80fd-32f35db07e55

Disc: Invested & Views are biased.

13

Hi Akash,

I have checked their latest annual report in which they are still losing cash on operations.
I will wait for the clear results, if they mange to break even on operations then only we can study it well :smile:

Regards,

Sunny

14

Hi Sunny,

It was languishing at around 50-60 for a long time till very recently and only now has started moving up, may be, because of signing of SS as BA, which is an interesting development and, may be, early signs of operational turnaround ahead. Itā€™s not a bad idea to wait for the operational turnaround but in that case one has to be ready to pay up considerably higher. Depending on oneā€™s investment style and comforts one can take a call.

15

Hi, I am in the core IT business with 15 years experience, They have sold networking components business to Schneider Electric. Their main business is now Digilite PC motherboards. if you are not aware it was earlier a part of D-link India after demerger Smartlink listed in both exchanges (as per industry they were contract manufacturer for D-Link Corporation Taiwan). Pretty tough compitation very very low margins.

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16

in latest annual report management has indicated that they have exited the motherboard, tablet manufacturing biz, etc because of low margins.

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17

Smartlink has been looking up recently. I know they have no intention of continuing their tablets line, but arent they a good candidate for contract manufacture (on the lines of FoxConn, Lenovo etc. subcontracting to indian manufacturers ) . Back in 2011 (http://www.thehindubusinessline.com/industry-and-economy/info-tech/smartlink-looking-for-contract-manufacturing-of-electronic-products/article2535093.ece) they stated intentions of getting into contract manufacturing.

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18

Smartlink Network Systems Limited has informed the Exchange that the
Board of Directors of the Company at its meeting held on 29th
February, 2016 has inter-alia:1. Approved Buyback proposal for
purchase by the Company of its own fully paid equity shares of Rs.2/-
each (ā€œEquity Shareā€) not exceeding 74,54,850 Equity Shares at a price
not exceeding Rs. 110/- (Rupees Hundred and Ten only) per Equity Share
(ā€œBuyback Offer Priceā€), for an aggregate amount of Rs. 82,00,33,500
/- (Rupees Eighty Two Crores Thirty Three Thousand Five Hundred Only) (hereinafter referred to as the ā€œBuyback Offer Sizeā€), (being less
than 25% of the total paid-up equity capital and free reserves of the
Company as on March 31, 2015) (hereinafter referred to as the
"Buyback") from the shareholders of the Company on a proportionate
basis through the tender offer route in accordance and consonance with
the provisions contained in the Securities and Exchange Board of India
(Buy Back of Securities) Regulations, 1998 (ā€œBuy-back Regulationsā€)
(including any statutory modification(s) or re-enactment of the Act or
Buy-back Regulations, for the time being in force) and the Companies
Act, 2013 (ā€œActā€).

My observation: Of the Rs 380 crores in current investments and cash (as per balance sheet for FY 2014-15), Rs 82 cr will be used to buy back around 25 per cent of outstanding shares.

disclosure: holding and no intention to tender shares under the buyback offer

  • shiv kumar
19

After reading entire thread I noted that majority of aspects are well covered. I would like to add the following:

  • Possibility of re entry into structured cabling business as non-compete agreement ended in May 2016.(Five year non compete clause)
  • Operating leverage: Only 2 out of 7 lines are currently being used.
  • Virtually NIL institutional holding
  • Decent management track record in preserving cash received from sale of Digi link business while still exploring new business possibilities. Cash so far mainly utilized in dividend payment.
  • Make India Campaign and govt thrust on local manufacturing. Govt policy of 30% reservation for local manufacturer for large scale integration projects.
  • Recent trend in public wifi connectivity where entire towns/ campuses are being connected to wifi. Smart link has product range to cater to this need.

Risk:

  1. Arti Naik (COO), is daughter of KR Naik and she is yet to prove herself.
  • Mr Naik is of 60+ years age and hence succession planning is key issue as of now

Conclusion: With sectoral tailwind 2016-2017 should be decisive year. If Smart Link fails to deliver even now then I do not believe there is any further point to wait. My strategy is to keep and close eye on operational metrics and add reduce accordingly.

Disclosure: Long

20

I believe that the biggest threat to the networking products and related services sector is competition.

Competitor analysis must start with D-Link India Ltd (Consolidated) which is one of the leading players in network products & solutions.

Extract from 2015-16 Managing Directors report of D-Link " the performance is creditable as there has been severe pressure on margins on account of intense competition from both well known MNCā€™s as well as small local players.ā€™ Executive Director & CEOā€™s report also acknowledges the intense competitive pressures, Segmental information in the Annual report groups everything under one category ā€œnetwork productsā€ so no segmental breakup-is not available sub-product-line wise to facilitate comparison with competition. Segmental information for Smartlink is also under the same one category.

Market is valuing D-Link is at 52 week low. June 30-2016 RONW% and EPS have fallen. The same trend is noted for Smart-link, hence tightening margins can safely be extrapolated for the industry.

Smartlinks high PE of 70 plus vs, 17 plus of D-Link does not help an investment case in Smart-link either.

Smartlink is surviving on its past cash. Buy back shares were at 110 earlier this year and CMP is down to 88. Sure the buy-back gave a great opportunity for the promotors (70% holding) to encash some of the large cash reserves on the balance sheet.

I haveā€™nt found any investment case yet for Smartlink.

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