Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
Stocks

SmartLink: Cash 2x of MarketCap (Live)

Update 30/4/2011: Added Piramal Healthcare CNBC Link.

Smartlink is a company I’ve recently discovered through a post on Sanjay Bakshi’s blog.

They own three pieces:

  • Digilink: structured cabling – CAT, Fiber, Patch Panels etc. (passive products)
  • Digisol: active networking products (switches, routers, IP cameras and what not.
  • Digicare: their service arm where they help customers, do RMA (return merchandise authorization, which is handling returns and service)  for brands etc.

Why are they interesting?

They just sold their DigiLink unit to Schneider for 503 crore. From their 09-10 report, they have 92 crores in the bank. No debt. They probably added another 20 cr. this year, and after the cap gains tax, they should have 500 cr. in the bank after the deal.

That would be all right until you look at the current stock price: Rs. 79. They have just 3 crore shares outstanding! That means their market cap is Rs. 240 crore. That’s less than half of the cash they’ll have.

Results

In 09-10 they made a profit of 17.8 crores ( 7 cr in 08-09) on a turnover of about 150 cr. (140 cr). In the first nine months of 10-11, they’ve made 11 cr. on a 140 cr. turnover. Most of this is the cabling business that they’ve sold – of the 190 odd crores they made in revenue in calendar 2010, they say 155 came from whatever they sold to Schneider. That’s around 80% of the business. (Yes, most people are saying 90%, I’m using actual press releases and financial data)

So what’s left?

The Digisol and Digicare units. Digisol looks interesting – good products for a low cost. Naik says the Digisol business has become the 2nd biggest in the active networking space, but I honestly doubt that. Still, there are some good reviews on their products (and this one)

Digicare is a steady business because the big brands abroad will want to use the network created by the Smartlink folks, instead of building their own, for the very logistically painful service and support they have to provide. Remember, this business is no longer about repairs – it’s about taking the customer product and delivering a fixed product to the customer, and keeping them happy. The best network wins, and the Smartlink folks seem to have a decent one in place.

But what’s scary?

That the deal was not a company sale – it was the sale of the largest piece of SmartLink. Earlier, they demerged from D-Link, which makes active products (routers etc.) and they were supposed to be the passive piece. But they set up a service arm (Digicare) and an active product arm (DigiSol) the latter of which competes with D-link. Now, they’ve sold the big passive piece (Digilink). Scary because they could have sold the entire co (and then shareholders would have benefited).

But having listened to management and looked at the Digisol and Digicare lines, I think it’s a good idea to leave the money in the company. The active market is good and if they even get slightly recognized, the global players will swoop in and buy them out, perhaps this time for an even better value. In any case, there is no point hoping for a big dividend, but yes, a buy back would be awesome as a deal for the existing shareholder (I will not tender shares).

They are waiting for shareholder approval on the deal – but then, promoters own 67% so it will pass. The important question is what they will do with the cash. Yes, they haven’t revealed it but why will they? Since the deal can only happen in May after shareholder approval, it makes sense to expect clarity then on the cash. (But I wish they would reveal at least a little bit on the dividend or buyback!)

Can you trust the promoter?

K.R. Naik is the chairman and for all purposes, the big shot. The CEO resigned last year. I can’t find much dirt on Mr. Naik (please send me links if you do!)

See: An interview with Naik in Nov 2010.

Amazingly, the promoter took no personal money as non-compete fee. That’s very encouraging.

Shareholding

Promoters own 67%. They’ve been buying recently. Good sign.

No mutual funds. About 0.68% owned by FIIs.

Ashish Dhawan bought about 2.37 lakh shares on April 6. I’m not chasing him, honest.

Technicals

(I should add a chart here) But note, this is not a technical story. It’s a story where it seems like everyone else is clueless – how can you value a company with a running business at less than the cash it’ll have? I will keep trying to find holes in the story. Technically the stock isn’t that great.

Links:

CNBC-TV 18 deserves a big mention, largely because they have been absolute pricks in this episode. The suave anchors browbeat this company’s chairman casting aspersions on his honestly, while at the same time being nice to the bigger honchos that are now in jail or facing corruption charges, and ignoring their own group’s murky transactions in mergers, demergers and wool-pulling-over-eyes. But because of that, you know that this is probably a story worth investing in.

Ashish Tater downgrades co on hearing the sale news

Entire stake sale money to go to company, says Naik (this is the browbeating interview) What a joke this is. Udayan says " …if you had to do this transaction, if you are so bullish on DigiSol, could you not have done a demerger of the DigiSol business, which is 10% of the revenues today. Got Schneider to buy into your existing DigiLink business at the kind of premium that you have got, which would have got every shareholder an open offer at the price which the business was being sold and they would still have had a share of DigiSol, which you are so bullish about to continue to hold to going forward? Why could you have not done that?"

So he has to first demerge = get shareholder approval, pay some random investment wankers and so on. Then he sells this unit, for which there needs to be an open offer….more time, cost, investment wankers, approvals, bla bla. While the question is fair, it’s a little strange they didn’t do this kind of questioning when a Piramal Healthcare did it. Or when a Reliance Power bought an RNRL which was basically worthless paper. Oh well.

Update 30/4/2011: Reader Jagadees informs that CNBC did question Piramal Healthcare on it. But note in that interview (with Menaka Doshi and Anil Singhvi) Ajay Piramal is questioned, in a much less harsh tone, and there is absolutely no indication they think he’s dishonest. Piramal says he’s a guy that has turned the company from 6 cr. market cap in 1988 to 17,000 cr. for just half the co.

In that, Piramal Enterprises – the promoter-owned company – takes 350 cr. as a "fee" for non-compete and for "advising" the transaction. In the Smartlink
deal, none of this has happened (i.e. there is not a rupee paid to the promoter for a non-compete). The Piramal deal stretches over four years – Smartlink is supposedly getting the money at one shot. I personally know some deals (which I can’t substantiate) where the Piramals have behaved, er, less than heavenly; Naik on the other hand seems to be much more clean.

Even in PIRHEALTH, the current business is what will drive value. He says if he can’t use the money, he’ll give it back.

Singhvi has the incredulity to mention that the correct way would be for the promoters to abstain in a vote – but that is zany because ownership is different from management, and owners, including  must be allowed to exercise their vote. Corporate governance is all good but at some point we are infringing on promoter rights with such demands.

The interview differences should be seen to be believed. The TV channel just bullies those that it can.

Disclosure

Long and buying more. I’ll keep updating this post. Oh, and this is not advice. I’m writing my opinion – it has nothing to do with whether I think this is useful for you.

  • Jagadees says:

    >Hi deepak,
    Nice analysis… U mentioned tat they have not questioned piramal when he sold his formulations business….No, actually these pricks from CNBC asked him in a interview why he did not demerged the formulation business and then sold to abbott so that it can create more value to the shareholders…..but these guys does not understand that the process involves lot of hassles including time and regulatory works…..Even in case of demerger and open offer, only 20% of the minority shareholder could avail the open offer price…. In all this cash bargain, the only thing is does promoters are honest and ethical? If yes, then i guess minority shareholders need not worry too much….

    Regards
    Jagadees

  • Deepak Shenoy says:

    >Thanks J – I didn't see that interview where they grilled the Piramals. That would be a good sign for CNBC at least.

    Yes, the open offer is a pain in the neck, I agree!

  • Jagadees says:

    >@Deepak
    Here is the link on piramal's interview on abbott deal in CNBC – http://www.moneycontrol.com/news/management/abbott-piramal-deal-abbott-buys-who-gains_462321-1.html
    One more question: u mentioned tat u wont tender ur shares in buyback.why? do u believe tat company will create more value with digisol business? or any other reason? please keep updating about this scrip.

    Regards
    Jagadees

  • Anonymous says:

    >Hi deepak you mentioned they'll have 500cr after cap gains tax on the 503cr they get. How're you calculating this? How much is the cap gain tax you're taking?
    Just curious.

    mark

  • Deepak Shenoy says:

    >Mark: 22% cap gains, plus they have around 100 cr. in cash from earlier anyhow.