Danlaw Technologies India Ltd: For multi-bagger gains (BSE Code: 532329) (CMP: Rs. 60.75) (FV: Rs.10)

The earnings season so far has been weak and worries over domestic growth continue to weigh on the market sentiment which has led the markets back on the downward path.. A value investor, however, need not worry about the broad markets as value stocks perform better and post good results. One such value-pick is Danlaw Technologies India Ltd. (DTIL). Company background: DTIL is the offshore technology and product development center of its parent company - Danlaw Incorporated, founded by Mr. Raju Dandu and Mr. Lloyd Lawrence in Michigan, USA in 1984. DTIL’s mission is to provide high quality services and products in Automotive Electronics, develop R&D driven Signal Processing technologies for communication and control, configure solutions and provide exceptional Information Technology (IT) services in the areas of education, health, banking and e-governance and provide world-class products and solutions for secured access through biometric access control technologies with intelligent solutions built around RFID (Radio Frequency Identifications), Time and Attendance. It determines to build quality into products and services to achieve the highest degree of customer satisfaction. DTIL operates in four IT and Engineering activities - Engineering and Industrial Automation, IT, Intelligent Security Systems (ISS) and Research and Development (R&D).  Its Engineering division provides embedded software and hardware solutions with a primary focus on Automotive« Software and related services and has several products oriented towards Automotive Messaging Protocols.  Its IT division develops web-enabled products and services ranging from educational products for challenged school« children to management of mega municipal information systems.  The ISS division serves the Intelligent Security needs for entry control into establishments and machines.«  Its R«&D division supports development of new technologies in voice processing, identification and communication. It has developed algorithms for echo cancellation, speech compression and modems, etc.A Time Communications Publication 25 DTIL’s core strength is to develop activities that encompass complete project cycles from feasibility study to requirements, design, coding, testing, implementation and customization. This single-roof expertise has led to consolidation of existing partnerships and customers and acquisition of new ones, which is reflected in the speed of activity expansion of the Company as well as its financial strength. Its clientele includes automobile majors like General Motors, Ford, Sumitomo and Visteon. Moreover, its parent company has been providing exceptional value in Embedded Software Solutions and Onsite Engineering Resources to the automotive electronics industry for over 25 years. In Q2FY16, DTIL posted net profit of Rs.48.6 lakh as against Rs.24.91 lakh in Q2FY15. The combined profits for the first two quarters of FY16 are already higher than the profit for FY15. Its revenues have grown 26% to Rs.264.93 lakh from Rs.209.64 lakh y-o-y and it has been steadily reporting profit for the past 3 years. Industry outlook: The automotive electronics industry is heavily influenced by the widespread use of smart phones and tablets. Currently, these devices are being used to pair with the music systems to play music, answer calls and for navigation. However, the expensive infotainment head units could soon get replaced with smart phones/tablets with numerous applications like cloud-based navigation, fuel reminders, driver profile, locating parked vehicles, real-time traffic scenario, state of battery charge, emergency/service assist, remote vehicle interaction etc. which will be more ground-breaking. Connected car technology is one big area that has been swept by the revolutionizing concept called Internet of Things (IoT). Over the next few years, automotive OEMs (Original Equipment Manufacturers) will compete to use connected car technologies all over the world. According to an industry report, the connected car market is growing at a 5 year CAGR of 45% (10 times faster than the overall car market). 75% of the expected 92 million cars shipped globally in 2020 are expected to be built with internet-connection hardware. DTIL and its parent company are experts in this domain and can benefit enormously from this demand. Conclusion: The DTIL share price has already doubled since its Q1FY16 results. If the Company is able to maintain its consistency in profits for the next two quarters as well, then this stock will prove to be a multi-bagger for investors. At its CMP of Rs.60.75, the share discounts only 8.4 times its FY16E EPS of Rs.7.2 compared to 30 for Tata Elxsi, which is one of its competitors. A P/E multiple of 15 will take its share price to Rs.105 which is a good 40% upside from its CMP whereas an optimistic P/E of 20 will yield Rs.150. The stock is trading at its 52-week high/low of Rs.75.90/13.75. Accumulate this stock in the price range of Rs.65-75 with a price target of Rs.105 in the medium-term and Rs.150 in the long-term.