Company Overview

Dixon Technologies (India) (DTIL) is the largest home‐grown, design‐focused and solutions company engaged in manufacturing products in consumer durables, lighting and mobile phones in India.

The diversified product portfolio includes

• Consumer Electronics like LED TVs
• Home Appliances like washing machines
• Lighting products like LED bulbs and tube lights, downlighters and CFL bulbs, and
• Mobile phones

DTIL also provides solutions in reverse logistics i.e. repair and refurbishment services of set top boxes, mobile phones and LED TV panels. The key customers include Panasonic India, Philips Lighting India, Haier Appliance (I), Gionee, Surya Roshni, Reliance Retail, Intex Technologies (I), Mitashi Edutainment, Dish Infra Services, Vijay Sales etc.

DTIL provides fully integrated end‐to‐end product and solution to Original Equipment Manufacturers (OEMs) ranging from Global Sourcing, Manufacturing, Quality Testing and Packaging to Logistics. They also are Original Design Manufacturer (ODM) of lighting products, LED TVs and semi‐automatic washing machines in India. DTIL enjoys market leadership position in manufacturing of FPD TV/ Washing machine/ LED/CFL amongst EMS/ODM players in India.

Industry Overview

 

The Indian Consumer Electronics and Appliances (CEA) market has been witnessing sustained double digit growth rate in the past few years. Increasing product awareness, affordable pricing, innovative products and the high disposable incomes have resulted in the CEA market recording a high growth rate. The existing low penetration rates and increasing usage of consumer durables have catapulted rural India to record high demand (30% annual growth).

India is becoming a favourable destination for electronics manufacturing driven by factors such as high demand, rising aspiration of consumers, rising affordability, availability of easy financing schemes and low penetration level across product categories. With increasing cost of labour in China, favourable policies of Indian government and levy of import duties, most of the brands prefer domestic sourcing of their consumer products. While the consumer electronics industry is poised to post 17% CAGR over FY16-FY21E, the EMS industry will outpace its growth with 31% CAGR owing to rising preference of OEM brands to outsource products from EMS players instead of in-house manufacturing.

However, still 25% of the CEA industry products are manufactured abroad. Providing government incentives and positive reforms to these products can help shift the balance production towards India. Main consumers of the CEA industry in the Indian market are the middle class consumers. With increase in urbanization, rise in young population and a continuous growth in the income levels, there is a constant rise in emerging middle class population in India. Rapidly shrinking replacement cycle for consumer durables is observed as the reason for sustained demand in urban India.

Financial Analysis

(Absolute Values - Rs. in Crores)  hhhhhhhhhhh

Years	2018	2017	2016
Net Profit Margin	2.13%	1.90%	1.97%
EBITDA Margin	4.10%	3.71%	4.09%
ROCE	30.75%	38.99%	26.95%
ROE	19.34%	24.14%	23.29%
Current Ratio	1.18	1.10	1.17
Interest Coverage	7.56	5.27	3.69
Debt to Equity	0.13	0.22	0.66
Receivables to Revenue Ratio	10%	11%	6%
Cash from Operating Activity	68.01	52.88	42.21
Cash from Investing Activity	-99.72	-43.42	-21.61
Fixed Assets Purchased	-75.82	-39.11	-27.03
Fixed Assets Sold	3.42	1.23	0.73
Interest Received	2.51	1.20	0.89
Cash from Financing Activity	41.66	-8.42	-20.01
Operating Cash Flow to Sales	0.02	0.02	0.03

 

2015-16

 

1. The receivables to revenue ratio was 6%, which is really low and can be a cause for concern.
2. The company generated net cash flow from operations of around Rs.42.21 crores.
3. The company had net cash outflow from investing activities of around Rs.21.61 crores and from financing activities of about Rs.20 crores.
   1. Purchased fixed assets worth Rs.27.03 crores and made interest payments of Rs.13.1 crores. The company also sold Fixed assets worth Rs.73 lakhs and received interest on its loans worth Rs.89 lakhs.
4. The operating cash flow to sales is extremely low at 0.03.

 

2016-17

1. The receivables to revenue ratio was 11%, which is an improvement from FY16, but is still a really low value.
2. The company generated net cash flow from operations of around Rs.52.88 crores.
3. The company had net cash outflow from investing activities of around Rs.43.42 crores and from financing activities of about Rs.8.42 crores.
   1. Purchased fixed assets worth Rs.39.11 crores and made interest payments of Rs.15.47 crores. The company also sold fixed assets worth Rs.1.23 crores and received interest on its loans worth Rs.1.2 crores.
4. The operating cash flow to sales is even lower at 0.02.
5. The company paid Rs.6.86 crores to the Key Managerial Personnel (KMP) as remuneration in FY17.
6. The company’s related party transactions are mostly all normal exceptthe following:
   1. Outstanding Guarantees given by the company for Subsidiary Companies / Joint Venture of Rs.39.5 crores.
   2. The company has taken a surety bond to be given to Customs department on behalf of Joint Venture of Rs.61 crores
   3. There is a bond given to custom department by the subsidiary/joint venture company on behalf of the company of Rs.24.2 crores.

 

2017-18

1. The receivables to revenue ratio was 10%, which is a slight fall from FY17, and still a worrying value.
2. The company generated net cash flow from operations of around Rs.68.01 crores.
3. The company had net cash outflow from investing activities of around Rs.99.72 crores and cash inflow from financing activities of about Rs.41.66 crores, mostly due to the IPO.
   4. Purchased fixed assets worth Rs.75.82 crores and made interest payments of Rs.13.29 crores. The company also sold fixed assets worth Rs.3.42 crores and received interest on its loans worth Rs.2.51 crores.
7. The operating cash flow to sales is the same at 0.02.
8. The company paid Rs.6.34 crores to the Key Managerial Personnel (KMP) as remuneration in FY18. This is barely 10% of the net profit, and is a lower value than last year despite the net profit having increased by 28%.
9. The company’s related party transactions are once again mostly all normal except:
   1. Outstanding Guarantees given by the company for Subsidiary Companies / Joint Venture has increased to Rs.54.5 crores.
   2. The company’s surety bond to the Customs department on behalf of Joint Venture is now at Rs.67 crores
   3. The bond given to customs department by the subsidiary/joint venture company on behalf of the company is now at Rs.56.45 crores.

 

Overall Breakdown

1. The company has had outstanding sales growth of 43.31% p.a. over the past 3 years, however the expense growth rate has also been 43% p.a.
2. Despite this, the company has had PAT growth of almost 50%. The EBITDA Margin is still extremely low approximately 4%. The ROCE and ROE is at a healthy level though.
3. The debt to equity and the Interest coverage ratio are at healthy levels.
4. The CAGR of Trade Receivables is 82.71% and Inventories is 53.79%, which is worrying considering the increase in revenue is much lower at around 43%.
5. The quality of profit seems to be good, considering the operating cash flow has remained above the PAT in the past 3 years

(Absolute Values - Rs. in Crores)  hhhhhhhhhhh

Years	2018	2017	2016
Cash from Operations	68.01	52.88	42.21
Net Profit	60.90	47.57	27.38

6. As at 31^st March 2018, the promoters have 37.05% shareholding, which seems a little low consider it is a 2300 crores market cap company.
7. The capex to depreciation ratio is 4.73 as at 31^st March 2018, which may indicate that it is not the optimal time to invest in this company.

 

Future Prospects

 

Positive

1. Dixon’s business is at the forefront of the government’s ‘Make in India’ theme. The government’s proposal to increase custom duties will further boost manufacture of electronics. The business has additional tailwinds in the form of low electronic penetration and pick-up in domestic consumption. The management has stated that it is aiming for a 20 percent growth in topline by adding clients as well as mining relationships with existing clients. 
2. DTIL has strong leadership position in three sub-categories of electronic manufacturing services industry (EMS), namely LED TVs (50.4% market share), semi-automatic washing machines (42.6% share) and LED/CFL lights (38.9% share). With economies of scale, highest market share and a healthy track record of manufacturing products for reputed brands, DTIL is likely to be the preferred manufacturing partner for any OEM brand looking to enter or enhance its offerings in these categories.
3. DTIL started making mobile phones in January 2016 starting a 50:50 joint venture (called Padget Electronics Private Limited) in partnership with the owners of Karbonn mobile phones. With strong FY17 sales of Rs8.1bn (DTIL’s share), mobile phone share catapulted to become the second-largest business segment of DTIL accounting for 33% of its total sales. As per a Frost & Sullivan report, mobile phone market is likely to post 20% CAGR over FY16-FY21E. Currently, 40% of mobile phones are manufactured by EMS industry while 60% are made in-house by the brands themselves. DTIL has a market share of 8.4% in EMS industry of mobile phone makers. Frost & Sullivan expects the share of EMS industry in total mobile phone manufacturing to rise to 66% by FY21E, thus providing strong growth opportunity for players like DTIL.

 

Negative

1. The rupee’s weakness against the dollar and higher commodity prices could hamper profitability.
2. Rapidly changing preferences and advancement in technology may cause obsolesce and disruption in CEA market. For example, any rapid shift in demand from semi-automatic to fully-automatic washing machines will impact DTIL’s home appliance business.
3. Sharp increase in labour cost in India or scarcity of raw materials could adversely impact DTIL’s business prospects. Additionally, any adverse government policies that may favour imports instead of local manufacturing or any unforeseen and irrational rise in competition could impact DTIL’s ability to source business from OEMs.

 

Conclusion

Overall, the company has exhibited good financial performance in the past three years, and the industry prospects in the near future are looking good. Thecompany is planning to increase its offerings in existing product as well as diversify into new verticals. Over last 6 years, the company has added LED lighting, washing machines, mobile phones, reverse logistics and, most recently, security systems. However, the inventory and trade receivable pile up can be a red flag. Apart from this, the company seems like a solid investment.

 

CA.Binoy J.Kattadiyil