Dixon Technologies (India) Ltd (Dixon) (NSE: DIXON, BSE: 540699) is one of the leading Electronic Manufacturing Services (EMS) provider in India. As an EMS provider, it provides fully integrated end-to-end product & solutions to Original Equipment Manufacturers (OEMs) ranging from Global Sourcing, Manufacturing, Quality Testing & packaging to Logistics as well as engages as an Original Design Manufacturer (ODM) of lighting products, LED TVs and semi-automatic washing machines in India. It is the largest home-grown design-focused and solution company with reputed anchor clientele engaged in manufacturing consumer durables, lighting, mobile phones & security surveillance equipment.
Positives
Rising Purchasing Power to propel growth of consumer durables – Consumption growth of any country is driven by increase in average spend per household, shortening replacement cycle and the total number of households. India's massive population & rising affluence of its households offers a huge consumer base for most large consumer goods makers. Penetration levels of Consumer Durables in India is lower compared to global averages. Availability of easy financing and increasing product awareness and usage have been driving consumer demand.
Beneficiary of Increasing trend of outsourcing by Consumer Durable Companies – The Indian Electronic Manufacturing Services (EMS) has witnessed a 26% CAGR over FY 13-17 & is expected to see a CAGR of 32% over FY 18-21E. Technology and product dynamism in the electronics industry is increasingly influencing branded consumer durable players to restrict their focus to their core competence of marketing and distribution. In India, particularly the geographical expanse and complexity of its target markets, call for high level of investment in the marketing and aftermarket functions. EMS companies offer consumer durable brands flexibility in product design updates, faster time to market, cost effectiveness; avoid manufacturing challenges besides offering value added services like design and aftermarket services. The industry typically has high volume and low margin. Also, EMS companies operate on a much larger scale than OEMs, the cost of manufacturing goes in favour of EMS companies. Due to these 2 primary reasons, brands prefer to outsource manufacturing.
Economies of scale and increasing level of backward integration to lead to increased cost effectiveness – Dixon has successfully developed in-house capabilities to ensure backward integration in plastics moulding products, sheet metal products, polymers and LED TV Panel assembly to enable it to become the most cost-effective player across its product portfolio. Its persistent efforts & regular capacity expansions, in line with vision to emerge as the largest and the most cost-effective 'Complete Solution Provider' across its product categories in the domestic and international market, should enable it to strengthen market share and give an edge over competitors. The cumulative capex for FY21 & 22 is estimated to be INR 1,600mn.
Market Leader and strong relationships with brands – The company is a market leader in Consumer Electronics, Lighting and Home appliances segment with market share of over 50%, 35% and 40% respectively. The company has been constantly adding more clients and expanding its product base.
Profitability on the rise with increasing contribution to revenue from Original Design Manufacturing (ODM) activities & richer product mix – Dixon’s ODM share has increased from ~15% in FY17 to ~38% in FY19. The company's LED TV division is currently working at just 3% on ODM platform however washing machine division is completely working on ODM platform and in case of LED lights division, it works at 89% on ODM platform. Currently the company is also considering expanding its product lines to refrigerators & fans.
Clientele
Xioami, Panasonic, Sanyo, Philips, Koryo, Bajaj, Syska, Samsung, Lloyd, Godrej, Reliance Jio, Karbonn, Intex, Gionee, Sony, Wipro, Jaquar, Anchor, Polycab, Usha, Luminous, RR Cables, CP Plus etc.
Business Analysis
The consumer electronics segment of the company mainly comprises of LED TVs. The capacity in LED TVs have been expanded from 2.4mn to 3.6mn annually in FY20 which will take care of 26% of the Indian Market requirement.
During H2FY20, the company has expanded the capacity from 16mn per month to 20mn per month in which is ~ 45% of the total organized market of Lighting in India.
The Home appliances segment of the company presently comprises of semi-automatic washing machines. The company has acquired in-house capabilities for designing the complete range of semi-automatic washing machines. The company has an overall capacity of 12 lakhs units p.a. catering to ~33% of the Indian requirement. The company is in the process of expanding the current capacity to 16 lakh units p.a. and the company is also adding top load fully automatic washing machine, this will take the total washing machine capacity to 22 lakhs units p.a.
Dixon has entered into mobile phone manufacturing through their joint venture Padget Electronics Pvt Ltd (PEPL). The company has converted PEPL into a wholly owned subsidiary on 12th April 2019 by purchasing the balance stake. The company manufactures mobiles on OEM basis, resulting in lower margins as compared to above mentioned segments.
Dixon has recently entered into security systems segment in 2017 through a joint venture named AIL Dixon Technologies Pvt. Ltd. (ADTPL) with Aditya Infotech Ltd (ADPL). The JV partner is the owner of the leading brand ‘CP Plus’ with a market share of around 24%. The capacity in CCTV has been expanded from 3 lacs per month to 7 lacs per month & DVR from 50k per month to 1.5 lacs per month from Jan, 2019
Raw Materials
The company imports its raw materials from China. To enhance its margins the company is going for Backward Integration on sheet metal, plastic moulding and wound components. This helps demand and Lead Time management, Inventory Management and control.
Manufacturing Facilities
The company has 10 manufacturing facilities located in Uttar Pradesh, Uttarakhand and Andhra Pradesh supported by 3 R&D centres (2 are located in India and 1 is located in China). They have 4 plants in Noida, 4 plants in Dehradun and 2 plants in Tirupati, Chittor, AP. The idea of setting up a plant in Tirupati is the proximity to ports to cater to the export market in Southeast Asia as well as the market in South India.
Financial Analysis
The company has been showcasing impressive growth in its operating revenue. However, its profits are miniscule, a testament to the volume-based operations of the company. This is also one of the reasons why the management has been pushing to increase its ODM business.
|
Mar-15 |
Mar-16 |
Mar-17 |
Mar-18 |
Mar-19 |
|
|
Operating Revenue (INR Cr.) |
1,201.34 |
1,388.26 |
2,457.03 |
2,841.63 |
2,984.45 |
|
YOY Growth (%) |
- |
15.56% |
76.99% |
15.65% |
5.03% |
|
Raw Materials as a % of Operating Revenue |
91.17 |
88.49 |
89.77 |
89.57 |
86.94 |
|
Trade receivables as a % of operating revenue |
4.60 |
6.39 |
11.40 |
10.50 |
17.31 |
|
Operating Margin (%) |
2.89 |
4.22 |
3.77 |
4.11 |
4.75 |
|
Net Margin (%) |
1.01 |
1.97 |
1.93 |
2.14 |
2.12 |
|
ROCE (%) |
15.76 |
25.65 |
37.37 |
33.70 |
27.33 |
|
ROE (%) |
13.61 |
25.78 |
30.24 |
23.79 |
18.35 |
|
ROA (%) |
4.01 |
7.47 |
7.93 |
6.94 |
5.16 |
|
Cash Conversion Cycle |
13.65 |
7.73 |
4.29 |
7.96 |
12.66 |
|
Cash from Operating Activities |
44.49 |
41.06 |
52.88 |
67.88 |
-3.06 |
|
Debt to Equity |
0.84 |
0.66 |
0.24 |
0.14 |
0.38 |
|
Interest Coverage |
2.69 |
3.92 |
5.27 |
7.56 |
4.56 |
The cash flow from operating activities have been higher than Net profit in 4 out of the past 5 years.
Risks
Changing consumer preferences and technology – Dixon is a design focused products and solution company which competes in a rapidly changing consumer preference and technology industry. Also, company may be affected by any technological disruptions in the industry and change in consumer preference with adoption of new technology.
Slowdown in the economy – The company is directly linked to retail consumption industry which can be affected due to any slowdown in the economy. Consumers may delay to buy consumer durables in such economic scenario which will directly impact the company’s growth. Any financial or market stress faced by the company’s customer may result in decline in revenue.
Client concentration risk – Dixon derives majority of its revenue from few major brands across the product segments. The company may face a risk when the key customer discontinues its business with the company or the customer’s business may hit a roadblock in terms of growth. Any of the above event may significantly impact the company’s growth. In FY19, because of the problem faced by their key client Gionee (14% share of revenue as of FY16), the mobile vertical saw revenue de-growth from INR 670 Cr. to INR 355 Cr.
Regulatory risks – Dixon operates in the industry where it is required to obtain or renew permits & licenses in a timely manner. Any delay or failure to do so may pose a risk to the company’s revenues.
Low promoter holding – Promoters held 36.17% stake in the company as of Mar 2020 which has reduced from 37.92% in Dec 2019.
Outlook
The recent pandemic outbreak and subsequent lockdown has led to a slump in demand for consumer durables and electronics. While the lockdown has also led to a change in consumers purchasing behaviour, a recent survey by a Bangalore based research firm has shown consumer durables and electronics are expected to see a slower pick-up. Since the company derives its business from consumer durables and electronics companies, any upbeat in demand for these companies will automatically lead to business for the company.
The company does not own any brands, therefore minimal inventory is maintained as these will be picked up by the clients. The management has mentioned that demand for TVs and cheap mobile phones have been upbeat. Lighting is a low-value product and demand is expected to return in the next 2-3 months. Security surveillance system will take more time because it is a discretionary spend.
The company has started the process of manufacturing set-up box (a maiden order from Reliance Jio worth INR 500mn for supplying 0.5mn units of dual-tuner set-top box for cable TV for the customers of Hathway and Den cable). and is expected to use 30-40% capacity. In addition to this, the company’s five factories in North India at Noida, where one mobile factory has reached 40-50% production capacity, while the second mobile factory’s production has also reached 30-40% of its capacity. The bulb and light factories have also reached the 15-20% level. However, the bulb and lighting facility located in Dehradun has reached 50% production level, while production capacity of washing machine factory is low yet.
For Dixon, the import content from China in terms of bill of materials is 45%-50% for lighting, 40%-45% for washing machines and 80% for LED TVs.
Achieving scale, migration to ODM, new customer acquisition and backward integration are key focus areas for Dixon which will drive growth. The management has also mentioned its plans to venture into medical electronics in the near future.
Dixon is currently available at a CMP of INR 4,342.40 (as on April 25, 2020) at a PE of 45.85 which is well above its 1-year median PE of 42.06. Given that the company is doing something quite unique and new to India, it might be getting higher valuation. In terms of competition, only if some reputed international player comes with a large scale, it would create threat to the business of Dixon, smaller players are unlikely to make a dent.
Team 3C Capitals
Sources
