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Dixon Technologies (India) Ltd

Stock Rating

Industry Rank:
75
Relative Strength Rating:
98
Very Strong
Acceleration in Earning Rating
73
Very Positive
Technical Rating
80
Very Strong
Consumer Durables - Domestic Appliances
CMP: Rs 8586.50
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Company details

Market cap:
9923.42
52-week high/low:
Rs. 8824.00 / 2430.00
NSE volume: (No of shares)
46,750.00
BSE code:
DIXON
NSE code:
540699

Shareholding

(in %)
30-Jun
Promoter
36.11
Public
63.89
Others
0
Total
100

Indexed Stock Performance

Dixon Technologies (India) Ltd Sensex
Dixon Technologies (India) Ltd
One Year Performance

Price performance

Return (%)
1m
3m
12m
36m
Absolute
7.79
65.64
229.34
196.49
Sensex
1.78
12.88
4.45
20.99

+91 22 6639 3000

research@stockaxis.com

Dixon Technologies (India) Ltd

Mobile phones opportunity and New customer wins to provide robust growth

Investment thesis

Domestic champion under Production Linked Incentive (PLI) scheme for mobile manufacturing
To provide level playing field to electronics hardware manufacturing sector vis-à-vis competing nations, Ministry of Electronics and Information Technology have introduced Production Linked Incentive Scheme (PLI) for large scale electronics manufacturing. The Scheme shall extend an incentive of 4% to 6% on incremental sales (over base year) of goods manufactured in India and covered under target segments. Minimum Capex for Mobile phones segment PLI is Rs. 200 crore with minimum investment of Rs. 50 crore each year.

Segment Proposed Incentive Rate Incremental Invesntment Incremental Sales
Mobile Phones
(Domestic companies)
Year 1: 6% Rs. 200 cr. over 4 years Year 1: 500 cr.
Year 2: 6% Cumulative minimum (cr.) Year 2: 1000 cr.
Year 3: 5% Year 1: 50 cr. Year 3: 2000 cr.
Year 4: 5% Year 2: 100 cr. Year 4: 3500 cr.
Year 5: 4% Year 3: 150 cr. Year 5: 5000 cr.
Year 4: 200 cr.

The government plans to identify 5 domestic players (champions) in the mobile phones manufacturing segment to offer incentives under the PLI scheme. Dixon is well placed to be identified as one such company. The company has filed two applications. It has already signed an agreement with one large brand for domestic and export orders. Management remains hopeful for approval of applications by mid September and if approvals are on time, management expects to start manufacturing from February or March 2021, as it would take approx. 4 to 5 months to set up manufacturing facility.

Global smart-phone players have shown strong interest in sourcing from local manufacturers of smart-phones. Dixon has successfully added new customers like Samsung, LG and Foxconn’s private label for smart phone manufacturing.

We believe smart-phone manufacturing is a huge opportunity, where India’s share in global exports is just 1.2% as compared to China at 47%. With incentives under PLI scheme, global brands should be keen on taking the benefit and reduce their dependence on China. India can be the biggest beneficiary for global outsourcing, and players like Dixon can benefit significantly.

Dixon Technologies (India)

Capacity expansion, new customer addition and regulatory tailwind in Consumer Electronics segment
In a move aimed at promoting domestic manufacturing, the government decided to license the import of TV sets. Currently, around 35% of the television sets sold in the country are imported. Premium TV sets of 60-65 inch screen size and above, which accounts for 15% of India’s TV market by value and 5% by volume are mostly imported.

Telivision sales have shown exponential growth in past few months, mainly led by new content on OTT platforms and work from home. There is higher demand for smart TVs which connect directly to streaming services.

Dixon has expanded LED TV manufacturing capacity from 3.6 million units to 4.4 million units and further to 5.6 million units by March 2021, which will account for 34% of Indian demand. Management has indicated that they are running at over 100% capacity utilization and order book is extremely healthly. In addition to anchor customers Xiaomi and Samsung, Dixon has added two major customers, namely Nokia and Toshiba and there is lot of inquiries from new customers.

Dixon Technologies (India)

Strong exports opportunity in Lighting segmen
Dixon started exporting its lighting products to multinational customers in U.S. and is receiving enquiries from more customers in both U.S. and Europe. Dixon has recently added capacities for battens and down lighters and is confident of the company’s exports forming a larger part of its overall lighting revenue with, more global brands looking for alternative / additional non-Chinese manufacturer.

Setting up of Greenfield fully automatic top-load washing machine plant by Q3FY21
Dixon is setting up 0.6 million units (25% of industry size), of fully automatic top-load washing machine plant and targets its commercialization in Q3FY21. The management is confident of starting trial production in Q3FY21. Dixon has already signed an agreement with two major brands for almost 70% of its capacity. We expect robust growth in the Home appliance segment from Q4FY21 onwards.

Foray into Medical electronics and Set top box manufacturing
AIL Dixon Technologies Private Limited, a Joint Venture Company of Dixon Technologies (India) Limited has entered into Memorandum of Understanding (MOU) with Molbio for manufacturing of Truelab™ Quattro Real Time Quantitative micro PCR Analyzer machines. These portable machines are capable of performing 40-48 tests per day of critical infectious diseases. Molbio’s TrueNat machine is a breakthrough technology which is capable of diagnosing Covid-19 and more than 30 other infectious diseases including tuberculosis, malaria, chickengunya, dengue, H1N1 etc.

Set Top boxes is the company’s new line of business, which will start contributing a significant portion to the company’s revenues and profitability starting FY 2020-21. The company is manufacturing Set Top Boxes for leading set top box brands. We believe the company’s foray into medical devices and set top box manufacturing provides huge scale-up opportunities.

Dixon – The brand behind brands
One of the most important competitive advantages is that Dixon doesn’t have its own brand, so it doesn’t compete with its customers. Dixon is a brand behind some of the leading brands of the world, while majority of other contract manufacturer competitors own an in-house brand which competes in the market place with its own customers.

Strategic shift to own design manufatcuring (ODM) business model
Dixon has shown strong design capabilities, and has successfully undergone shift from original equipment manufacturer (OEM) to own design manufatcuring (ODM). The ODM model leads to customer stickiness and has higher margins as compared to OEM model. 87% of revenue from Lighting segment is under ODM model, while is it at 100% for Home appliances segment.

ODM % share in Revenue

Year Consumer Electronics Lighting Products Home Appliances
FY2018 6% 87% 100%
FY2019 9% 71% 100%
FY2020 6% 40% 100%

Key Risks:

  • Muted demand: Sustained macro slowdown impacting discritionary spend for long period of time.
  • Labour availability issue
  • Adverse currency movement

Industry

The Indian Electronic Manufacturing Services (EMS) market is growing at a phenomenal rate and is anticipated to continue the same in the next five years. The EMS market size was approx. USD 6 billion in FY20 and is expected to touch USD 40 billion by 2025 growing at a CAGR of 47%. The low penetration of consumer electronics, increased focus of brand owners to outsourcing production, and government incentives for Make-in-India is the key growth factors. Further, rising labour cost in China, along with INR depreciation and the recent increase in import duty, on various products augur well for indigenous EMS providers. Rising cost of imports from China could also potentially open export opportunities. Backward integration and economies of scale by contract manufacturers can drive better control over cost and product quality. Global giants are exploring opportunities to re-locate their manufacturing base to alternate location such as India. This is anticipated to provide strong impetus to Indian electronic industry going forward.

LED TV
The LED TV market size is estimated to grow faster pace from 14 mn unit p.a in 2019 to 21 mn units by 2023, at a CAGR of 10%. The Indian LED TV market was valued around Rs. 220 billion in 2019 and is projected to touch Rs. 322 billion by 2023.

Lighting Products
The Indian LED Lighting industry was estimated to Rs. 188 billion in 2019 & expected to touch Rs. 300 billion by 2023 & at CAGR of 12.5%.

Home Appliances
Indian washing machine market was estimated at 7mn units in FY 19-20, valued at Rs. 104 billion & estimated to touch 10 mn units, valued at Rs. 146 billion till FY23 at CAGR of 12%.

Mobile Phones
Indian mobile phones market was valued at Rs. 1600 billion FY 19-20 & estimated to touch Rs. 2000 billion, till FY23 at a CAGR of 6%.

Financials

Segment Informtion

(Rs Crores)

Particulars FY18 FY19 FY20 FY21 E FY22 E
Revenue
Consumer Electronics 1073.50 1193.70 2095.20 2793.60 3990.90
Growth % 11% 76% 33% 43%
% of sales 38% 40% 48% 53% 44%
Lighting Products 774.20 919.40 1139.70 1082.70 1353.40
Growth % 19% 24% -5% 25%
% of sales 27% 31% 26% 20% 15%
Home Appliances 250.30 374.40 396.30 445.80 693.50
Growth % 50% 6% 13% 56%
% of sales 9% 13% 9% 8% 8%
Mobile Phones 669.80 354.90 536.90 724.90 2797.30
Growth % -47% 51% 35% 286%
% of sales 24% 12% 12% 14% 31%
Reverse Logistics 73.40 30.20 15.60 18.70 22.40
% of sales 3% 1% 0.4% 0.4% 0.2%
Security Systems 0.50 112.00 216.40 248.90 311.10
% of sales 4% 5% 5% 3%
Total 2841.60 2984.50 4400.10 5314.60 9168.60
Source: Stockaxis Research, Company Data

Profit & Loss Statement:- (Consolidated)

(Rs Crores)

Particulars FY16 FY17 FY18 FY19 FY20 FY21 E FY22 E
Net Sales 1388.26 2457.03 2841.63 2984.45 4400.12 5314.57 9168.64
% Growth 16.00% 77.00% 16.00% 5.00% 47.00% 21.00% 73.00%
COGS 1212.31 2180.17 2510.27 2609.27 3860.00 4676.82 8105.08
Gross Profit 175.95 276.86 331.36 375.18 540.12 637.75 1063.56
GP Margin (%) 13.00% 11.00% 12.00% 13.00% 12.00% 12.00% 12.00%
Employee Cost 54.89 63.91 72.75 83.87 117.96 143.49 218.21
Other Expenses 65.28 121.70 145.92 155.16 198.89 247.13 421.76
Total Costs 1332.48 2365.78 2728.94 2848.30 4176.85 5067.44 8745.05
EBITDA 55.78 91.25 112.69 136.15 223.27 247.13 423.59
EBITDA Margin 4.00% 3.70% 4.00% 4.60% 5.10% 4.70% 4.60%
Depreciation & Amortization 8.44 10.71 15.18 21.65 36.53 44.12 58.07
Other Income 3.00 1.00 4.00 6.00 5.00 5.00 5.00
Interest & Finance Charges 12.09 15.54 13.45 26.32 34.97 42.09 64.84
Profit Before Tax 38.06 66.41 88.23 93.81 156.97 166.12 305.88
Tax Expense 7.90 18.82 27.33 30.45 36.26 41.81 76.99
Net Profit 30.16 47.59 60.90 63.36 120.71 124.31 228.89
Net Profit Margin 2.00% 1.90% 2.10% 2.10% 2.70% 2.30% 2.50%
EPS 88.24 43.30 53.78 55.94 104.33 105.30 193.89
Source: Stockaxis Research, Company Data

Balance Sheet

(Rs Crores)

Particulars FY16 FY17 FY18 FY19 FY20 FY21 E FY22 E
Share Capital 3.10 11.00 11.30 11.30 11.30 11.60 11.60
Total Reserves 114.50 186.10 303.60 366.90 529.80 845.10 1070.00
Shareholders' Funds 117.60 197.10 315.00 378.20 541.10 856.60 1081.50
Borrowings 77.10 43.00 40.60 136.10 82.80 63.20 43.20
Deferred Tax Assets / Liabilities 7.20 -0.30 4.10 14.40 14.80 14.80 14.80
Trade Payables 185.20 503.00 514.70 897.60 939.10 1091.20 1587.20
Other Liabilities 24.80 45.60 91.10 64.60 119.00 119.00 119.00
Total Equity & Liabilities 411.80 788.40 965.50 1490.80 1696.70 2144.90 2845.70
Property, Plant and Equipment 123.60 136.60 179.00 240.90 315.40 421.30 513.20
Capital Work in Progress 0.00 2.00 12.50 18.80 9.60 15.30 15.30
Inventories 136.30 282.20 322.30 408.40 497.80 558.90 833.30
Sundry Debtors 88.80 280.20 298.50 516.70 515.10 638.80 992.00
Cash and Bank 7.50 15.30 44.10 36.70 100.20 251.90 233.30
Other Assets 55.70 72.20 109.00 269.30 258.60 258.70 258.70
Total Assets 411.80 788.40 965.50 1490.80 1696.60 2144.90 2845.70
Source: Stockaxis Research, Company Data

Cash Flow Statement

(Rs Crores)

Particulars FY16 FY17 FY18 FY19 FY20 FY21 E FY22 E
Profit After Tax 27.37 47.59 60.90 63.36 120.71 124.31 228.89
Depreciation 8.44 10.71 15.18 21.65 36.53 44.12 58.07
Operating Cash Flow before Working Capital Changes 35.81 58.30 76.08 85.01 157.24 168.42 286.96
Working Capital Changes
Trade & Other receivables -33.45 -191.46 -18.30 -218.24 1.62 -123.65 -353.23
Inventories -23.25 -145.91 -40.14 -86.02 -89.47 -61.10 -274.35
Trade & Other payables 63.02 317.79 11.74 224.94 199.38 152.18 495.96
Others -1.25 -4.06 19.54 -48.20 -32.00 - -
Changes In working Capital 5.07 -23.65 -27.17 -127.51 79.53 -32.57 -131.62
Cash Flow after changes in Working Capital 40.88 34.65 48.91 -42.50 236.77 135.85 155.34
Other Items 0.18 18.23 18.97 39.44 - - -
Cash From Operating Activities 41.06 52.88 67.88 -3.06 236.77 135.85 155.34
Cash Flow from Investing Activities
Purchase of Fixed Assets -27.03 -39.11 -75.82 -80.61 -111.00 -150.00 -150.00
Sale of Fixed Assets 0.73 1.23 3.42 1.65 - - -
Others 4.69 -5.54 -27.32 15.17 11.70 - -
Cash Flow from Investing Activities -21.61 -43.42 -99.72 -63.79 -99.30 -150.00 -150.00
Cash Flow from Financing Activities
Increase / (Decrease) in Loan Funds -2.68 6.16 -2.55 96.40 -58.00 -20.00 -20.00
Equity Dividend Paid -4.23 -8.38 - -2.27 -4.00 -4.00 -4.00
Income tax on dividend paid - - - -0.47 -0.82 - -
Others -11.95 -6.20 44.34 -25.04 1.00 200.00 -
Cash from Financing Activites -18.86 -8.42 41.79 68.62 -61.82 176.00 -24.00
Net Cash Inflow / Outflow 0.59 1.04 9.95 1.77 75.64 161.85 -18.66
Opening Cash & Cash Equivalents 1.09 1.68 2.71 12.67 14.43 90.07 251.93
Closing Cash & Cash Equivalent 1.68 2.71 12.67 14.43 90.07 251.93 233.27
Source: Stockaxis Research, Company Data
 

Ratios

(Rs Crores)

Particulars FY16 FY17 FY18 FY19 FY20 FY21 E FY22 E
Profitability and Growth
Net sales growth 16.00% 77.00% 16.00% 5.00% 47.00% 21.00% 73.00%
EBITDA margin 4.00% 3.70% 4.00% 4.60% 5.10% 4.70% 4.60%
ROE 26.00% 30.00% 24.00% 18.00% 26.00% 18.00% 24.00%
Gearing
Working Capital Days 11.00 7.00 11.00 18.00 11.00 6.00 7.00
Debt/EBITDA 1.40 0.50 0.40 1.00 0.40 0.30 0.10
Total debt/Equity 0.66 0.24 0.14 0.37 0.15 0.07 0.04
Valuation
EV/EBITDA 1.20 0.30 32.90 20.40 18.40 39.80 23.20
PE - - 61.00 42.00 34.10 80.70 43.80
P/BV - - 11.80 7.10 7.60 11.70 9.30
Others
Sales/Total assets (x) 3.80 4.10 3.20 2.40 2.80 2.80 3.70
Sales/Net FA (x) 12.60 18.90 18.00 14.20 15.80 14.40 19.60
EBITDA/Interest 4.60 5.90 8.40 5.20 6.40 5.90 6.50
Source: Stockaxis Research, Company Data

Valuation

We see strong business opportunities in PLI scheme for smart phone manufacturing. The management remains confident of getting approval for 1 application under PLI scheme where potential is upto Rs. 4,000 crore in revenues in the first year itself. Manufacturing medical devices, refrigirators and Set top boxes are new growth avenues. Existing segments are likely to show robust growth through new customer addition, increasing capacities and strong order book. With low cost of labour and lower corporate tax rate, Dixon can be one of the beneficiaries of China ‘+ 1’ strategy by global brands. Thus, we initiate ‘Buy’ on Dixon Technologies for long term horizon. At the CMP of Rs. 8,525, stock trades at 44x FY22 E earnings of Rs.194.