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.

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.

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.

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

Key Risks:

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