Dixon Technologies (India) Ltd - Research Report

Private Client Research

Rating

Buy

Sector

Consumer Durables - Electronics

Company

Dixon Technologies (India) Ltd

Consumer Durables - Electronics


September 25, 2017

Sensex: 31626.63


CNX Nifty: 9872.60

NSE: DIXON


BSE: 540699

Reco Price
Rs. 2545.00
Price Target (1.5 - 2 Years)
Rs. 5100.00
Upside
100.39%

Date

September 25, 2017

Sensex

31626.63

CNX Nifty

9872.60

Exchange

Code

NSE

DIXON

BSE

540699

Stock Data

CMP (Rs)
2612.75
Face value (Rs)
10
52 Week Range (Rs)
3024.00 - 2635.00
Market cap (Rs Crores)
2873.05
Price To Book Value (x)
11.51
P/E Ratio (x)
58.85
EV/EBIDTA (x)
32.48

One Year indexed Stock Performance

Dixon Technologies (India) Ltd Sensex
Dixon Technologies (India)  Ltd
Return (%)
1m
3m
12m
36m
Absolute
-
-
-
-
Sensex
-0.39
2.16
11.78
19.49

Shareholders

(in %)
15-Sep
Promoter
38.9
Public
61.1
Others
0.00
Total
100

+91 22 6639 3000

research@stockaxis.com

Change in manufacturing model, expanding manufacturing facilities, new products and reverse logistics to drive growth

ODM – next leg of growth driver:
Dixon Technologies (Dixon) is the largest home-grown design-focused and solutions company engaged in the manufacture of consumer durables, lighting and mobile phones. While OEM (Original Equipment Manufacturing) sales continue to be a major source of Dixon’s revenues, the company plans to gradually expand its share of the ODM (Original Design Manufacturing) model.

As an ODM (Original Design Manufacturer), Dixon controls the entire manufacturing cycle of a product from the initial stage of designing to planning and sourcing of raw materials and components. Under ODM, Dixon provides for warranty with respect to defect in raw materials and workmanship affecting the normal use of products. The ODM model requires additional investment in research and development (R&D) as well as working capital, but provides much higher margins as compared to the OEM model of pure assembly. While Tier-I players with their financial strength rely on in-house product design and development, Tier-II players (midsized brands) are content with brand positioning and rely on EMS (Electronic Manufacturing Services) players for production efficiency.

Dixon has been enjoying a high EBITDA margin of 16.3% in the ODM model; overall, Dixon’s ODM sales posted 51% CAGR over FY14-FY17.

Expansion into new geographies:
The company plans to expand its geographical footprint by enhancing current manufacturing capacities and setting up new manufacturing facilities in South India. Additionally, the company plans to expand its product portfolio to include Closed Circuit Televisions (CCTVs), Digital Video Recorders (DVRs), etc. This will help in strengthening its relationships with existing customers and gaining new customers. Dixon’s manufacturing plant at Tirupati is close to the Krishnapatnam and Chennai ports, which will provide easy access to the export market.

Increasing focus on Reverse logistics (RL):
The company plans to offer repairs and refurbishment services for set top boxes (STBs), repair of mobile phones, LCD and LED TVs, LED panels, home theatres, printers, etc., and further expand the products under its RL initiative. RL has high potential and enjoys higher margins and return ratios. Dixon’s RL services are being offered in the B2B space (and not to retail customers), which is in line with its strategy of building relationships with brand owners and OEMs (recently, the company started offering its RL services to “Sony”). The company has 17 centres spread across the country (primarily in metros) to offer its RL services.

Cost effective model and Focus on High Margin business:
Dixon has reported a margin of 3.7% in FY17. If adjusted to actual sales (value addition revenue), the company has a margin of ~13%. Dixon is the most cost-efficient player in each of the product verticals. The company has achieved cost leadership through backward integration and large manufacturing capacities.

Dixon has 2 high margin businesses, 1) Original Design Manufacturing (ODM) and 2) Reverse Logistics (RL). Contribution from these businesses has increased from 15%/1.5% in FY15 to 22%/3% in FY17. The company plans to gradually expand its ODM and RL share. As an ODM, the company controls the entire manufacturing cycle of a product. This model requires additional investment in 1) R&D 2) working capital but provides higher margins as compared to the OEM model.

Flexible and Cost effective manufacturing capabilities:
Dixon currently has six manufacturing facilities - three each at Dehradun and Noida. It maintains flexibility of manufacturing facilities through measures such as multiple function training and standardization of equipment. Also, through surface mounting technology lines, it can manufacture diverse products through the same machinery. Another facility is coming up in Tirupati with an area of approximately 13,935 sq m, with proximity to the airport as well as to Chennai and Katupalli ports. The company plans to foray into CCTV manufacturing, along with LED TV and Lighting products. Production from the said plant is expected to commence shortly.

 

Industry

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. Rapidly shrinking replacement cycle for consumer durables is observed as the reason for sustained demand in urban India. The existing low penetration rates and increasing usage of consumer durables have catapulted rural India to record high demand (30% annual growth).

Profile

Dixon Technologies (Dixon) is the largest home-grown design-focused and solutions company engaged in the manufacture of consumer durables, lighting and mobile phones. It also provides solutions in reverse logistics i.e. repair and refurbishment. The company is a leading manufacturer of lighting products (CFL and LED), Flat Panel Display (FPD) TVs and semi-automatic washing machines with market share of 39%, 50% and 43% respectively in India. Dixon is one of the most profitable companies in the domestic consumer durable sector. Its services range from global sourcing, manufacturing, quality testing and packaging. The company has six state-of-the-art manufacturing units in Noida and Dehradun.

Profit & Loss Statement:- (Consolidated)

(Rs Crores)

DESCRIPTION Mar-15 Mar-16 Mar-17 Mar-18E Mar-19E
Net Sales 1201.34 1388.26 2456.76 3070.95 3685.14
Growth (%)   15.56 76.97 25.00 20.00
Total Expenditure 1169.57 1332.48 2366.02 2948.11 3532.21
EBITDA 31.77 55.78 90.74 122.84 152.93
% Margin 2.64 4.02 3.69 4.00 4.15
Other Income 2.93 2.81 1.50 2.00 3.50
Operating Profit 34.70 58.59 92.24 124.84 156.43
Interest 10.33 12.09 12.77 5.00 5.00
PBDT 24.37 46.50 79.47 119.84 151.43
Depreciation 6.90 8.44 10.64 12.00 14.00
Profit Before Taxation & Exceptional Items 17.47 38.06 68.83 107.84 137.43
Exceptional Income / Expenses 0.00 -2.79 0.00 0.00 0.00
Tax 5.27 7.90 18.46 32.35 41.23
Profit After Tax 12.20 27.37 50.37 75.49 96.20
Share of Associates 0.00 0.00 0.00 0.00 0.00
Consolidated Net Profit 12.20 27.37 50.37 75.49 96.20
Adjusted EPS 35.52 88.24 45.86 64.85 82.65
Source: Stockaxis Research, Company Data

Valuation

At the current market price of Rs 2,733, Dixon Technologies is trading at a valuation of 33.2x its FY19 earnings. Change in its manufacturing model, reverse logistics initiative, expanding capacities and new product lines will help Dixon achieve significant growth going forward.