EQUITY RESEARCH: DIXON TECHNOLOGIES (INDIA) LIMITED

Dixon Technologies (India) Ltd, previously Dixon Technologies (India) Pvt Ltd, is an India-based design-focused products and solutions business enterprise. The Company is engaged in manufacturing products in the client durables, lighting fixtures and mobile telephones markets in India. Its product portfolio includes customer electronics; domestic appliances; lighting merchandise; and cellular phones. It additionally presents solutions in reverse logistics, which includes repair and refurbishment services of set top boxes, cellular phones and LED television panels. Consumer electronics include LED tv. Home appliance includes washing machine. Lighting products consists of LED bulbs and tube lighting fixtures, down lighters and compact fluorescent lamp (CFL) bulbs. It operates in six manufacturing centers placed in the states of Uttar Pradesh and Uttarakhand, India.

ABOUT:

Dixon Technologies is the largest home-grown design-focused solutions company engaged in contract manufacturing of products in the consumer durables, home appliances, lighting, security devices, set-top box, wearables, and mobile phones market in India. The company is fully end-to-end product integrated to Original Equipment Manufacturers (OEMs) ranging from global sourcing, manufacturing, quality testing and packaging to logistics. It is also a leading Original Design Manufacturer (ODM) of lighting products, LED TVs and semi-automatic & fully automatic washing machines in India. An OEM is a company who sources parts, components and other materials to assemble the final product based on the client’s specification. While an ODM entity is responsible for generating an idea, designing the product from scratch and then provide it to their clients. The company offers cost-effective consumer products in India through leading domestic as well as global retail brands. The company has core strengths in electronic components, surface mounting, box building, semiconductors, silicon, thermal management, wound components, polymer processing, plastics & sheet metal. The company had 18 manufacturing facilities located in Uttar Pradesh, Uttarakhand and Andhra Pradesh and 6 research & development (R&D) centres in India and China.

Consumer Electronics – OEM & ODM models of ultrahigh definition TVs, commercial displays and signage displays. It is a fully backward integrated segment. It caters to ~35% of India’s requirements.
• Lighting Products - Top ten global manufacturers of indoor lighting and LED bulbs along with main electronic board designing, mechanical and light source and package designing. It caters to ~50% of India’s requirements.
• Mobile & EMS division – Manufacturers of feature phones, smart phones, Printed Circuit Board (PCB) for mobiles as well as wearables. It also started manufacturing IT hardware and telecom products.
• Home Appliances – Manufacturers of semi and fully automatic washing machines.
• Security Systems – Manufactures security devices such as CCTV & Digital Video Recorders (DVRs).

SHAREHOLDING PATTERN:

The promoter group (Vachani Family) holding was maintained at 33.80% in September 2023. The FII shareholding increased to 15.66% in September 2023 from 12.04% in March 2023 while the DII shareholding increased to 24.6% in June 2023 from 23.77% in March 2023. The noninstitution shareholding decreased to 26.36% during the quarter. 

SECTOR:

• In the realm of consumer durables, the Indian appliance and consumer electronics (ACE) market achieved a substantial worth of ₹73,800 crore (US$ 9.84 billion) in 2021, with projections indicating it is poised to burgeon to ₹1.58 lakh crore (US$ 21.18 billion) by 2025, as per data sourced from IBEF. This growth trajectory is notably underpinned by the escalating manufacturing costs in other economies, amplified labor expenses in China, and a predilection among major Original Equipment Manufacturers (OEMs) to subcontract manufacturing as opposed to constructing their proprietary infrastructure. Consequently, this dynamic is propelling the expansion of the electronic manufacturing services (EMS) market in India. Over the past two decades, the Indian electronic manufacturing services industry has undergone a remarkable transformation, driven by several factors. Firstly, there have been remarkable advancements in product offerings, spanning across various technologies, formats, and designs. Secondly, the retail landscape has evolved, transitioning from traditional outlets to expansive specialized stores and the burgeoning e-commerce sector. Furthermore, the trade environment has experienced significant shifts, with an emphasis on domestic production and import duty escalations. Lastly, a nascent regulatory framework has played a role in shaping this evolving landscape. A pivotal government policy that has significantly bolstered the electronic manufacturing industry is the Production Linked Incentive (PLI) scheme, which gained approval in November 2020. This scheme is designed to foster India's manufacturing capabilities, boost exports, and align with the 'Atmanirbhar Bharat' (self-reliant India) initiative. In a bid to encourage value addition in the production of televisions, the government has taken measures such as reducing the basic customs duty on components of open cells for TV panels to 2.5% in the Union Budget of FY24. Additionally, customs duty relief has been extended to the import of specific parts and inputs like camera lenses, thereby further intensifying the domestic value addition in the production of mobile phones. Notably, the production of mobile phones in India has experienced substantial growth at a compound annual Growth Rate (CAGR) of 15% over the past seven years.

• In the expansive landscape of Electronic Manufacturing Services (EMS), the total addressable market in India boasted a valuation of ₹3,372 billion ($45 billion) in FY22. Projections paint a compelling picture, with expectations of this market surging to ₹7,504 billion ($101 billion) by FY26, driven by a commendable Compound Annual Growth Rate (CAGR) of 22%. It's noteworthy, however, that Indian EMS companies, contributing approximately 44%, were valued at ₹1,469 billion ($20 billion) in FY22. These domestic entities are anticipated to exhibit remarkable growth, projected to soar at a CAGR of 32%, ultimately reaching ₹4,502 billion ($60 billion) by FY26.

• In the realm of consumer electronics, the television industry has been a focal point for groundbreaking technological advancements over the past decade. The market size for televisions reached 20.2 million units in FY22, and market projections foresee an expansion to 30.4 million units by FY26, underpinned by an impressive CAGR of 11%. Despite a 65% television penetration rate in India, the considerable scope for further demand expansion remains evident.

• The Indian LED lighting market, on the other hand, exhibited a value of ₹21,708 crore in FY22. Projections indicate a robust CAGR of approximately 12%, propelling it to ₹33,820 crore by FY26. This growth narrative is steered by the increasing appetite for energy-efficient lighting solutions, coupled with the introduction of cost-effective smart LED lighting solutions that offer enhanced control. In recent years, LED lighting has unquestionably asserted its dominance in India's general lighting market.

• The home appliance sector, specifically the Indian Washing Machines industry, has enjoyed a sustained and consistent growth trajectory. Factors such as rising disposable incomes, augmented purchasing power, and a wave of product innovation are expected to amplify the demand. The washing machine market in India reached ₹2.2 billion in FY22, and growth forecasts indicate a CAGR of approximately 4.5%, pushing it to $3 billion by FY28.

• India stands as the world's second-largest smartphone market, with annual sales volumes of approximately 263 million units in FY21. Projections are robust, with an anticipated CAGR of 11.5%, set to escalate sales to 454 million units by FY26. The smartphone market share is poised to witness an incremental increase of 5-7% year-on-year, reaching a significant 76% by FY25, a substantial uptick from the 58% market share recorded in FY21.

MANAGEMENT:

• The management is focused on their strategy of offering customers good quality products at great value.
• Dixon is constantly working towards accomplishing its vision of being the most preferred & trusted manufacturing & solution partner to brands operating across verticals.
• For that, the company has been acquiring new customers across verticals which is enabling them to increase the scope of work and improve the market share. 
• Going forward, the basis for the company’s future growth rests on innovation.
• The demand across all business segments remains promising and they have a very strong order book across all the verticals. They are shifting from a prescriptive manufacturing approach to a more design-oriented one. 

FINANCIALS:

• In the fiscal year 2023, Dixon Technologies achieved a revenue of ₹12,192 crore, marking a robust 14% year-on-year growth. The primary drivers of this growth were the mobile division and home appliances businesses. However, the consumer electronics and lighting businesses faced year-on-year challenges due to price corrections, resulting in a reduction in the unit value of televisions and sluggish demand for lighting products.

• In the first quarter of fiscal year 2024, revenue continued to exhibit resilience, with a 14.6% year-on-year growth, reaching ₹3,272 crore. This uptick was attributable to healthy expansion across all business verticals, primarily led by the mobile division.

• The company maintains a robust order book across the mobile, home appliance, wearable, and hearable segments. However, in the lighting and consumer electronics segments, the order book appears relatively flat.

• During fiscal year 2023, Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) demonstrated significant growth, reaching ₹513 crore, a remarkable 35% year-on-year increase. Despite inflationary pressures, strategic price adjustments were implemented across the Original Design Manufacturer (ODM) business for washing machines and lighting. Additionally, operating leverage benefits were realized due to the company's backward integration strategy.

• In the first quarter of fiscal year 2024, EBITDA continued its positive trajectory, surging by 31.7% to ₹132 crore, mirroring the factors mentioned above.

• For fiscal year 2023, Profit After Tax (PAT) amounted to ₹253 crore, reflecting a robust year-on-year growth of 33%. However, it's worth noting that the company is in an expansion phase, which is expected to result in higher depreciation in the future. In the first quarter of fiscal year 2024, PAT experienced an impressive year-on-year growth of 47.9% to reach ₹67 crore.

  On the margin front, fiscal year 2023 saw an expansion in margins by 67 basis points (bps) on a year-on-year basis, reaching 4.2%. This improvement was attributed to an increased share of ODM business and the realization of operating leverage benefits.

• In the first quarter of fiscal year 2024, EBITDA margin improved to approximately 4% compared to around 3.5% in the same period in the prior year. The PAT margin has been relatively consistent over the past five years, typically falling within the range of 2% to 3%. In fiscal year 2023, the PAT margin improved by 30 bps on a year-on-year basis, standing at 2.1%. In the first quarter of fiscal year 2024, the PAT margin exhibited a 50 bps year-on-year improvement, reaching 2.1%.

• Over a five-year horizon, the Return on Capital Employed (ROCE) has consistently averaged around 30%. In fiscal year 2023, ROCE remained within a similar range.

• Dixon's unwavering focus on operational efficiency and financial discipline has been instrumental in sustaining a healthy ROCE over the past few years. The ongoing investments in the expansion of the mobile division, lighting products, telecom, IT, and home appliances segments are primarily aimed at leveraging the benefits of the Production Linked Incentive (PLI) scheme. Once these capacity expansion initiatives are completed, a further improvement in ROCE is expected in the future.

• In fiscal year 2023, the Return on Equity (ROE) stood at a commendable 22.6%. The company's practice of reinvesting a significant portion of its net profit has resulted in an augmentation of its total net worth.

• In recent years, the firm's free cash flow has predominantly been in the negative territory, primarily due to substantial capital expenditure (capex) outflows. However, in the fiscal year 2023, the company managed to reverse this trend, successfully generating a positive free cash flow.
• The total capex for FY23 amounted to approximately ₹461 crore, with a primary focus on segments that contributed significantly to the company's revenue. Notably, in the fourth quarter of FY23, a substantial portion of the capex was allocated to the refrigerator segment.
• Looking ahead to FY24, the management has provided guidance for a capex of ₹400 crore. Cash from operations (CFO) exhibited volatility in the past couple of years, including negative cash flow from operations in FY19 due to elevated working capital requirements. However, in FY23, CFO reached ₹726 crore, driven by improved profits and adjustments in working capital. The working capital adjustments primarily encompassed an increase in trade receivables, trade payables, and a decrease in inventories.
• In the realm of investing activities, Dixon allocated ₹461 crore to capex-related initiatives and divested net investments worth ₹98 crore. Consequently, this translated into a net cash outflow of ₹356 crore from investing activities in FY23.
• Turning to financing activities, the company repaid borrowings amounting to ₹280 crore, resulting in a net cash outflow from financing activities of ₹330 crore in FY23. The Return on Equity (ROE) for FY23 stood at a commendable 22.6%. The company has consistently reinvested a significant portion of its net profit, leading to an increase in its total net worth. The 5-year Return on Capital Employed (ROCE) averaged around 30%, and in FY23, it remained within a similar range.
• Dixon's unwavering commitment to operational efficiency and financial discipline has been instrumental in maintaining a healthy ROCE over the past few years. The ongoing investments in expanding the mobile division, lighting products, telecom, IT, and home appliances segments, primarily to leverage the benefits of the Production Linked Incentive (PLI) scheme, are expected to drive an improvement in ROCE once the capacity expansion initiatives are completed.

KEY FACTORS:

• The company has been working on increasing its share of ODM (original design manufacturer) business to enhance its overall margin profile. In the consumer electronics sector, they aim to raise the ODM share to approximately 40% from 23% in FY23.
• In the LED television segment, as part of their backward integration strategy, they have invested in LED bar manufacturing for internal use. Production is expected to commence in Q3 FY24.
• The company has signed agreements with Google for sub-licensing rights related to Android and Google TV, with production set to begin in Q2 FY24. Additionally, they have partnered with Samsung for the Tizen operating system, with production slated for Q3 FY24.
• In the lighting segment, the company plans to launch smart lighting solutions in Q3 FY24 and professional lighting in Q4 FY24. Approximately 40% of the Indian lighting industry is in professional lighting. They are also venturing into strip and rope lighting, which is expected to be launched by Q2 FY24. They have received export orders from Germany, to be fulfilled in Q2 FY24, and are in advanced discussions with potential customers in the US and UK.
• In the home appliances segment, the company intends to introduce an economy series by the end of Q2 FY23. For fully automatic top-load washing machines, they have added Voltas Beko as another anchor customer, anticipating significant volume growth in the near future. The company will focus on delivering technological innovation in this segment. They have a healthy order book and expect growth, primarily in the fully automatic segment. Their new state-of-the-art facility for semi-automatic machines in Dehradun will be operational by July 2023, and they have set up their own tool room for in-house board manufacturing as part of their backward integration strategy.
• In the mobile and EMS (Electronic Manufacturing Services) segment, the company boasts a robust order backlog, encompassing both domestic and international markets. Notably, they have initiated a strategy of backward integration for Motorola, entailing the establishment of an additional manufacturing line. Furthermore, the company has embarked on an Original Design Manufacturer (ODM) journey within this sector and has successfully secured partnerships with two new clients, Itel and Xiaomi. 
• For Itel, production of approximately 10 lakhs feature phones per month has already commenced, with plans to extend this to smartphone manufacturing (approximately 8-10 lakhs per month) starting in September 2023. Xiaomi smartphone production is anticipated to commence by mid-September or early October 2023. The company is currently in the process of building the necessary production capacity and infrastructure, with an initial plan to manufacture approximately 5 lakh units per month, intending to gradually double this capacity. 
• During the quarter, the company received substantial orders of approximately 1.5 crore units from Jio for Jio Bharat phones, of which they have already delivered 10 lakh units. 
• In terms of new initiatives, the refrigerator segment is poised for development, with an initial capacity of approximately 1.2 million direct cool (DC) refrigerators. Manufacturing operations are anticipated to commence in Q2 FY24. The company is in the final stages of finalizing an agreement with a significant brand, committing to 0.6 million units, equivalent to 50% of the segment's capacity. Trials for this collaboration are expected to take place in Q3. 
• The company anticipates that revenue growth will be primarily driven by the mobile segment, with projected margins falling within the range of approximately 2.3% to 2.7%. 
• Furthermore, the company holds a substantial order book in the wearable and hearable segments. As part of their backward integration strategy, they are planning to commence the in-house manufacturing of printed circuit board assemblies (PCBA) within this segment during FY24. The management's objective is to double both their capacity and revenues in this segment. 
• Additionally, the company is exploring high-margin product categories, including electric vehicles, defense, drones, medical electronics, and telecom infrastructure.

VALUATION:

• Dixon's dividend payout has remained consistently stable at approximately 4% over the past four years. However, in FY23, this metric rose to approximately 7%. Given the company's substantial growth prospects and planned capital expenditures, it's unlikely that the dividend yield will witness a substantial increase in the near term. It's worth noting that Dixon is currently trading at a notably high Price-to-Earnings (PE) ratio (TTM) of 117.48x. We think that the stock can reach 6000Rs provided better financials and future outlook.
• With the robust demand for electronic products both in India and overseas, Dixon finds itself in a favorable position as a leader among Original Equipment Manufacturers (OEM) and Original Design Manufacturers (ODM) in India. The "China+1" strategy adopted by global players augurs well for the company's future order book. The management remains optimistic about the growth prospects that lie ahead.

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