Dixon - India's leading contract manufacturer
Company Name – Dixon Technologies (India) Ltd (Dixon)
Current Share Price – INR 2,722 (January 27, 2022)
Market Cap – INR 16,211 cr
1. What is interesting about the stock?
Almost every day we use multiple electronic appliances ranging from televisions, and washing machines to as small as lightbulbs. When we think about these products only brand names such as Samsung and Phillips come to our mind. But do they manufacture all these products themselves? Chances are high that the product you are using today was manufactured by someone else in one of the relatively low-cost emerging markets.
Dixon Technologies (India) Limited is an Indian multinational electronics manufacturing services company, based out of Noida. It has 17 manufacturing units in Noida, Dehradun, and Tirupati, as well as the largest television, washing machine, and bulb assembly plants in India.
Established in 1993 by Sunil Vachani, Dixon initially manufactured 14-inch televisions, Sega video game consoles, Philips video recorders, and push-button phones for Bharti Airtel. It got a breakthrough in the 2000s when the company won a Government contract to manufacture televisions. Apart from televisions and video recorders, the company also started to manufacture air conditioners and microwave ovens for LG Electronics, as well as DVD players for other brands.
Currently, the company operates under two models: Original Equipment Manufacturer (OEM) and Original Designing Manufacturer (ODM). Under OEM the company sources parts, components, and other materials to assemble the final product based on the client’s specifications. While in ODM the company is responsible for generating an idea, designing the product from scratch, and then providing it to its clients.
In today’s scenario, their portfolio could be broken down into 6 segments:
A. Consumer Electronics
The company was able to capture the consumer electronics outsourcing potential much ahead of its peers, which gives it a solid early-mover advantage. It has a fully backward integrated manufacturing capacity of ~4.5 mn units of LED TVs p.a., which is ~35% of the Indian market’s requirement through which it catered to a diverse product portfolio for Indian as well as foreign brands. This segment contributed ~36% to Q3FY23 revenue (~48% in FY22) with a 3.1% operating margin and ODM share of 22% (the remaining being OEM).
B. Lighting Products
Dixon is among the top 10 global players in the lighting products segment backed by its strong R&D, enabling it to develop low-cost innovative products. Backward integration within the segment includes sheet metal, plastic molding, and wound components. This segment contributed ~11% to Q3FY23 revenue (~12% in FY22) with a 9.1% operating margin, RoCE of 25% (9MFY23), and ODM share of 89%. Current capacity is 300mn LED bulbs p.a., 5mn battens per month, and 1.5mn downlighters per month.
C. Mobile Phones
Dixon has a state-of-the-art infrastructure with SMT and other testing equipment coupled with strong manufacturing and quality team. Currently, it has in-house manufacturing capability for key components including PCBA, and further intends to manufacture other components/accessories such as batteries, chargers, plastic parts, etc. Dixon is the first Indian mobile manufacturing company with the capability to manufacture 5G phones. This segment contributed 38% to Q3FY23 revenue (~29% in FY22) with an operating margin of 3.6% and RoCE of 27% (9MFY23).
D. Home Appliances
In this segment, Dixon manufactures washing machines. It has a 1.2mn p.a. capacity for semi-automatic washing machines, which is ~28% of the Indian market’s requirement. Backward integration within the segment includes plastic molding and other bought-out components such as motors, clutch assembly, and PCBA.
It has initiated the process of creating capacity to manufacture top-loading fully automatic washing machines and is expected to begin commercial production in the current financial year with Bosch as an anchor customer. This segment contributed 10% to Q3FY23 revenue with an operating margin of 10.3%, RoCE of 31% (9MFY23), and ODM share of 100%.
E. Security systems
Dixon entered this segment in 2017 through a JV with Aditya Infotech, which holds the trademark for CP Plus and Dahua brands, and has a ~30% market share in India. The current capacity is 8.4mn units p.a. in CCTVs and 1.8mn p.a. in DVRs. This segment contributed ~5% to Q3FY23 revenue with an operating margin of 2% and RoCE of 42%.
F. Other electronic manufacturing
This segment includes the manufacturing of set-top boxes and medical equipment, which Dixon entered into recently. In the wake of the pandemic, the company entered the manufacturing of Quattro Real-Time Quantitative micro PCR Analyser machines, which recently received ICMR approval to conduct Covid tests. It has inked an MoU with Molbio for manufacturing the same.
Its unique and sustainable competitive edge reflects well in its industry-leading growth and superior cash-returns structure. This makes it a great bet on consumer durable/electronics manufacturing growth, which drives the bulk of FY21-25E growth and the initial scale/critical mass needed to penetrate the global supply chain.
Dixon, leveraging its key strengths, was able to ramp up its revenue market share from 4% to 6% over FY17–21 with TAM coverage jumping from USD 9bn to USD 15bn, largely domestic. The company is particularly targeting segments such as LED lights and mobile phones, wherein it has made globally comparable capacity/inroads with global players. If it executes on these two segments well, Dixon’s addressable target market/EBITDA pool could jump 5–10x over FY21-25E. Domestic opportunity for Dixon is pegged at ~USD 50bn by FY25E if one goes by growth across segments, the global potential could be USD 170bn in LED lights/mobile phones alone (three global players only).
The government of India has introduced a PLI scheme worth INR 40,000 cr as part of the Make in India initiative along with the Atmanirbhar scheme, encouraging companies to reduce imports and depend upon the local market. At the same time, the current Government is also anticipating mobile phone export from USD 7bn to USD 110 bn by 2025. This is unlocking the growth opportunities for Dixon. Key segments where the PLI scheme will be beneficial are mobile, LED TV category, telecom, Networking products, etc.
Going ahead, Dixon looks well-placed for industry-leading growth as favorable policy initiatives (PLI, rising duty structure for imports, etc.) expand its overall TAM and EBITDA pool.
To sum it up, Dixon’s business model has many sustainable competitive edges—first-mover advantage, scalable revenue streams, low cost-capital intensity, among others-- leading to high returns structure/FCF generation. The past five years' revenue/EBITDA CAGR of 34%/32% reflects significant outperformance in the consumer durables industry, reflecting a strong market share ramp-up as brands seek to shift the supply chain to India.
2. Key Historical Financials
Company revenue grew by 66% in FY22 on a YoY basis with strong growth in the mobile segment (Motorola and Nokia). Dixon revenue de-grew by 22% in Q3FY23 on a YoY basis
However, the EBITDA margin contracted due to higher material costs and a change in segment mix (the mobile segment has lower margins) in FY22. EBITDA margin expanded in Q3FY23 to compensate for the fall in revenue
Cash Flow convertibility (CFO/EBITDA) has been poor in FY21 and FY22 owing to higher receivables and inventory levels
ROCE/ROE has come down from 33%/25% in FY21 to 25%/22% in FY22
Management had guided towards 55-60% revenue growth in FY23 led by the mobile segment with an EBITDA margin to be between 4-4.25%. In Q3FY23, management scaled down the guidance to 20% growth with an EBITDA margin of 4%
3. What is my view on company valuation?
The Company's stock price has seen a ~500% appreciation since the IPO at INR 531 in September 2017. This is when the stock has been corrected by 40% since Jan 2022. Even then the stock seems to be overvalued with an EV/EBITDA (TTM) multiple of 34x and a P/E (TTM) of 68x.
Dixon's annual (FY22) revenue growth of 66% outperformed its 5-year CAGR of 34% and PAT growth stood at 19% for FY22. However, the growth has slowed down in Q3FY23, and management guidance has significantly downwards for FY23. The current P/E is very high in the background of slowing growth (15-20% at best for the next few years) and is likely to correct disproportionately. It may not be prudent to catch a falling knife! Long-term investors could evaluate the opportunity if any correction that brings the P/E in the 20-25x range.
4. What are the risks to the investment analysis?
Risks to the analysis are:
Dixon derives 50% of its revenue from just two clients and 80–85% from just five clients. The fate of Dixon is intertwined with the fate of its clients. If the clients don’t make money, Dixon doesn’t make money as brand owners reduce OEM margins whenever costs become difficult to pass on to the end-users
If the government decides not to award PLI to Dixon, it will erode the competitiveness of the Company
About the Author
I have over 8 years of experience across the Technology Sector and other sectors in India and the Middle East. Currently, I am looking after developing a robust supply chain process for a leading conglomerate to support its e-commerce ambitions.
I hold an MBA degree from HEC Paris and an Engineering degree from the Indian Institute of Technology, Madras (IITM).
I am an insignificant public investor and have an avid interest in Blockchain and Cryptocurrencies. I am a hustler and always on the lookout for deriving value.
I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.