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Almost every day we use multiple electronic appliances ranging from televisions, washing machines to as small as lightbulbs. Even though many of these products are manufactured by companies like Samsung or Philips, chances are that many components are made by other companies in low-cost emerging markets.
One such electronics manufacturing company is Dixon Technologies Limited, based out of Noida. With 17 manufacturing plants in Noida, Tirupati, and Dehradun, Dixon has the largest television, washing machine, and bulb assembly plants in India.
Established in 1993, the company started off by producing video recorders for Philips, video game consoles for Sega, and push-button phones for Airtel. In 2000, Dixon got a government contract to manufacture televisions. It soon began producing air conditioners and microwaves for LG Electronics.
Currently, the company operates in 2 models: Original Equipment Manufacturer (OEM) and Original Designing Manufacturer (ODM). In OEM, the company sources parts and materials to assemble the final products for clients. While in ODM, the company is responsible for generating an idea, and designing the product from scratch.
Currently the company’s portfolio could be broken into 6 segments. These include Consumer Electronics, Lighting Products, Mobile Phones, Home Appliances, Security Systems and Other Electronic Manufacturing. This incredible diversity reflects in its industry-leading growth and superior cash-returns structure.
Leveraging its strengths Dixon has ramped up its market share from 4% to 6% in the last 4 years. The company is particularly targeting segments such as LED lights and mobile phones, wherein it has put up capacity comparable with the global players. If Dixon focuses on these 2 segments, it could grow its target market by 5 to 10 times over the next four years.
The Government of India has introduced a PLI scheme worth over 40,000 crore rupees, encouraging companies to reduce imports and provide incentive to local manufacturing. This is unlocking growth opportunities for Dixon as the key segments where the PLI scheme will be beneficial are mobiles and the LED TV categories.
To sum it up, Dixon’s business model has many sustainable competitive edges including first-mover advantage, scalable revenue streams and low capital cost intensity leading to high returns .
So, what is our view on company valuation?
The stock price of the Company has seen an ~750% upside since the IPO at 531 rupees in September 2017. With an EV/EBITDA (TTM) multiple of 70 times and a Price to Earnings (TTM) of 140 times, the stock seems to be overvalued. Even though the Company is growing at a fast pace, the current Price to Earnings ratio is very high and is likely to correct disproportionately in any market correction.
As for the risks to this analysis, 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 and they are not able to pass on cost increase, Dixon would not make money as brand owners will reduce OEM margins.
So, would you invest in Dixon Technologies?
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