Dixon Technologies (India) Ltd(DTIL) came out with its IPO in September 2017. The IPO was subscribed by 116 times and it listed at 54% premium to the offer price. The company is a Electronics Manufacturing service(EMS) provider to original equipment manufacturer(OEM) i.e. they manufacture electronic products for brands such as Panasonic, Philips, Xiaomi, TCL, Samsung etc. I will be covering more about the company in the blog ‘ Dixon Technologies(India) Ltd- Analysis’.
In the recent slowdown, while all the sectors were down, the electronics segment outdid the entire space. Let me first explain about the sector and then the company.
Dixon Technologies(India) Ltd- Analysis
Electronic Manufacturing Services- Industry
Electronics Manufacturing services industry or EMS in general is simply manufacturing products which gets sold in other brands name. EMS companies get orders for electronic brands and they manufacture/assemble those products according to specifications provided and charge certain fee for that. The industry typically has high volume and low margin. China had been the leader in this space for a long long time. But now with increasing labor cost, tariffs imposed by US , other Asian countries are trying to be competitive to capture the space vacated by China.
Since technology is changing fast, more so now, that original equipment manufacturers (brands such as Xiaomi, Philips, Panasonic, Samsung etc) need to be on its toes to anticipate changes in tech & to successfully develop and introduce new products, differentiate themselves as well as market and create a distribution network for its products. To focus on their core business, outsourcing the manufacturing to EMS becomes much more meaningful.
Also, EMS companies operate on a much larger scale than OEMs, the cost of manufacturing goes in favor of EMS companies. Due to these 2 primary reasons, brands prefer to outsource manufacturing.
Current, Low outsourcing by brands offer bigger opportunity for EMS companies. DTIL is the second-largest player in India with a market share of 9.3% and lags the top player Jabil Inc which has a market share of 12.6%.
The Indian EMS witnessed a 26% CAGR over FY 13-17 to reach ₹192 bn in revenues & is expected to see a CAGR of 32% over FY 18-21E.(Source: AR FY19)
There are a number of incentives provided by the Indian govt to the sector:
GOI India has allowed 100% Foreign Direct Investment (FDI) under the automatic route in Electronics Systems Design & Manufacturing sector.
M-SIPS(Modified Special Incentive Package Scheme)– Under this scheme, the central govt provides subsidy for capital investment to the tune of 20-25%. Other proposals include Electronic Development fund, Electronics manufacturing cluster. Govt is also pushing to make India a mobile export hub.
On the other hand, to discourage the imports of finished goods, there are many duties levied. And duties have been removed from the import of several components latest being the Open cell LED TV Panel.
Also, the initiative taken by the previous Andhra Pradesh govt to encourage electronics manufacturing is much more commendable.
Because of all these, a larger number of Chinese brands(Xiaomi, TCL, Oppo, Haier etc) are finding that getting their products manufactured via EMS in India is much better than importing from China.
Dixon Technologies(India) Ltd- Analysis
Factors driving the growth in sales of electronic items
You would have seen amid the slowdown in the Indian economy, there was an exponential increase in sales of electronics items in the recently concluded sale by Amazon & Flipkart. The demands have been very robust for the past couple of years and seem to continue in the near future. Companies such as Dixon Technologies benefit from such growing demand. These are the factors driving the growth of electronic goods in India:
Dixon Technologies (India) Ltd- About
The co. was incorporated in the year 1993 to manufacture and export color television. As of now the company has 10 manufacturing facility and provide fully integrated end to end product and solution. Its services range from global sourcing, manufacturing, quality testing and packaging.
Dixon Technologies (India) Ltd- Management
The current executive chairman of the company ‘Sunil Vachani’ had founded the company in 1993 is still associated with the company. So is the Managing director ‘Atul Lall’ who has been with the company since the beginning. Both of them have already steered the company to be competitive on a global level in terms of costing and have built a reputation for Dixon Technologies. They continue to manage the company. The management salary is reasonable.
The company also has separate Chief Operating Officer(COO) in each vertical and that is quite unique.
Dixon Technologies (India) Ltd- Business Model
The company works on 2 operating model. One is OEM(Orginial Equipment manufacturer) and the other is ODM(Original Design Manufacturer). OEM should not be confused with OEM brands. It is just a name to identify a particular business vertical.
Fixed conversion cost- Co. charges a conversion cost to convert the raw material to the end product. Conversion charge is fixed irrespective of raw material price volatility.
Specifications are provided by brands. Also called as Prescriptive business model where each and everything is mentioned and the DTIL needs to adhere to it.
Cost of shipping is borne by the brands
Highly scalable, low working capital requirement but very thin margins.
OEM segment has EBITDA of about 2%.
Dixon Technologies(India) Ltd- Analysis
Higher margins but also Higher working capital which the company is trying to bring down.
DTIL is involved in designing, planning, sourcing of raw materials & components and final product manufacturing and then shipping.
DTIL will also be responsible for providing warranty services.
ODM vertical has EBITDA of about 10%.
The company plans to focus on this vertical and increase its share to the total revenue. And has been able to do so. Co. also spends on R&D to grow this particular vertical and has centers in both India & China(to stay close to changing technology there).
This model is much more convenient to regional and private label brands. Over the period, Dixon technologies have brought several well-known brands under this umbrella such as Panasonic.
Dixon Technologies (India) Ltd- Key Pointers
Dixon Technologies(India) Ltd- Analysis
Dixon Technologies (India) Ltd- Products & Clients
Dixon Technologies (India) Ltd- Raw Materials
The company imports its raw materials from China. To enhance its margins the company is going for Backward Integration include sheet metal, plastic moulding and wound components. That helps demand and Lead Time management ,Inventory Management and control.
Dixon Technologies (India) Ltd- Plants
Dixon Technologies (India) Ltd has 10 manufacturing facilities located in Uttar Pradesh, Uttarakhand and Andhra Pradesh supported by 3 R&D centers (2 are located in India and 1 is located in China).
They have 4 plants in Noida, 4 plants in Dehradun and 2 plants in Tirupati, Chittor, AP.
The idea of setting up a plant in Tirupati is the proximity to ports to cater to the export market in Southeast Asia as well as the market in South India.
Dixon Technologies (India) Ltd- Subsidiaries
Dixon Technologies (I) Ltd before going for IPO merged 2 of its subsidiaries with itself, ‘Dixon Bhurji Moulding Private Limited’ and ‘Dixon Appliances Private Limited’. Post-IPO, they were left with 1 subsidiary and 2 Joint ventures (both 50:50).
One joint venture with Gionee mobiles called ‘Padget Electronics Private Limited’ in which they acquired the remaining 50% stake by paying a consideration of ₹27cr making it a wholly-owned subsidiary.
The other joint venture is with Aditya Infotech Ltd(manufacturer of CP Plus CCTV camera) by the name ‘AIL Dixon Technologies Private Limited’.
As of 20th October 2019, the company had :
1. Two wholly owned subsidiary ‘Padget Electronics Private Limited’ and ‘Dixon Global Private Limited‘
2. One joint venture(AIL Dixon Technologies Private Limited)
The wholly owned subsidiary “Dixon Global Private Limited(DGPL)” is a material subsidiary of the company. DTIL sells goods worth ₹25.9cr to DGPL and purchases goods worth ₹587.51 cr(20% of Consolidated sales) from them for FY19. IT IS NOT CLEAR THE REASON FOR THE TRANSACTIONS.
It just says that “DGPL is authorised to carry on agency business in all its branches and to act as agents for Indian and Foreign principals to, inter-alia, sale, purchase, import and export electrical appliances and gadgets of all kinds.” This is a very generic statement and does not explain anything. Have mailed the company to get some clarity.
THE INVESTOR RELATION GUY REFUSED TO ANSWER AFTER REPEATED FOLLOW-UPS SAYING EVERYTHING IS MENTIONED IN THE ANNUAL REPORT. THIS IS KIND OF NEGATIVE.
Dixon Technologies (India) Ltd- Financial Analysis
As you can observe from the above image that there is a phenomenal jump in revenue but the profits are at a minuscule 2%. Although it has improved from 1% in 2014 still it is at a very low level. In recent quarters they have improved it further to 2.5% to 2.8%. But, given that it is a volume-based business model where the profit margins are quite thin, we can not expect significant
revenue profits even in the future, it can be improved only to a certain extent.(Amber enterprises with 85% revenue coming from ODM has about 3.5% profit margin)
The company is pushing its ODM model where the profitability is much higher than OEM vertical.
Other than profitability, the company has managed to do extremely well with other financial ratios.
The return ratios are quite impressive. The cash conversion cycle is also excellent.
The management also has kept the debt at a very low level and their debt is rated A+ and above. The company is among the highest tax-paying bracket and the current tax cut will help increase the profitability. Dixon Technologies(India) Ltd- Analysis
The Cash flow from operations has been higher than PAT historically except in 2019 where it is negative due to very high trade receivables. Trade receivable as a % of sales has gone up from 11% to 17% in FY19. This probably maybe to compensate for the lower or no orders for mobile phones by one of their largest client Gionee, they did a lot of work on credit so that the top line does not look bad.
THE IPO EFFECT- NUMBERS IMPROVEMENT(24.04.20)
While discussing with a friend, the below point about IPOs came to light. So thought of updating the same.
Historically, there has been lot of studies done to understand the company’s performance improving just before the IPO. In India, company’s are given 3 years post IPO to reduce their stake to 75%. With the rosy financials, there is often increase in share prices.
Let me try to analyze the numbers in the table above.
Quite often better terms are given to buyers/customers in terms of credit payment to show increase in sales. Between 2015-19, the Receivables to sales ratio grew by 4 times from 4.6% to 17.3%.
Hence, the Days sales outstanding(DSO) & Working capital has increased.
To maintain Cash conversion cycle, Days payable outstanding(DPO) is increased with suppliers to the company. Increase in DPO comes with a cost, the supplier would require Letter of credit from the company’s banker and that comes with a fee that the company needs to pay to its bankers. This is reflected in the increase in Finance cost. I would assume the increase in working capital has led to the company borrowing more in the form of short term debt.
Now, given that the space in which Dixon is, typically has very thin margins. If such practice continues then very soon, the impact will start showing stress on the financials.
I DO NOT KNOW THE EXACT PURPOSE BEHIND DOING SO, IT IS JUST MY OBSERVATION. BUT TO BE ON A SAFER SIDE, IT ALWAYS BETTER TO BUY ONLY IF THERE IS SIGNIFICANT STOCK PRICE CORRECTION GIVEN THERE IS NO DETERIORATION IN THE PERFORMANCE, TO PROTECT YOUR DOWNSIDE IN CASE THAT ANYTHING NEGATIVE COMES OUT.
Dixon Technologies (India) Ltd- Future plans
Continue to focus on ODM model
Continue to strengthen the existing product portfolio and diversify into products with
attractive growth and profitability prospects
Development of service offerings. From semi-automatic, they want to get into fully-automatic washing machine. Dixon Technologies(India) Ltd- Analysis
Expand existing relationships with customers into other product verticals
Expansion of industrial footprint into new geographies
Dixon Technologies (India) Ltd- Key Risks
Higher dependence on a few customers is a big negative for the company. It significantly reduces revenue if the client faces any problem or discontinue purchasing from Dixon. In FY19, because of the problem faced by their key client Gionee(14% share of revenue as of FY16), the mobile vertical saw revenue de-growth from ₹670cr to ₹355 cr, a drop from 47%. This is the biggest risk the company faces. Top 5 customers would be around 80% of total revenue today.
The company has been adding new clients but it will take substantial time to reduce client concentration to a meaningfully low level.
EMS companies in a way represent the brands for which they are manufacturing. Any kind of major defect or failure to meet regulatory quality, the company may face losing out its clients. It has not happened to date so the probability is quite lower.
The electronics industry is fast-changing, the company needs to keep pace with it and always need to evolve and that will require frequent capital expenditure though at a small level given the company’s expertise.
As of now, the electronics goods segment is booming, but technology changes very fast. That can leave things obsolete. But again the company has already seen so much technology disruption and has growth irrespective. Dixon Technologies(India) Ltd- Analysis
Usually, Brands or OEMs do not depend on one/single EMS to manufacture their entire product. They will negotiate and give orders to multiple manufacturers to reduce risks. EMS providers to get larger share of order quotes lower prices pushing much more pressure on margin. To tackle that co. is pushing hard for ODM where Dixon will be taking care of the entire process and increasing the stickiness of brands with DTIL.
The current Andhra Pradesh govt is cancelling the projects supported by previous govt. As of now it is limited to infrastructure sector. Hope it does not come to electronics manufacturing one. DTIL is given a number of subsidies by the previous govt for setting up the plant in Andhra Pradesh(tirupati)
Dixon Technologies (India) Ltd- Valuations
Such low margin business usually trade at very low valuations. But given what Dixon Technologies (India) Ltd is doing is quite unique and new to India and they also have the first mover’s advantage, they might be getting a higher valuation. Also, might be a factor of growth. But the current valuations are too high (24.04.20).
In terms of competition, only if some reputed international player comes with a large scale, it would create threat to the business of Dixon, smaller players are unlikely to make a dent.
In my opinion, one should wait for a correction to take a position in the company.