While the overall economy continued to witnesses increasing level of slowdown, the two Electronics Manufacturing services(EMS) company have consistently bucked the trend. In the current blog, ” Dixon Technologies Ltd & Amber Enterprises India Ltd : Q3FY20 Result Analysis” I will try to cover what has been working for them.
Before going further, you can read my analysis on both these companies to understand better:
For both the companies, it will be more prudent to compare on a year on year basis numbers because there are seasonality in their nature of business.
Also, these 2 company works on the below model:
OEM model: Usually fixed conversion cost model. Co. charges a conversion cost to convert the raw material to the end product. Conversion charge is fixed irrespective of raw material price volatility. Very thin margin.
ODM model: EMS co. invests in R&D to come up with new designs & products for its clients and once that is approved, they get involved in all aspects to manufacturing to servicing the warranty. This model has higher margins but require higher working capital.
Dixon Technologies Ltd & Amber Enterprises India Ltd : Q3FY20 Result Analysis
Dixon Technologies Ltd- Q3FY20 Result Analysis
Dixon Technologies manufacture consumer electronic products for brands such as Panasonic, Philips, Xiaomi, TCL, Samsung etc. The product range includes mobile phones, LED tvs, washing machine, CCTV, Bulbs, home appliances and many more.
The last quarter i.e. the September quarter(Q2) usually is the best for the company because of the festival season that follows offering huge discount both online & offline, thus pushing up the volumes of consumer electronics sold.
In the current quarter, the company increased expenditure towards R&D to enhance revenue share from ODM segment which currently stands at 25% compared to 85% for Amber. With ODM, the profit margin improves.
In the December quarter (Q3FY20),Dixon Technologies acquired quite a good number of new customers which include Reliance Jio(Cable TV setup boxes), Havells(Emergency Bulbs), HPL Electric & Power, Voltas (Top loading washing machine), Chroma, Flipkart Private Labels and a large MNC for LED TVs. One of the biggest problem faced by Dixon Technologies was dependence on a few large customer for its sales but with new customer acquisitions, the risk is gradually reducing.
In terms of taking more wallet share of existing customer, the co. commenced production of feature phones & LED TVs for electronic giant Samsung. Earlier Dixon was manufacturing only home appliances for them.
With the increase in number of customer, gaining further wallet share of brands, widening product portfolio, the growth is expected to continue.
Dixon is present in a wide variety of electronic product manufacturing which diversifies the risk and reduces the dependence on a single segment.
The gross margin improved both on a year on year(YoY) as well as quarter on quarter(QoQ) basis mainly led by lower commodity prices and stable currency. Other than it was more or less a consistent performance.
The management team/ promoters have been selling shares on a regular basis. Usually, it is considered negative.
Amber Enterprises India Ltd- Q3FY20 Result Analysis
Amber Enterprises manufactures Room AC, AC components as well sheet metal components for washing machines and other electronic appliances. Usually September and December quarter are lean season for AC whereas March(Q4) and June(Q1) are the best seasons for them with the profit margin exceeding 5-6%.
Room AC(RAC) business continues to grow due to lower penetration of AC(4% last year) and easy financing, shortening replacement cycle. RAC is the lowest penetrated consumer durable product in India. With such low penetration level and other factors acting in favor of AC business, it is expected to continue the momentum. And this makes them more or less delinked to Indian economic conditions for the time being.
With the temperature rising, ACs is fast replacing traditional coolers mainly due to increased affordability and income.
The company has come up with Solar ACs but it is at a very in initial stage because of the problems with installations in big city apartments as well as requires much higher costs.
The company has taken new tax system for the subsidiaries but continued with the old tax system with the parent. The reason being MAT credit with the parent company.
Since Amber caters to only one segment there always remains a risk of some new technological disruption changing the course of industry something that has happened to room cooler segment now. But looks like such disruptions are long time away.
During this quarter for Amber, this time around the subsidiaries(past acquisitions) did exceedingly well. In particular that of Sidwal refrigeration which has a much higher margins 21-22% EBITDA than the parent or the other subsidiaries(3-5%). Sidwal contributed 18 crores of the total EBITDA margin of 54 cr (33%) and around 9% of total revenue.
Sidwal is into manufacturing of Air Conditioning equipment for mobile applications such as railway coaches, metro coaches, buses, telecom, commercial refrigeration and related components which demand a much higher margin. Because of this segment it cushions the lower margins of other segments. Sidwal order book at the end of December quarter stands at ₹420cr.
Also, the because of higher sales the economies of scale have started to come into play. While the revenue grew by 25.5% quarter on quarter(Q0Q), the increase in employee cost was just 7.8% and other expenses increased by a 11.7%, both much lower than the revenue growth percentage and hence the increase in margin.
CoronaVirus Impact on these companies
Both Dixon Technologies and Amber Enterprises depend significantly on imports of components from China. China was closed to celebrate their new year till 3rd Feb 2020. But with the Coronavirus now into the picture, the holidays has been extended to 10th and 14th of Feb 2020.
Both the company’s management mentioned that if China opens up(including all its manufacturing facilities) by 10th Feb, there would not be any problem but in case there is further delay, the procurement issue will start escalating.
The typical transit time for the products to reach the Indian facilities is 20 days.
Because of the problems faced by China and the current stored inventories, there runs a risk of that being dumped into India at a cheaper cost. But there exists a custom duty of 20% on import of AC. Hope that act as a shield for Amber Enterprises.
EMS(Electronics Manufacturing Services) Indutry- Growth prospects
In my hometown, we can see companies such such as Aditya Vision(Vmart of electronic goods in Bihar) and Bajaj finance, pushing the growth of electronics item sales. I assume there would be similar retail chains in other part of India to continue to push the growth.
Despite the deep slowdown, consumer electronics have continued to do well mainly on account of affordable pricing, easy financing, increasing penetration of e-commerce. And these 2 EMS continues to reap fruit of the growth.
The EMS industry is such that they can expand real quick with very little capex. Maximum capital expenditure required in a greenfield project at stands around ₹100cr. And the lower margins are a part of this business which in a way act as a entry barrier as well, as in order to reach even such margin one needs to reach the kind of scale these companies have achieved.
The other obvious entry barrier is that ‘for a reputed brand to outsource its manufacturing to someone would require lot of validation’. The outsourcing by these brands continues to gain momentum.
Dixon Technologies Ltd & Amber Enterprises India Ltd : Q3FY20 Result Analysis - My Opinion
The share price of both these company has increased significantly in the past couple of months. It would be wiser to wait for correction to get in.
In case the corona virus issue gets extended (Seems likely to be), there can be opportunities to slowly accumulate these companies if anyone wants to. Also, the commodity prices was soft in the quarter along with stable currency. In the current quarter, with the easing trade war situation, there has been some increase the commodity prices.
In the budget 2020, the govt has imposed custom duties on imports of non-essential items such as mobile chargers and other parts. These are going to increase the cost of parts in the near term & hence the end product, until similar manufacturing of such scale comes up in India. In the current budget, there was a announcement of setting up Electronics SEZ parks like earlier budgets but no idea when that will even get started.