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Dixon Technologies () 21 August 2018

Reuters: DIXO.BO; Bloomberg: DIXON IN

Preferred Play In Highly Scalable EMS Industry BUY (India) or DTIL is the second-largest EMS (electronic manufacturing services) player in India with a market share of 9.3%. The EMS industry in India offers robust growth prospects, Sector: of which DTIL will be a major beneficiary. With reputed anchor clients and market leadership in categories such as LED , lighting and washing machines, DTIL is likely to be the preferred CMP: Rs2,515 EMS partner for any OEM brand looking to enter or enhance its offerings in these categories. Further, an asset-light balance sheet, healthy return ratios, low working capital cycle, disciplined capital Target Price: Rs3,285 investment with a payback period of 18 months, and rising prominence of the ODM model makes DTIL Upside: 31%

an attractive play in an exciting EMS industry. Over the past few quarters, DTIL has been investing in backward integration and capacity expansion across product categories to improve its value Chirag Muchhala offerings, which has led to increased costs and lower-than-expected profitability. However, the exercise is nearing completion in 2QFY19, post which DTIL is likely to reap immense benefits. DTIL Research Analyst posted industry-leading revenue CAGR of 30% over the past five years. With multiple growth and [email protected] margin levers in place, we expect DTIL to register 19%/31% revenue/PAT CAGR, respectively, over +91-22-6273 8092 FY18-FY21E. We initiate coverage on DTIL with a Buy rating and a target price of Rs3,285 based on 35x FY20E earnings, assigning it 1.1x PEG ratio and a 10% discount to branded peers. Key Data Backward integration to improve value addition: In the consumer electronics segment (LED TVs), DTIL is shifting its manufacturing operations from Dehradun to Tirupati by building a much advanced and completely Current Shares O/S (mn) 11.3 backward integrated assembly line. DTIL expects its value addition to rise by 70%-80%, led by rising scope of work through liquid crystal module (LCM) line (to start in 2QFY19), surface mount technology (SMT) line (to Mkt Cap (Rsbn/US$mn) 28.4/406.7 start in 3QFY19) and plastic tooling and injection moulding work for certain customers (like Lloyd). TV 52 Wk H / L (Rs) 4,494/2,381 assembly in Dehradun plant will stop from 2QFY19, leading to elimination of the dual cost structure and improvement in margins. Similarly, in the segment, backward integration of PCBA and starting Daily Vol. (3M NSE Avg.) 25,598 of SMT lines in 2QFY19 will expand margins.

Initiating Coverage Initiating Market leadership and capacity expansion to drive growth: DTIL has strong leadership in three segments, Shareholding (%) 3QFY18 4QFY18 1QFY19 namely LED TVs (50.4% market share), semi-automatic washing machines (42.6% share) and LED lights (38.9% share). DTIL is focusing on capacity expansion to gain economies of scale, expand client base and Promoter 38.9 38.9 38.9 enter adjacent categories. Capacity expansion is underway for LED TV (from 1.2mn units in FY18 to 2.4mn Institutions 30.8 32.2 33.0 units now and 3.4mn units in 2HFY19E), lighting (9mn LED bulbs per month to 14mn LED bulbs per month), washing machines (0.7mn units to 1.2mn units) and CCTV cameras (0.15mn units to 0.45mn in 2QFY19E and Public 30.2 28.9 28.1 0.9mn units in FY20E). Foray into new product categories having promising business potential includes security systems (CCTV cameras, DVR), fully automatic top-load washing machines as well as scale-up in One -Year Indexed Stock Performance luminaires (downlighter and batten). 300

RoCE is an ideal indicator of profitability: While the EBITDA margin of DTIL appears to be low at 4% in 250 FY18, it must be noted that DTIL earns only a conversion charge in the OEM business and hence the 200 percentage margin is not a correct indicator of its profitability. The ideal tool to judge profitability is return ratios. DTIL follows a strict and disciplined approach towards capital investment and ensures that the payback 150 period is not more than 18 months. This ensures healthy returns on its investments. DTIL has healthy 100 RoCE/RoE of 27.1%/19.3%, respectively, in FY18, which is likely to rise to 33.6%/23.1% in FY21E. In FY13- 50

FY18, EBITDA/PAT grew at a faster pace of 41%/65% CAGR, respectively, versus 30% revenue CAGR. 0 Sep-17 Nov-17 Jan-18 Feb-18 Apr-18 Jun-18 Aug-18 Strong growth and healthy financial franchise: DTIL is a robust financial franchisee with 31% earnings Dixon Tech Nifty 50 CAGR over FY18-FY21E, healthy return ratios, low working capital cycle (3.9% of sales), high fixed-asset turnover (16x) and healthy free cash flow generation. DTIL is placed favourably compared to listed brands in terms of its valuation vis-à-vis RoE and EPS growth prospects. We value DTIL at 35x FY20E EPS (based on Price Performance (%) 1.1x PEG ratio and a 10% discount to branded peers) to arrive at a target price of Rs3,285. 1 M 6 M 1 Yr Y/E March (Rsmn) FY17 FY18 FY19E FY20E FY21E Dixon Technologies (10.6) (22.3) - Net sales 24,570 28,416 33,010 40,237 48,001 Nifty Index 5.1 11.3 18.6 EBITDA 912 1,127 1,372 1,843 2,327 Net profit 476 609 751 1,062 1,373 Source: Bloomberg PAT growth YoY (%) 54.1 28.0 23.4 41.4 29.2

EPS (Rs) 43.3 53.8 66.3 93.8 121.2 EBITDA margin (%) 3.7 4.0 4.2 4.6 4.8 P/E (x) 58.1 46.8 37.9 26.8 20.7 P/BV (x) 14.0 9.0 7.4 6.0 4.8 EV/EBITDA (x) 31.6 25.3 20.7 15.3 11.9 RoCE (%) 33.6 27.1 28.0 31.7 33.6 RoE (%) 24.1 19.3 19.6 22.3 23.1 Source: Company, Nirmal Bang Institutional Equities Research

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Strong growth potential in EMS industry India is becoming a favourable destination for electronics manufacturing driven by factors such as high demand, rising aspiration of consumers, increasing affordability because of healthy economic growth, availability of easy financing schemes and improving power supply owing to better electrification infrastructure. With a low penetration level across most consumer electronics categories, the demand will continue to be healthy owing to first-time buyers in semi-urban and rural areas as well as replacement demand in urban areas. To benefit from the high growth potential of the , numerous domestic as well as foreign brands are getting attracted to the Indian market with a wide range of offerings at varied price points. Low penetration level of white goods in India The consumer electronics industry in India offers highly promising growth prospects driven by its low penetration level as well as rising demand owing to improved affordability as well as easy availability of consumer financing options. The collective industry size of four core categories of consumer electronics comprising , , televisions and air-conditioners (ACs) is very small at only ~Rs700bn as of FY18-end considering the high population base of India. The penetration level across product categories remains low with refrigerators at 23%, washing machines at 13%, televisions at 65% and ACs at only 5%, as per industry estimates. As per Crisil’s estimates, , washing machine, televisions and AC segments posted 14.4%/12.5%/10.5%/13.5% CAGR in value terms over FY10-FY18, respectively. Exhibit 1: Consumer electronics industry synopsis Size - FY18 CAGR Size in units Penetration Key players (Rsbn) (FY10-FY18) (mn) level (%) Colour 258 10.5% 13.7 65% Sony, , LG, Refrigerator 228 14.4% 12.3 23% LG, Samsung, Whirlpool, Godrej Washing machine 84 12.5% 5.8 13% LG, Samsung, Whirlpool, IFB, Panasonic Air-conditioner 137 13.5% 4.7 5% , LG, Daikin, , Hitachi, Lloyd Source: Crisil, Industry, Nirmal Bang Institutional Equities Research Exhibit 2: Consumer electronics industry growth trend over FY10-FY18

(Rsbn) 275 250 225 200 175 150 125 100 75 50 25 0 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 Television Refrigerator Air-conditioner Washing machine Source: Crisil, Nirmal Bang Institutional Equities Research We believe the home appliance industry is on the cusp of a strong and sustainable long-term growth trajectory driven by factors such as higher GDP growth, rising disposable income, increasing urbanisation, improving rural electrification, rising affordability, increasing number of nuclear families, easy availability of consumer finance, quicker replacement cycle and growing necessity of consumer durables. We expect the home appliance industry to post a 15% CAGR in value terms over the next five to seven years.

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Rising trend in per capita GDP as compared to ASP As seen in Exhibits 3 and 4 below, the affordability of white goods is on the rise as the extent of increase in per capita GDP far outpaced the rise in average selling price (ASP) of white goods products over the past eight years. Per capita GDP increased from Rs55,366 in FY10 to Rs128,507 in FY18, translating to a 11.1% CAGR over the past eight years. During the same period, the average selling price of refrigerators, washing machines, televisions and ACs increased by only 6.7%, 5.0%, 9.5% and 5.6%, respectively. Thus, the affordability of white goods is much higher today compared to earlier years and is likely to improve further going forward. Rising affordability along with growing necessity of home appliances are likely to be the key triggers which will spur consumer demand and improve the penetration level of white goods. The affordability indicator (per capita GDP divided by average selling price of individual category) has increased consistently for all four categories - refrigerator, washing machine, televisions and ACs. For refrigerators, the affordability indicator rose from 5x in FY10 to 6.9x in FY18. For washing machines, the affordability indicator increased from 5.7x in FY10 to 8.9x in FY18. For televisions, the affordability indicator grew from 6.1x in FY10 to 6.8x in FY18. For ACs, the affordability indicator grew from 2.9x in FY10 to 4.4x in FY18. Exhibit 3: Rise in per capita GDP versus ASP of white goods

(Rs/Unit) 140,000

120,000

100,000

80,000

60,000

40,000

20,000

0 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 Television ASP (Rs/Unit) Refrigerator ASP (Rs/Unit) Washing machine ASP (Rs/Unit) Air conditioner ASP (Rs/Unit) GDP per capita Note: ASP – Average selling price Source: Industry, Nirmal Bang Institutional Equities Research Exhibit 4: FY10-FY18 CAGR in per capita GDP and ASP of white goods

(%) 12 11.1

10 9.5

8 6.7

6 5.6 5.0

4 Refrigerator Washing Air-conditioner Television GDP per capita machine

CAGR (FY10-FY18) Note: ASP – Average selling price Source: Industry, Nirmal Bang Institutional Equities Research

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India is an attractive manufacturing hub Most of the Indian brands prefer to manufacture domestically considering the favourable policies of Indian government (like Make-in-India, MSIPS), rising cost of labour in China, and the levy of duties and tariffs to discourage imports. The electronics industry is one of the key focus sectors for the ‘’ campaign with policy initiatives like modified special package scheme (MSIPS), Electronic Development Fund (EDF), Electronic Manufacturing Clusters (EMC), and Preferential Market Access (PMA) scheme to promote large- scale manufacturing in the Electronic System Design and Manufacturing (ESDM) sector. The government has also introduced tariffs and import duties to encourage domestic manufacturing of electronic appliances. For example: the two main components used in the manufacturing of LED TVs are the open cell (accounting for 65% to 70% of total cost) and the panel (accounting for ~10% of total costs) which attracts import duty of 5%/15%, respectively, while the import duty on a fully-built LED TV is 20%. Thus, the higher import duty on the fully-built LED TV as compared to its components (open cell and panel) is a key fillip for large television brands looking at domestic EMS manufacturing as a more viable option compared to imports. The cost of labour and other overheads as a percentage of total cost is considerably lower in India at 12.5% compared to China at 16% to 18% as shown in Exhibit 5. This trend is expected to get more pronounced as the cost of labour and other overheads as a percentage of total cost is expected to be at 13% for India and 18%-19% for China in FY21E. As seen in Exhibit 6, the average annual wage rate in China has posted a 12.5% CAGR over 2000-17 and currently stands at RMB64,452 in 2017. This translates to ~Rs6,50,000, as per the current exchange rate, and is almost double of India’s wage rate. All these crucial factors are likely to make India an attractive manufacturing hub with global companies taking strides to enter India and set up a base here. Exhibit 5: Trend in labour and overheads as a percentage of total costs in India and China

(%) 20 18-19 18 16-18 16 14 13 13 12 12.5 12 10 8 6 4 2 0 FY14 FY17 FY21E India China Source: Frost & Sullivan, Company, Nirmal Bang Institutional Equities Research Exhibit 6: Rise in average annual manufacturing wage in China

(RMB) 70,000

60,000

50,000

40,000

30,000

20,000

10,000

0

2000 2001 2002 2003 2004 2005 2010 2011 2012 2013 2014 2015 2016 2017 2006 2007 2008 2009

Source: National Bureau of Statistics, Nirmal Bang Institutional Equities Research

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Strong growth potential in EMS industry Favourable policies of the Indian government (like Make-in-India, MSIPS), rich demographic dividend of India, positive economic reforms, skilled labour force, a favourable taxation policy and import substitution for some products have led to the rise of manufacturing units for the electronic industry. In addition, rising cost of labour in China presents a strong growth opportunity for the EMS industry in India as there is flexibility in product design, faster time to market, cost effectiveness as well as knowledge of local taste and preference. OEM brands prefer to avoid manufacturing challenges and dealing with local labour by outsourcing the manufacturing to EMS players and focus their energies on key functions like branding and distribution. As per a Frost and Sullivan report, the Indian electronics market is expected to post a 17% CAGR over FY17-FY21E from Rs2.7trn to Rs5.2trn. It expects the EMS industry to outpace that growth by registering a 30% CAGR over the same period from Rs192bn in FY17 to Rs428bn in FY20E.

Exhibit 7: Indian consumer electronics market growth trend Exhibit 8: Category-wise break-up of electronics market

(Rsbn) Washing Others, 1 6,000 Digital machines, 3 5,236 cameras, 6 5,000 Set top boxes, 7 4,326

4,000 3,615 3,055 3,000 2,718 2,364 2,165 TV, 16 1,791 2,000 1,621 Mobiles, 67

1,000

0 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E FY21E

Source: Frost & Sullivan, Company, Nirmal Bang Institutional Equities Research Source: Frost & Sullivan, Company, Nirmal Bang Institutional Equities Research

Exhibit 9: EMS industry likely to post 30% CAGR Exhibit 10: Market share of EMS players across all categories

(Rsbn) Jabil, 12.6 450 428 400 350 325 Dixon, 9.3 300 250 250 192 200 SFO, 6.5 149 150 Others, 66.5 Elin, 3.2 100

50 PG electroplast, 0 1.9 FY16 FY17 FY18E FY19E FY20E

Source: Frost & Sullivan, Company, Nirmal Bang Institutional Equities Research Source:Frost & Sullivan, Company, Nirmal Bang Institutional Equities Research

DTIL stands to benefit handsomely from the growth of EMS industry as it is the second-largest player with a market share of 9.3% (top 3 players account for 28.5% of the market). Having attained large economies of scales, DTIL becomes a more viable option for foreign OEM brands who wish to enter India without making substantial and direct capital expenditure.

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DTIL - Preferred play in highly scalable EMS industry Market leadership position of DTIL While DTIL is the second-largest player in the EMS industry in India with a market share of 9.3%, it has a strong leadership position in three sub-categories of the EMS industry. In the LED TV segment, DTIL has a strong market share of 50.4% in the EMS industry. Out of the total industry capacity of 2.4mn units last year, DTIL accounted for a capacity of 1.2mn units and operated at a utilisation rate of 83%. As per its expansion plan, DTIL’s capacity has risen to 2.4mn units in 1QFY19 and will further rise to 3.4mn units in 2HFY19E. In semi-automatic washing machine segment, DTIL has a strong market share of 42.6% in the EMS industry. Out of total industry capacity of 1.7mn units in FY18, DTIL accounted for a capacity of 0.7mn units and operated at a capacity utilisation rate of 75%. As per its expansion plan, the installed capacity is being increased to 1.2mn units in FY19. In LED and CFL lights category, DTIL has a healthy market share of 38.9% in the EMS industry. Out of total industry capacity of 277mn units in FY18, DTIL accounted for a capacity of 108mn units. It is on course to enhance this capacity further to 168mn units in FY19E. Exhibit 11: Market leadership of DTIL Products DTIL Industry size in EMS segment (mn units) Installed capacity of DTIL (mn units) market share 2016 2018 2018 2019E LED TVs 50.4% 1.2 2.4 1.2 3.4 Washing machines 42.6% 0.6 1.7 0.7 1.2 LED lights 38.9% 227 277 108 168

Source: Company, Industry reports, Nirmal Bang Institutional Equities Research Rising prominence of the ODM model While OEM sales continue to be a major source of DTIL’s revenues, it plans to gradually expand the share of the ODM model of manufacturing. As an ODM player, DTIL controls the entire manufacturing cycle of a product from the initial stage of designing, planning, sourcing of raw materials and components to final product manufacturing. Under ODM, DTIL provides warranty with respect to defect in raw materials and workmanship affecting the normal usage of products. The ODM model requires additional investment in R&D as well as working capital, but provides much higher margins as compared to the OEM model of pure assembly. While Tier-I players (like LG and Samsung) with their financial strength can rely on in-house product design and development, Tier-II players (mid-sized brands) rely on EMS players for production efficiency while keeping their core focus on brand positioning and distribution activities. Semi-automatic washing machine is a key product category for DTIL under the ODM model with 100% of revenues derived through the ODM route. The category enjoyed a high EBITDA margin of 12.3% in FY18. In the lighting segment, DTIL registered a healthy scale-up in ODM offerings as revenue contribution from the ODM model surged from 3.5% of sales in FY14 to 40% of sales in FY18, while EBITDA margin in FY18 stood at 6.1%. In the consumer electronics segment, ODM sales accounted for 5.8% of FY18 revenues. On a consolidated revenue basis, ODM sales of DTIL posted a 41% CAGR over FY14-FY18 compared to a 24% CAGR in OEM sales. In FY18, ODM sales accounted for 21.8% of DTIL’s total revenues. Exhibit 12: Rising ODM share in total revenues

(Rsmn) (%) 7,000 30 26.9 6,208 6,000 5,374 25 5,000 20 21.9 21.8 3,734 4,000 14.2 14.7 15 3,000

1,768 10 2,000 1,558

1,000 5

0 0 FY14 FY15 FY16 FY17 FY18 Revenue ODM as a % of total revenue Source: Company, Nirmal Bang Institutional Equities Research

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Exhibit 13: Share of ODM revenues by business segments Revenue (Rsmn) FY14 FY15 FY16 FY17 FY18 ODM sales in home appliances 849 1,067 1,306 1,880 2,503 As a % of total segment sales 100 100 100 100 100 ODM sales in lighting products 108 374 1,727 2,498 3,081 As a % of total segment sales 3.5 12.4 40.2 45.4 39.8 ODM sales in consumer electronics 601 327 701 996 623 As a % of total segment sales 8.6 4.2 9.1 11.8 5.8 Source: Company, Nirmal Bang Institutional Equities Research Diversification of business verticals Diversification of business verticals by entering new categories of consumer durables and electrical products could provide further impetus to growth of DTIL as well as reduce dependence on a few product segments. DTIL successfully ventured into manufacturing mobile phones in January 2016 through a 50:50 joint venture called Padget Electronics Pvt Ltd with the owner of Karbonn mobile phones. The business has scaled up in the past two years and with a turnover of Rs6.7bn in FY18, it became the third-largest business segment for DTIL accounting for 23.6% of its FY18 sales. DTIL is currently backward integrating by setting up a PCB plant in and venturing into the feature phone segment for future growth. The latest business foray of DTIL is in the security systems segment where it will manufacture security surveillance systems like digital cameras (CCTV) and digital video recorder (DVR). DTIL has set up a manufacturing facility at Tirupati in a 50:50 joint venture with Aditya Infotech (owners of CP Plus cameras), to manufacture CCTV cameras and DVRs. This venture is highly promising as CP Plus holds a 40% market share in the Rs60bn security systems industry, which is growing 25% to 30% annually driven by demand from institutions like school, colleges, hospitals and corporate offices. DTIL is increasing its capacity from 150,000 cameras per month to 450,000 cameras per month by September 2018 (and further to 900,000 in FY20) and DVRs from 30,000 per month to 150,000 per month to cater to rising demand. Security systems segment is likely to account for 5.5% of DTIL’s total sales in FY19E with revenues of Rs1.8bn (corresponding to DTIL’s 50% stake). In the home appliance category, DTIL is investing in diversifying its product offerings and has set up a design team to foray into fully automatic top-load washing machines. DTIL expects to offer this product to its customers in 2HFY19 and revenues are likely to commence from FY20. In the lighting category, DTIL aims to replicate its success of LED bulbs in the tubelight, baton and downlighter segments. Currently, DTIL manufactures ~500,000 units per month of tubelights, ~100,000 units per month of batons and ~80,000 to 100,000 units per month of downlighters. On the commercial lighting front, the solution for 2x2 is ready and the sample evaluation with various customers is on, while in street lights the product SKUs are ready. Scale-up in these product categories is likely to drive growth of the lighting segment for DTIL. Exhibit 14: Business segment-wise revenue break-up

(%) 100 2 7 8 3 3 3 9 9 8 9 1 80 34 28 25 24 31 33 60 27 22 40 64 65 59 55 20 34 38

0 FY13 FY14 FY15 FY16 FY17 FY18 Consumer electronics Lighting Mobile phones Home appliances Reverse logistics

Source: Company, Nirmal Bang Institutional Equities Research

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New OEM addition Driven by factors such as attaining large scale of operations, healthy track record of manufacturing products for credible domestic as well as foreign OEM brands, diversification in new product categories as well as scaling up of the ODM model, the prospects of new OEM addition for DTIL remains bright. In its three core categories of LED TVs, semi-automatic washing machines and LED lights, DTIL is likely to be the preferred EMS player for any OEM brand looking to enter or enhance its offerings because of its dominating market share. DTIL currently has the largest market share of 50.4% in LED TVs, 42.6% in semi- automatic washing machines and 38.9% in LED lights as of FY18. With the plan for capacity expansion in all three segments, DTIL will have enough scope to add new OEM clients to its fold. In the semi-automatic washing machine category, DTIL added Samsung as a customer in October 2017. DTIL is currently manufacturing two products in the semi-automatic washing machine category for Samsung and has a run-rate of ~15,000 units per month and an order book of ~200,000 units for FY19. Diversification into new product categories like top-load fully automatic washing machines in 2HFY19 will also aid addition of new OEM brands in DTIL’s portfolio. In FY18, DTIL added CP Plus as a client by foraying into the security systems segment, which holds strong long-term growth potential as the industry is growing 25% to 30% per annum. Similarly, DTIL has added several well-known brands in FY18 as its customers which provides it a strong scale-up opportunity. Some notable names are Crompton, Usha, Jaquar, Syska and Orient (in the lighting segment), Tambo (in the feature phone segment) and TCL and Skyworth (in the LED TV segment). DTIL is also a preferred vendor for in-house brands of retailers. It has well established relationships with ReConnect (in-house brand of Reliance Digital), Koryo (in-house brand of ) and Vice (in-house brand of Vijay Sales). With a rising trend of private label brands gaining customer acceptance, DTIL is well placed to benefit from it. In FY18, DTIL added Marq (in-house brand of Flipkart) as its customer. After the Walmart-Flipkart deal, the prospect of strong scale-up of Marq brand has improved further. In the consumer electronics segment, DTIL has commenced production of Liquid Crystal Module (LCM) line at Tirupati facility towards the end of FY18 and is India’s largest facility for LED TV panel manufacturing. This can help to add more OEMs as its clients. Further, the reverse logistics segment also provides DTIL with an opportunity to engage with various new OEMs by initially offering them repair and refurbishment solutions. DTIL can leverage such relations to later become a complete manufacturing solutions provider for such brands. Existing OEM and ODM contracts do not prohibit DTIL from working with competitors of the brands it is currently servicing. Capacity utilisation offers further scope for growth DTIL operates at a healthy capacity utilisation rate across its business segments and has lined up capacity expansion plans in segments where the capacity has risen above 75%. In the consumer electronics segment, DTIL’s FY18 capacity utilisation rate stood at 83%. Consequently, it has increased its capacity from 1.2mn units in FY18 to 2.4mn units in 1QFY19 and is in the process of increasing it further to 3.4mn units in 2HFY19E. Similarly, capacity expansion is underway in the home appliance segment from 0.7mn units in FY18 to 1.2mn units in FY19E. In the lighting segment, LED bulb capacity is being expanded from 9mn units per month in FY18 to 14mn units per month in FY19E. The rising trend of capacity expansion signals healthy business ramp-up by DTIL and augurs well for its future growth prospects. Exhibit 15: Capacity utilisation (Figures in units) Installed capacity Installed capacity Sales in units Utilisation rate (%) Capacity expansion Segment (FY17) (FY18) (FY18) (FY18) (FY19E) Consumer electronics 1,200,000 1,200,000 1,000,000 83% 3,400,000 Lighting 260,400,000 260,400,000 170,000,000 65% NA Home appliances 550,000 720,000 530,000 74% 1,200,000 Mobile phones 10,080,000 10,080,000 2,700,000 27% 10,080,000 Source: Company, Nirmal Bang Institutional Equities Research

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Performance and outlook of business segments Consumer electronics The core focus of the consumer electronics segment is on manufacturing LED TVs ranging from 19 inch to 65 inch as well as 4K2K LED TVs and 2.1/4.1 channel home theatre systems. It is the largest business segment of DTIL with FY18 revenues of Rs10.7bn (37.8% of total sales). The segment posted revenue CAGR of 11.4% over FY14-FY18. Of the total revenues, the OEM business (raw materials and product designs are provided by the OEM brand while DTIL mainly does assembly) accounted for Rs10.1bn of sales while the ODM business (product development and designing is done in-house by DTIL) accounted for Rs623mn of sales in FY18. DTIL has shifted its manufacturing plant from Dehradun to Tirupati, and increased its installed capacity from 1.2mn units to 2.4mn units (in 1QFY19) and is in the process of further increasing it to 3.4mn units by 2HFY19. Last year, the Indian television market volume stood at 12mn to 13mn units, of which the EMS segment accounted for 2.4mn to 2.5mn units. DTIL formed 50% of the EMS market and 10% of total industry capacity. DTIL manufactured 1mn LED TVs during FY18 with a capacity utilisation of 83%. EBITDA margin of the consumer electronics segment stood at 2.2% in FY18, up from 1.6% in FY14 but lower than 3% in FY17. EBITDA margin during the year was restricted because of: (a) Increase in the share of OEM revenues driven by a large order from Panasonic in FY18. (b) Shifting of the manufacturing unit from Dehradun to Tirupati leading to dual cost structure at both locations. (c) Investment in backward integration for setting up a LCM panel-making facility. It must be noted that DTIL earns only a conversion charge in OEM business and hence the percentage margin is not a correct indicator of profitability. In absolute terms, EBITDA posted a 19.6% CAGR over FY14-FY18. Panasonic (fourth largest market share in India) is the anchor customer of DTIL in LED TVs accounting for 72% of this segment’s revenues. Other customers include ReConnect (in-house brand of Reliance Digital, 9% of total sales), Lloyd, Koryo (in-house brand of Future group), Vice (in-house brand of Vijay Sales), Mitashi, Marq (in-house brand of Flipkart), Haier, Akai and Intex. For the top two customers namely Panasonic and ReConnect, DTIL is an OEM manufacturer while for most other private label brands, it is an ODM manufacturer. DTIL has also commenced production of LED TVs for TCL (which launched its brand called iFFALCON on an online basis at aggressive prices) and Skyworth, which are among the world’s top 10 LED TV’s brands. DTIL is also in the process of tying-up with a disruptive customer ( is the possibility) for whom it is likely to make 300,000 TV sets annually. DTIL’s strategy in the consumer electronics segment is to further strengthen relationships with its existing customers, scale-up the ODM model, focus on enhancement of design capability and develop a large range of product portfolio like smart TVs, ultra-high definition, commercial display and signage display, invest in new tools such as backlight unit, and expand its geographical footprint and manufacturing capacity. During FY18, DTIL commenced production of the Liquid Crystal Module (LCM) line at Tirupati facility, making it India’s largest facility for LED TV panel manufacturing with a capacity of 2.4mn units in 1QFY19 (to be further increased to 3.4mn units in 2HFY19). This is in line with DTIL’s strategy of backward integration and will help it to scale up its ODM share in total revenues to 12%-13% in near term. DTIL expects its value addition to rise by 70%-80%, led by rising scope of work through LCM line, surface mount technology (SMT) line (to start in 3QFY19) and plastic tooling and injection moulding work for certain customers (like Lloyd). TV assembly in Dehradun plant will stop from 2QFY19, leading to elimination of the dual cost structure and improvement in margins. The two main components used in the manufacturing of LED TV’s are the open cell (which accounts for 65% to 70% of total cost) which has an import duty of 5% and the panel (~10% of total cost) which has an import duty of 15%, while the import duty on a fully-built LED TV is 20%. Thus, the higher import duty on the fully- built LED TV as compared to its components (open cell and panel) is a key fillip for large television brands looking at domestic EMS manufacturing as a more viable option compared to imports. The LED TV market is expected to grow by 18% to 20% CAGR in the next couple of years while the EMS industry is expected to grow by an even higher rate. DTIL is likely to be a big beneficiary of this growth as it is a preferred EMS player with a 50% market share and production capability being 6x that of its next competitor. The management expects volume sales of 1.35mn to 1.4mn units in FY19E, registering 35% YoY growth. Considering the multiple growth and margin levers, we have factored in 23% revenue CAGR over FY18-FY21E with restoration of EBITDA margin to 2.8% in FY21E.

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Exhibit 16: Trend in consumer electronics revenues & margin Exhibit 17: Share of ODM in consumer electronics revenues

(Rsmn) (%) (%) 25,000 3.5 16 3.0 14 19,951 3.0 14 20,000 16,558 11.8 12 2.2 2.5 12 2.1 2.8 10 13,200 9.1 15,000 1.7 2.5 2.0 10 8.6 1.6 10,735 8 1.9 1.5 10,000 7,756 7,701 8,448 5.8 6,983 6 1.0 4.2 5,000 4 0.5 2 0 0.0 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E 0 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E Revenue EBITDA Margin (%) Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 18: Customer-wise break-up of FY18 revenues Exhibit 19: LED TV market growth trend

Akai Others (Rsbn) (Units mn) 2% 8% 900 30 Intex 777 3% 800 Daikin 694 25 700 26 6% 601 23 600 20 520 20 500 448 Reliance Retail 17 15 9% 374 400 315 15 300 254 12 10 10 200 161 8 5 5 Panasonic 100 72% 0 0 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E FY21E LED TV market size (value) Volume

Source: Company, Nirmal Bang Institutional Equities Research Source: Frost & Sullivan, Company, Nirmal Bang Institutional Equities Research

Exhibit 20: EMS industry expansion trend Exhibit 21: Market share of EMS players

(Units mn) 12 10.8 Others, 17%

10 8.2 8 SVL, 8% 5.9 6 Dixon, 50% 4.2 4 Noble, 8% 2.3 2 1.2 0.5 0.6 0.1 MEPL, 9% 0 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E FY21E Videotex, 8%

Source: Frost & Sullivan, Company, Nirmal Bang Institutional Equities Research Source: Frost & Sullivan, Company, Nirmal Bang Institutional Equities Research

10 Dixon Technologies (India)

Institutional Equities

Lighting Lighting is the second-largest business segment of DTIL with FY18 revenues of Rs7.7bn, accounting for 27.2% of total sales. DTIL’s range of products include LED lights (such as bulbs, tubelights, downlighters, battens and T-LEDs), CFL lamps and lamp drivers (indoor and outdoor). DTIL’s lighting manufacturing plants are located in Noida and Dehradun while it is in the process of setting up manufacturing capacity at its Tirpuati plant also. The Tirupati plant is primarily aimed at enhancing the export opportunities owing to its close proximity to Chennai port (140km). DTIL currently exports to 18 countries (primarily in Europe, Africa and South East Asia), accounting for ~Rs1bn of revenues in FY18. The OEM business accounted for 60% of lighting sales in FY18 (Rs4.6bn) whereas the ODM business formed 40% (Rs3.1bn). The ODM business model of DTIL has achieved good success in the lighting segment as its contribution jumped sharply from 3.5% in FY14 to 40% in FY18. While overall lighting revenues posted a 25.9% CAGR over FY14-FY18, ODM sales outpaced it by registering a CAGR of 131% over the same period. DTIL is the largest EMS player in the lighting segment in India with a market share of 39%. DTIL is in the process of expanding its LED bulb capacity from 9mn units to 14mn units per month. EBITDA margin of the lighting segment in FY18 stood at 6.1%, up from 3.1% in FY17. The significant improvement in lighting margins during FY18 was mainly because of a 23.4% YoY growth in ODM revenues as well as increased operating leverage (largest LED bulb manufacture) and new customer acquisition. In absolute terms, EBITDA posted a 52.5% CAGR over FY14-FY18, outpacing revenue CAGR. , the market leader in lighting in India, is the anchor customer of DTIL, accounting for 82% of FY18 lighting revenues. The revenue share from Philips increased from 71.4%/66.4% in FY16/FY15, respectively. DTIL has very strong relations with Philips dating back over the past eight years. The customer acquisition in the lighting segment for DTIL during the past couple of years has been very impressive. All marquee brands like , Panasonic, Anchor, Crompton, Usha, Jaguar, Bajaj, Syska and Orient are now DTIL’s customers. The principal raw materials used in the production of lighting products include PCB, electronic components, capacitors, mechanical and plastic parts. DTIL has undertaken backward integration in light manufacturing inclusive of facilities such as sheet metal making, plastic moulding and wound components. DTIL has also developed design capabilities such as main electronic board design, mechanical and light source and packaging designing. This plays a crucial role in reducing the production cost of lights, especially for large EESL tenders. For LED bulbs, backward integration of mechanicals is completed for 1mn units for making 7 watt and 9 watt bulbs. DTIL aims to replicate its success of LED bulb in the tubelight, batten and downlighter categories. Currently, DTIL manufactures ~500,000 units per month of tubelights, ~100,000 units per month of battens and ~80,000 to 100,000 units per month of downlighters. On the commercial lighting front, the solution for 2x2 is ready and the sample evaluation with various customers is on, while in street lights the product SKUs are ready. Scale- up in these product categories is likely to drive growth of the lighting segment for DTIL. However, the CFL business is in decline, and the management expects it to stop contributing to sales by September 2018. Government initiatives such as UJALA, DELP (domestic efficient lighting programme), SLNP (street lighting national programme) are likely to further drive adoption of LED lights and be the growth catalysts. The current LED market in India stands at Rs200bn, which is expected to rise to Rs300bn by 2020. DTIL is well placed to capture this growth prospect as it is the largest EMS player in the lighting segment with a market share of 39%. Driven by large volume EESL orders, the EMS industry in the lighting segment is expected to post robust growth in the coming years. The management expects healthy revenue growth of 15% to 20% in FY19 (net of CFL decline) and an EBITDA margin expansion to 7%. Taking into account DTIL’s focus on customer acquisition and the recent backward integration, we are factoring in 15% revenue CAGR over FY18-FY21E along with conservative margin estimates of 6.6%/6.8%/7% for FY19/FY20/FY21, respectively, owing to highly price-sensitive nature of the industry.

11 Dixon Technologies (India)

Institutional Equities

Exhibit 22: Trend in lighting revenue and margins Exhibit 23: Share of ODM in lighting revenues

(Rsmn) (%) (%) 50 14,000 8 45 6.6 6.8 11,771 45 12,000 6.1 7 40 40 40 10,148 7 6 10,000 5.2 8,748 35 7,742 5 8,000 30 5,508 4 25 6,000 2.8 3 4,295 3 20 4,000 3.1 3,077 3,006 2 15 12 2,000 10 1 4 5 - 0 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E - FY14 FY15 FY16 FY17 FY18 Revenue EBIDTA margin (%) Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 24: Customer-wise break-up of FY18 revenues Exhibit 25: Product-wise break-up of lighting industry

Crompton, 4% Bajaj, 3% (Rsbn) Anchor, 4% 350

300 47 12 Wipro, 6% 250 65 61 23 200 29 75 150 89 30 274 95 92 100 80 192 201 69 33 119 50 35 38 37 53 Philips , 82% 35 27 - 7 12 17 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E FY21E LED CFL Others Source: Company, Nirmal Bang Institutional Equities Research Source:Frost & Sullivan, Company, Nirmal Bang Institutional Equities Research

Exhibit 26: Manufacturing share of in-house OEM versus EMS Exhibit 27: Market share of EMS players

Others, 3% EMS, 22%

Compact lamps, 28% Dixon, 39% Tier 1, 48%

Tier 2, 30%

NTL, 30%

Source:Frost & Sullivan, Company, Nirmal Bang Institutional Equities Research Source:Frost & Sullivan, Company, Nirmal Bang Institutional Equities Research

12 Dixon Technologies (India)

Institutional Equities

Mobile phones DTIL started making mobile phones in January 2016 through a 50:50 joint venture (called Padget Electronics Private Limited) in partnership with the owners of Karbonn mobile phones. Mobile phone is the third-largest business segment of DTIL with revenues of Rs6.7bn in FY18, accounting for 23.6% of its total sales. However, DTIL is facing challenges in this segment as its mobile phone customers are not doing well in the marketplace. DTIL derived 50% of its FY17 revenues from Gionee, but the brand has struggled in the market in FY18 (owing to aggressive marketing and pricing by Xiaomi, and Vivo). Consequently, DTIL’s revenues in mobile phone segment fell 17% YoY in FY18. The key raw materials and components used in manufacture of mobile phones include touch panel, LCD, PCBs, FPCs and front and back housing. DTIL offers services such as assembly, testing, inspecting and packaging of a mobile phone. Currently, DTIL does not have designing capability. Hence, EBITDA margin is very low as DTIL earns only a conversion charge per assembly of a phone. EBITDA margin of the mobile phone segment stood at 1% in FY18, up from 0.6% in FY17. However, it is good business from a RoIC perspective as DTIL invested just Rs150mn with a payback period of only 14-15 months and does not need any working capital to run the operations. Apart from Gionee, DTIL’s key customers include Panasonic, Karbonn and InFocus. DTIL’s partner Karbonn has partnered with Airtel for sale of affordable 4G which are being manufactured at DTIL’s mobile factory. During FY18, DTIL has added Blaupunkt (for whom it will manufacture smart phones) and Tambo (for whom it will manufacture feature phones) to its list of customers. These additions won’t require any further working capital allocations as the capacities are already installed. The total installed capacity of DTIL stood at 10.1mn units while the sales in FY18 stood at 2.7mn units. In the mobile phone EMS industry, DTIL has 8% market share in India. In India’s mobile phone industry, five brands dominate the market in the smart phone segment namely Samsung, Xiaomi, Apple, Oppo and Vivo. While Samsung, Oppo and Vivo have in-house manufacturing of mobile phones, Apple and Xiaomi have established relationship with the largest EMS player, . Hence, it will be difficult for DTIL to get one of these five brands on board as a customer. DTIL’s strategy in mobile phones segment is to: (a) Enhance capacity utilisation by getting into the feature phone segment. (b) Do backward integration of largest-cost item (PCB) to offer more value to clients. (c) Acquire new customers. Currently in India, feature phone accounts for 50% to 55% of the market in volume terms and is more stable than the smart phone market with a lower degree of brand shift. Therefore, DTIL tied up with Tambo in FY18 to manufacture feature phones. This tie-up is expected to improve DTIL’s revenues, operating leverage and capacity utilisation. DTIL is also undertaking backward integration by setting up a PCB plant (as PCB accounts for ~50% of the component cost) in Noida which is expected to be functional by 1HFY19. The capacity of the PCB plant is expected to be 300,000 to 350,000 units for smart phones, depending upon the configuration, and ~750,000 units for feature phones. While the first priority will be to internally consume all the PCB it produces, DTIL could explore the possibility of supplying PCB to others if it does not get the requisite volume of mobile phones. This backward integration is expected to increase efficiency and margins which will be reflected from FY19 itself. DTIL plans to invest Rs100mn in the PCB plant and is expecting a payback in 17 to 18 months. Currently, India has 650mn mobile phone users out of which 300mn people use smart phones while the balance 350mn are feature phone users. Out of the total mobile phone manufacturing, 60% is done in-house by the various brands themselves while 40% of mobile phones are manufactured by EMS players. DTIL has a market share of 8% in the EMS industry of India. Mobile phone market is likely to post a CAGR of 20% over the next few years. Considering DTIL’s entry in the feature phone market, backward integration by setting up the PCB plant and focus on customer acquisition, we are factoring in a 3% revenue CAGR over FY18-FY21E (on a lower base) along with EBITDA margin expansion from 1% in FY18 to 1.5% in FY21E. However, it must be noted that EBITDA margin is very low as DTIL earns only a conversion charge per assembly of a phone while the revenue captures the entire value of phone.

13 Dixon Technologies (India)

Institutional Equities

Exhibit 28: Trend in mobile phone revenues and margin Exhibit 29: and feature phone market size

(Rsmn) (%) 9,000 1.5 1.6 8,107 1.4 8,000 7,271 1.4 6,698 1.2 7,000 6,162 1.2 Feature phone, 38% 6,000 5,358 1.0 (Rs 597.8 bn) 5,000 1 0.8 4,000 0.6 3,000 0.6 Smart phone, 62% (Rs 985.6 bn) 2,000 0.4 0.2 1,000 200 - 0.0 FY16 FY17 FY18 FY19E FY20E FY21E

Revenue from mobile phones EBITDA margin (%) Source: Company, Nirmal Bang Institutional Equities Research Source: Frost & Sullivan, Company, Nirmal Bang Institutional Equities Research

Exhibit 30: Manufacturing share of in-house OEM versus EMS Exhibit 31: Production market share of EMS players

Dixon, 8%

Others, 20%

EMS, 40%

Foxconn, 35% BGM, 15% OEM, 60%

Flextronics, 22%

Source: Frost & Sullivan, Company, Nirmal Bang Institutional Equities Research Source: Frost & Sullivan, Company, Nirmal Bang Institutional Equities Research

Exhibit 32: Growth trend of mobile phone market

(Rsbn) 4,500 3,947 4,000

3,500 3,152 3,000 2,558 2,500 2,101 2,000 1,801 1,490 1,584 1,500 1,252 1,254 1,000 500 0 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E FY21E

Source: Frost & Sullivan, Company, Nirmal Bang Institutional Equities Research

14 Dixon Technologies (India)

Institutional Equities

Home appliances Home appliances is the fourth-largest business segment of DTIL with FY18 revenues of Rs2.5bn, accounting for 8.8% of total sales. Under this segment, DTIL makes semi-automatic washing machines ranging from 6kg to 9kg where it offers 140 models to offer to clients. The segment witnessed a healthy growth, registering 31% CAGR over FY14-FY18. DTIL started manufacturing semi-automatic washing machines in February 2010. It currently has an installed capacity of 0.7mn units per annum, which DTIL is expanding to 1.2mn units per annum in FY19E. The capacity utilisation rate of DTIL in FY18 was ~75% with a sales volume of 530,000 units. The segment has a diversified customer profile with Intex (19% of total sales), Panasonic (18% of total sales), Samsung (17% of total sales), Godrej (11% of total sales) and Haier (9% of total sales) being the top five OEM brands accounting for 74% of total sales. Other customers include Lloyd, Micromax, Weston etc. DTIL added Samsung as a key customer in October 2017 in the ODM category. DTIL is currently manufacturing two products in the semi-automatic washing machine category for Samsung with a run rate of ~15,000 units per month. It has an order book from Samsung of at least ~200,000 machines for FY19 and an even more aggressive target for FY20. Home appliance is a highly profitable business segment for DTIL as 100% of its revenues are derived through the ODM business model. EBITDA margin in FY18 stood at 12.3%, down from 16.7% in FY17 because of product range expansion and capacity expansion which led to increased fixed costs during the year. DTIL’s core strength lies in product design as well as differentiating of specific features such as magic filters and different pulsators. The principal raw materials and components used in the manufacture of washing machines are mechanical and electrical items such as gears, timers and motors which are imported primarily from China. In FY18, DTIL faced headwinds from component cost increase (primarily motors) and commodity price increase (primarily polymer) that were passed on to the customers with a time lag which had also affected margins. This also impacted 1QFY19 margins, which further declined to 10.7%. However, the margins are likely to recover as most customers have monthly pass-through while will come in to effect from 2QFY19. Over FY14-FY18, EBITDA of home appliance category posted a CAGR of 55.2%, outpacing revenue growth. As per Frost & Sullivan’s report, semi-automatic washing machine is the most dominant category in India with 56% volume market share because of price-conscious nature of Indian consumers, especially in Tier 2 and 3 towns. DTIL has an edge in this category as many global MNCs may not be having a semi-automatic product in their global portfolio and hence need to rely on ODM solution offered by DTIL. The washing machine market is expected to post 15% CAGR over the next few years while the EMS industry is likely to grow at a much faster pace. Currently, EMS accounts for only 13% of washing machine manufacturing (87% is in-house production by brands themselves). DTIL has market leadership status in the EMS category with a market share of 42.6%. The current Indian washing machine industry size is 6.5mn units where LG, Samsung and Whirlpool are the top three players. Semi-automatic washing machines accounted for 3.6mn units in the total industry, of which LG and Whirlpool (which have in-house manufacturing) accounted for 1.7mn-1.8mn units. The remaining 1.8mn units is the addressable market size of DTIL, of which it is likely to make 0.73mn units in FY19E. The EMS industry in washing machine category is expected to achieve healthy growth, driven by rising penetration and increased outsourcing by brands and thus offering strong growth prospects for DTIL. DTIL is investing in diversifying its product offerings and has set up a design team to prepare prototypes of various models for entry into the top-load fully automatic washing machine segment. It expects to offer this product to its customers in 2HFY19 and revenues are likely to start from FY20. DTIL manufactured ~530,000 semi-automatic washing machines in FY18 and with its current healthy order book, it aims to sell ~730,000 units in FY19E (leading to 35% volume growth) with revenues of ~Rs3.2bn. DTIL has a stable relationship with its current customers and is in the process of acquiring some significant brands in its portfolio during FY19, which will further boost its status as the market leader in the home appliance category. Considering the strong growth drivers like robust order book, addition of Samsung as a client, capacity expansion, foray into fully-automatic washing machine and industry leadership, we expect 24% revenue CAGR over FY18-FY21E. With rising capacity utilisation, operating leverage benefit and 100% ODM model advantage, the EBITDA margin is likely to increase from 12.3% in FY18 to 13% in FY21E.

15 Dixon Technologies (India)

Institutional Equities

Exhibit 33: Trend in home appliance revenues and margin Exhibit 34: Share of ODM in home appliance revenues

(Rsmn) (%) (%) 100 100 100 100 100 100 100 100 5,000 16.7 4,730 18 100 16 3,965 4,000 12.3 14 80 3,243 12 10.7 13 3,000 12.3 2,503 11.6 10 60 5.8 1,880 8 2,000 6.3 1,306 6 40 849 1,067 1,000 4 2 20 - 0 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E - Revenue EBITDA margin (%) FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E

Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 35: Customer-wise break-up of FY18 revenues Exhibit 36: Washing machine industry break-up

Fully automatic front load, 15% Others, 26% Intex, 19%

Haier, 9% Panasonic, 18% Fully automatic top load, 29% Semi automatic, 56%

Godrej, 11% Samsung, 17%

Source: Company, Nirmal Bang Institutional Equities Research Source: Frost & Sullivan, Company, Nirmal Bang Institutional Equities Research

Exhibit 37: Growth trend of washing machine market Exhibit 38: Market share of EMS players

(Rsbn) (Units mn) 180 12 9.9 160 8.5 10 140 Others, 29% 7.4 120 8 Dixon, 43% 6.5 100 5.7 5 6 80 4.1 4.5 164 3.8 139 60 120 4 104 40 79 91 59 64 70 2 20 0 0 Noble, 28% FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E FY21E Market size (value) Volume Source: Frost & Sullivan, Company, Nirmal Bang Institutional Equities Research Source: Frost & Sullivan, Company, Nirmal Bang Institutional Equities Research

16 Dixon Technologies (India)

Institutional Equities

Reverse logistics Reverse logistics is the smallest business segment of DTIL with FY18 revenues of Rs734mn, forming 2.6% of total sales. Under the reverse logistics segment, DTIL offers repair and refurbishment services for set-top boxes, mobile phones, LED TV, printer and laptop panel. In FY18 revenues, set-top box repairs accounted for 25% of total sales, mobile phones accounted for ~65% of total sales while the remaining was driven by other product categories like LED TV panel repairs. The reverse logistics segment posted 126% revenue CAGR over FY14- FY18, partly driven by a low base. DTIL commenced its reverse logistics operations in 2008 with repair services for set-top boxes. Currently, it serves 35 clients under the reverse logistics segment and has 98 employees associated with it. Principal raw materials used in repair and refurbishment include open cell, backlight units, electronic components including microprocessors, ICs, COFs, touch panels, OCA glue, mechanical, plastic parts and other consumables like paint and thinner. As per the Frost & Sullivan report, reverse logistics is likely to gain prominence as OEMs are starting to look at it as an alternate revenue stream. Average return rates of electronic items are mobile phones (9%), set-top boxes (16%), LED TVs (8%), washing machines (8%), and computer peripherals (10%). Further, selling refurbished products is a highly profitable proposition for OEM brands and in fact it is a very large and mature market in developed economies. As reverse logistics is not the core competence of most OEMs, they have high dependence on outsourcing for both repairs as well as refurbishment. Rising relevance of e-waste is also likely to make government policy stricter towards waste disposal. All these matters provide strong opportunity for DTIL. However, DTIL is facing certain challenges in the reverse logistics segment. The set-top box vertical is unlikely to grow materially as digitisation of set-top boxes in India is almost complete and growth in sales of new set-top boxes has saturated. However, DTIL has an order book from its anchor customer (Airtel) for refurbishment of 250,000 to 300,000 units in FY19. In the mobile phone vertical, DTIL offers three main services namely repairs, refurbishment of old mobile phones as well as spare part management for the mobile brand. The key customers of DTIL include Gionee, Intex and Panasonic. DTIL’s strategy is to encircle the customer by offering a whole gamut of services from mobile assembly to its repair, refurbishment as well as spare part management. However, the mobile repair business in India remains highly competitive as well as unorganised. DTIL has reduced its mobile service centres in India from 17 in FY17 to just 7 in FY18 with focus only on metro cities. In the LED TV panel repair business, DTIL has customers such as Sony, Panasonic and Haier and the growth is likely to be strong. DTIL also aims to scale-up refurbishment of laptops. While the set-top box vertical is unlikely to grow much, the mobile vertical is likely to attain decent growth and the TV panel vertical is likely to post very healthy growth. DTIL has also appointed a new business head towards FY18-end to drive reverse logistics segment. As a matter of prudence, we are expecting only a 4% revenue CAGR for the segment over FY18-FY21E. EBITDA margin in FY18 fell to 7.8% versus 19.6% in FY17 and above 18% EBITDA margin witnessed over the past five years. This was partially owing to write-offs amounting to Rs15mn towards receivables and Rs0.7mn towards inventory on account of a client (Reliance Communications). We are factoring in EBITDA margin of 7% in FY19E, 9% in FY20E and 10% in FY21E.

Exhibit 39: Trend in reverse logistics revenues and margin Exhibit 40: Product-wise break-up of FY18 revenues

(Rsmn) (%) Others (including 900 25 TV panel), 10% 814 Set-top box, 25% 800 734 740 19.6 700 661 20 20.7 627 19.1 600 18.1 15 500 391 400 10 7.8 9 10 300 7 184 200 5 100 28 - 0 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E Mobile phones, Revenue EBIDTA margin (%) 65% Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research

17 Dixon Technologies (India)

Institutional Equities

Security systems Security systems is the newest business segment of DTIL which manufactures security surveillance systems like digital camera (CCTV) and digital video recorder (DVR). DTIL has formed a 50%-50% joint venture with Aditya Infotech (owners of CP Plus cameras) and set up a manufacturing facility at Tirupati. DTIL is currently in capacity expansion and plant stabilisation phase. DTIL is increasing its CCTV camera capacity from 100,000 units per month to 450,000 units per month in September 2018 and further to 900,000 units per month in FY20E. DVR capacity is being increased from 30,000 units per month to 150,000 units per month. The capacity expansion is boosted by a hike in customs duty on the security surveillance system to 20% in December 2017. This is expected to increase the demand for domestically manufactured security systems. In security systems segment, Aditya Infotech is DTIL’s only customer currently. It is the largest player in the industry with a market share of 40% in FY18 and operates primarily under three brands namely CP Plus, Dahua (a very large Chinese brand) and Panasonic (as CP Plus is the brand licencee for Panasonic). The initial focus of DTIL is to meet the huge requirement of Aditya Infotech and in future it can explore adding other brands to its fold. However, the manufacturing for other brands will also take place under the JV with Aditya Infotech. The security systems market in India is worth ~Rs60bn and is growing 25% to 30% annually driven by demand from institutions like schools, colleges, hospitals and corporate offices. DTIL expects FY19 revenues of Rs2.2bn (towards its 50% stake) with an EBITDA margin of ~3.5%. Considering the high scalability potential of the security systems segment, large installed capacity and a strong anchor client, we expect revenues of Rs1.8bn in FY19E and 48%/30% YoY growth in FY20E/FY21E, respectively. We are factoring in EBITDA margin of 3.2%/3.7%/4% in FY19E/FY20E/FY21E, respectively. The security systems segment offers highly promising business prospects and its contribution to total sales is likely to rise to 7% in FY21E. Exhibit 41: Trend in security systems revenues and margin

(Rsmn) (%) 4,000 4 5 3,500 3.7 4 3,000 3.2

2,500 3 2,000 3,463 1,500 2 2,664 1,000 1,800 1 500 - 0 FY19E FY20E FY21E Revenue EBITDA margin (%) Source: Company, Nirmal Bang Institutional Equities Research Tirupati to become the new manufacturing hub for DTIL Till a year ago, Dehradun was the main manufacturing location for DTIL where key products such as LED TVs, semi-automatic washing machines and lighting products were made. Other products such as mobile phones, reverse logistics solutions and LED bulbs & drivers were made at Noida units. DTIL has now set up a much larger, backward integrated and highly automated manufacturing plant at Tirupati in Chittoor district of Andhra Pradesh which will be its biggest manufacturing hub. The production of LED TV has been shifted from Dehradun (1.2mn units capacity) to Tirupati (3.4mn units capacity, India’s largest) while security systems (CCTV and DVR) is the new product category to be made at Tirupati. The Dehradun facility will be used to expand capacity of lighting and washing machines. DTIL has future plans to explore manufacturing of washing machines and LED lights at Tirupati also, primarily to service South India region and export markets. The Tirupati facility is spread across an area of 12 acre and has 200,000 sq ft. construction space leased from Andhra Pradesh government for a period of 30 years. The key benefits include (a) 100% SGST exemption (on refund mechanism) for eight years. (b) Proximity to Chennai port (just 140km away) which can help DTIL to explore export opportunities. DTIL is undertaking capex of Rs400mn to set up the manufacturing facilities at its Tirupati plant.

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Institutional Equities

DTIL is a healthy financial franchise

Strong 19% revenue CAGR, 27% EBITDA CAGR and 31% PAT CAGR likely over FY18-FY21E DTIL is a strong growth franchise with a proven track record of outpacing industry growth as well as its peers. Over the past four years from FY14-FY18, DTIL posted industry-leading revenue CAGR of 27%. We believe India is becoming an attractive destination for electronics manufacturing leading to strong growth prospects for the EMS industry. We expect DTIL to post 19% net revenue CAGR over FY18-FY21E. The top-line will be driven by consumer electronics (22.9% CAGR), home appliance (23.6% CAGR), lighting (15% CAGR) as well as foray into security systems segment. Along with operating leverage, rising capacity utilisation, backward integration, cost optimisation as well as growing sales of the ODM model are likely to lead to an 80bps expansion in EBITDA margin of DTIL from 4% in FY18 to 4.8% in FY21E. This will translate to a 27% EBITDA CAGR and 31% PAT CAGR over FY18-FY21E, surpassing revenue CAGR of 19% over the same period.

Exhibit 42: Revenues to post 19% CAGR over FY18-FY21E Exhibit 43: EBITDA CAGR of 27% likely over FY18-FY21E

(Rsmn) (Rsmn) (%) 60,000 2,800 6 2,327 2,400 50,000 48,001 4.6 5 4.2 4.2 4.0 40,237 2,000 3.7 1,843 4.8 40,000 4 33,010 1,600 28,416 2.7 1,372 30,000 2.4 1,127 3 24,570 1,200 912 20,000 2 13,894 800 10,937 12,013 587 322 10,000 400 260 1

0 0 0 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E EBITDA EBITDA margin (%) Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research

Healthy return ratios are an ideal indicator of profitability While the EBITDA margin of DTIL appears to be low at 4% in FY18, it must be noted that DTIL earns only a conversion charge in the OEM business and hence the percentage margin is not the correct indicator of its true profitability. The ideal tool to judge profitability is return ratios. DTIL follows a strict and disciplined approach towards capital investment and ensures that the payback period is not more than 15 to 18 months. This ensures healthy returns on its investments. DTIL has healthy RoCE of 27.1% and RoE of 19.3% in FY18, which dipped YoY owing to equity dilution. We expect RoCE to rise to 33.6% and RoE to increase to 23.1% in FY21E. RoIC stands at 32% in FY18, which is likely to rise to 41.2% in FY21E.

Exhibit 44: PAT CAGR of 31% over FY18-FY21E Exhibit 45: Return ratios are a true indicator of profitability

(Rsmn) (%) (%) 1,600 2.9 3 45 41.2 2.6 37.5 1,400 1,373 40 35.9 2.2 2.3 33.4 2.1 35 32 1,200 1.9 1,062 28.2 2 30 33.6 33.6 1,000 27.1 31.7 751 25 800 27.1 27.1 28 609 20 15.7 24.1 1 22.3 23.1 600 13.1 476 1 15 19.3 19.6 0.7 14.6 309 400 10 12.3 14 11 200 81 119 5 0 0 0 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E PAT PAT margin (%) RoE RoCE RoIC Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research

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Institutional Equities

Healthy free cash flow generation likely DTIL has generated positive operating cash flow of Rs2.1bn and free cash flow of Rs603mn over the past five years. We expect DTIL to generate operating cash flow of Rs3.6bn over FY18-FY21E driven by large scale of operations and rising profitability. DTIL is likely to incur capex of Rs600mn to Rs700mn for each of the next three years on capacity expansion and foray into new product categories. However, we still expect it to generate positive free cash flow of Rs1.6bn over FY18-FY21E.

Exhibit 46: Cash flow metrics Exhibit 47: Positive free cash flow generation

(Rsmn) (Rsmn) 2,000 900 827 800 1,500 700 1,000 600 500 500 419 400 345 0 300 185 181 191 200 (500) 100 59 (1,000) 0 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E (100) (13) Operating cash flow Investing cash flow Financing cash flow FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research Working capital cycle remains lean The ex-cash net working capital cycle of DTIL improved from 6.7% of sales in FY14 to 3.9% of sales in FY18 and remains extremely lean. DTIL had debtor days at 39, inventory days at 47 and creditor days at 76 in FY18. DTIL is focused on bringing down the inventory and debtor days further, especially in the lighting and home appliance segments, as both were in the business ramp-up phase in the past two years. The working capital deployment is much lower in the OEM business. In fact, for some clients like Panasonic, DTIL operates with zero working capital. However, the ODM business requires higher working capital requirement, which DTIL aims to bring down with improved operational efficiency. Over FY18-FY21E, we expect the ex- cash working capital cycle to further moderate to 3.7% of sales, despite a 19% revenue CAGR and investment on new product development. The leverage position has also reduced from 1.2x in FY14 to 0.1x in FY18, partly owing to fund-raising. The debt level of Rs406mn as of FY18-end remains low. Exhibit 48: Declining leverage position Exhibit 49: Lean working capital cycle

(Rsmn) (x) (Rsmn) (%) 1,000 1.4 2,000 8 1,760 869 6.7 7 1.2 799 1.2 800 744 1,600 1,435 5.3 6 1.0 0.9 4.8 1,095 1,151 5 600 0.8 1,200 430 859 4 0.7 406 406 356 0.6 733 400 800 640 3.5 3.7 661 3.9 3.5 3.6 3 0.4 206 2 0.2 200 0.1 0.1 400 0.1 0.2 1 0 0 0.0 0 0 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E Total debt Debt/equity Ex-cash net working capital As a % of sales Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research

20 Dixon Technologies (India)

Institutional Equities

High fixed-asset turnover amid low gross block requirement DTIL enjoys a high fixed-asset turnover of 16x in FY18, up from 9.5x in FY14. The jump is partially owing to the mobile phone segment where DTIL’s capital investment is low as it has a 50% stake in the joint venture and it is a 100% OEM model of business. As 78% of total consolidated revenues accrue through the OEM model, the capex requirement remains low. While DTIL posted 27% revenue CAGR over FY14-FY18, its gross block grew by only 15% CAGR over the same period. With a gross block of Rs2bn as of FY18-end, DTIL achieved a strong turnover of Rs28.4bn in FY18. However, with rising capex on capacity expansion as well as a rising share of revenues from the ODM model, we expect fixed-asset turnover to reduce to 12.4x in FY21E, albeit it will still be a very healthy level. Exhibit 50: High fixed-asset turnover amid low gross block requirement

(Rsmn) (x) 4,800 18 16.2 16.0 4,173 16 4,000 13.3 3,573 14 3,200 2,873 12 9.5 9.6 9.6 12.5 12.4 10 2,400 2,084 8 1,472 1,339 1,556 1,600 1,175 6 4 800 2 0 0 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E Gross block Fixed asset turnover Source: Company, Nirmal Bang Institutional Equities Research Diversified segment presence lowers business concentration risk Diversification of business verticals by entering into new categories of consumer durables and electrical products provides further impetus to growth of DTIL as well as reduces dependence on a few product segments. Share of the largest segment, consumer electronics, in total revenues fell from ~65% in FY14- FY15 to ~38% in FY18 owing to scale-up in the mobile phone segment, which DTIL forayed into in FY16. The security systems segment, which DTIL entered in FY18, is on course to account for 7% of FY21E total sales. Similarly, the home appliance segment, which accounted for 8.8% of FY18 sales, is likely to become much bigger in terms of revenue mix once the top-load fully automatic washing machine is launched. Exhibit 51: Business segment-wise revenue mix

(%) 100 5 7 7 7 8 2 3 3 3 9 9 8 9 2 2 2 1 10 10 10 80 34 28 25 24 16 31 33 15 15 60 27 27 25 25 22 40 64 65 59 55 42 20 34 38 40 41

0 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E Consumer electronics Lighting Mobile phones Home appliances Reverse logistics Security systems Source: Company, Nirmal Bang Institutional Equities Research

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Outlook and Valuation DTIL is a strong growth franchise with a proven track record of outpacing industry growth as well as its peers. Over the past four years from FY14-FY18, DTIL posted industry-leading revenue CAGR of 27%. We believe India is becoming an attractive destination for electronics manufacturing driven by factors such as favourable demography, rising affordability, easy availability of consumer finance schemes and favourable government policies. With a low penetration level across most consumer electronics categories, the demand will continue to be healthy owing to first-time buyers in semi-urban and rural areas as well as replacement demand in urban areas. To benefit from the high growth potential of electronics industry, numerous domestic as well as foreign brands are getting attracted to the Indian market with a wide range of offerings at varied price points. Most of these brands prefer domestic manufacturing considering the rising cost of labour in China, favourable policies of Indian government (like Make-in-India, MSIPS) and levy of duties and tariffs to discourage imports. This presents a strong growth opportunity for the EMS industry as there is flexibility in product design, faster time to market, cost effectiveness as well as knowledge of local tastes and preferences. OEM brands prefer to avoid manufacturing challenges and dealing with local labour by outsourcing the manufacturing to EMS players and focus their energies on key functions like branding and distribution. DTIL is a key beneficiary of this growth prospects with likely revenue CAGR of 19%, EBITDA CAGR of 27% and PAT CAGR of 31% over FY18-FY21E. With healthy return ratios, lean working capital cycle, healthy cash flow and high fixed-asset turnover, DTIL is a strong financial franchise. As seen in Exhibits 52 and 53, DTIL is placed favourably compared to listed brands in terms of its valuation vis-à-vis RoE and EPS growth prospects. We have assigned a P/E of 35x FY20E earnings of DTIL (based on 1.1x PEG ratio and 10% discount to branded peers) to arrive at a target price of Rs3,285. We initiate coverage on DTIL with a Buy rating and an upside potential of 31%. Exhibit 52: Peer comparison - FY19E P/E versus EPS growth

(PE,x) Whirlpool 50 Hitachi 45 IFB 40 Bluestar 35 Voltas 30 Dixon 25 Technologies 20 15 10 5 0 0 5 10 15 20 25 30 35 40 45 50 (FY19E EPS growth YoY, %) Note: Bloomberg consensus data for all companies. Source: Bloomberg, Nirmal Bang Institutional Equities Research Exhibit 53: Peer comparison - FY19E P/E versus RoE

(PE,x) Whirlpool 50 45 Hitachi IFB 40 Bluestar 35 Voltas 30 Dixon 25 Technologies 20 15 10 5 0 15 17 19 21 23 25 ( FY19E RoE, %) Note: Bloomberg consensus data for all companies. Source: Bloomberg, Nirmal Bang Institutional Equities Research

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Institutional Equities

Exhibit 54: International peer comparison Revenues (Rsmn) EBITDA margin (%) PAT (Rsmn) EPS (Rs) Company name FY15 FY16 FY17 FY18 FY15 FY16 FY17 FY18 FY15 FY16 FY17 FY18 FY15 FY16 FY17 FY18 Dixon Technologies* 12,013 13,894 24,570 28,416 2.7 4.2 3.7 4.0 119 309 476 609 10.5 27.3 42.0 53.8 CY14 CY15 CY16 CY17 CY14 CY15 CY16 CY17 CY14 CY15 CY16 CY17 CY14 CY15 CY16 CY17 Jabil 965,742 1,225,259 1,256,974 1,383,864 5.0 6.3 6.8 7.1 4,799 20,529 18,284 20,531 23.7 104.5 94.9 110.2 Hon Hai Precision 8,481,455 9,052,317 9,084,501 10,071,581 5.1 5.2 5.5 3.7 256,685 298,061 321,731 237,934 14.9 18.0 18.4 13.6 (Foxconn) Quanta Computers 1,864,759 2,034,296 1,863,244 2,185,150 2.2 2.5 2.9 2.4 38,488 35,547 30,888 31,587 9.9 9.1 7.9 8.1 Compal Electronics 1,702,463 1,711,251 1,598,190 1,899,428 2.1 2.0 2.2 1.6 13,181 16,953 16,766 12,981 3.0 3.8 3.8 2.9 Corp. 1,192,441 1,258,788 1,375,385 1,789,065 2.0 1.7 2.1 1.6 7,361 (990) 8,342 11,276 2.7 (0.4) 3.2 4.2

RoE (%) P/E (x) EPS growth (%) Company name FY15 FY16 FY17 FY18 FY15 FY16 FY17 FY18 FY16 FY17 FY18 Dixon Technologies* 14.0 27.1 24.1 19.3 240.2 92.3 59.9 46.7 160.3 54.1 28.0 CY14 CY15 CY16 CY17 CY14 CY15 CY16 CY17 CY15 CY16 CY17 Jabil 10.5 12.5 10.7 5.4 55.8 11.6 14.9 18.8 341.2 (9.2) 16.0 Hon Hai Precision (Foxconn) 15.4 15.1 14.2 12.8 9.9 8.2 9.8 11.9 21.0 2.3 (26.4) Quanta Computers 14.7 13.5 11.4 10.8 16.2 11.5 15.3 16.6 (8.1) (12.6) 2.1 Compal Electronics 7.1 8.5 7.7 5.5 13.6 9.2 9.8 16.1 27.5 (1.6) (21.9) Wistron Corp. 5.3 1.9 4.4 5.9 19.7 NA 20.8 16.2 NA NA 31.6 Note: Bloomberg data as on 21 August 2018 Note: * Per share data of Dixon is as per the current outstanding shares of 11.3mn Source: Company, Bloomberg, Nirmal Bang Institutional Equities Research

1QFY19 quarterly result summary Exhibit 55: Financial snapshot - consolidated

Y/E March (Rsmn) 1QFY18 4QFY18 1QFY19 YoY % QoQ % Revenues 6,846 5,978 5,927 (13.4) (0.9) Raw material 6,082 5,056 5,073 (16.6) 0.3 Staff costs 155 200 182 17.3 (8.9) Other expenses 398 448 412 3.5 (8.1) Total expenditure 6,635 5,704 5,667 (14.6) (0.7) EBITDA 211 274 260 23.5 (5.2) EBITDA Margin (%) 3.1 4.6 4.4 - - Interest 31 43 54 70.9 24.7 Depreciation 29 45 46 61.4 2.4 Other income 8 16 15 93.4 (8.7) PBT 158 203 175 10.7 (13.5) Tax 50 62 48 (4.6) (22.7) PAT 108 141 128 17.7 (9.5) NPM (%) 1.6 2.4 2.2 - - EPS (Rs) 9.6 12.5 11.3 17.7 (9.5) Source: Company, Nirmal Bang Institutional Equities Research

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Exhibit 56: Segment-wise performance - consolidated

Y/E March 1QFY18 4QFY18 1QFY19 YoY % QoQ % Revenue (Rsmn)

Lighting 1,737 2,132 1,899 9.4 (10.9) Consumer electronics 1,650 2,136 2,228 35.0 4.3 Home appliances 394 810 857 117.8 5.8 Reverse logistics 140 123 144 2.3 16.6 Mobile phones 2,926 772 732 (75.0) (5.2) Security systems 0 5 67 NA 1271.4 Total 6,846 5,978 5,927 (13.4) (0.9) Revenue mix (%)

Lighting 25.4 35.7 32.0 - - Consumer Electronics 24.1 35.7 37.6 - - Home appliances 5.8 13.6 14.5 - - Reverse logistics 2.0 2.1 2.4 - - Mobile phones 42.7 12.9 12.4 - - Security systems 0.0 0.1 1.1 - - EBITDA (Rsmn)

Lighting 69 135 145 110.3 7.3 Consumer electronics 45 29 27 (39.8) (8.5) Home appliances 47 110 92 95.9 (16.6) Reverse logistics 36 (4) (7) NA 54.8 Mobile phones 15 9 8 (45.3) (6.9) Security systems 0 (4) (5) NA 7.0 Total 211 274 260 23.6 (5.2) EBITDA margin (%)

Lighting 4.0 6.3 7.6 - - Consumer electronics 2.7 1.4 1.2 - - Home appliances 11.9 13.6 10.7 - - Reverse logistics 25.3 (3.4) (4.5) - - Mobile phones 0.5 1.1 1.1 - - Security systems NA (87.8) (6.8) - - Source: Company, Nirmal Bang Institutional Equities Research

 DTIL posted 1QFY19 consolidated revenues of Rs5.9bn, down 13% YoY. The decline in sales was largely owing to the mobile phone segment, which posted 75% YoY decline to Rs732mn from Rs2.9bn in 1QFY18.  Strong scale-up continued in the consumer electronics segment (sales up 35% YoY to Rs2.2bn) and home appliance segment (sales up 118% YoY to Rs857mn).  Gross margin improved 330bps YoY to 14.4% while EBITDA margin rose 130bps YoY to 4.4% in 1QFY19. Consequently, consolidated EBITDA grew 23% YoY to Rs260mn.  Lighting segment single-handedly improved profitability of DTIL with EBITDA of Rs145mn translating to an operating margin of 7.6%, up 360bps YoY. The combined EBITDA of all other segments was Rs115mn with deterioration in margin largely owing to investments towards capacity addition and backward integration.  PAT grew 18% YoY to Rs128mn.

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Key risks  Client concentration is a key risk faced by DTIL as it is highly dependent on a few key customers for a large portion of its revenues. In FY18, more than 50% of total sales came from just two brands – Panasonic and Philips. The share of top 5 customers in total revenues has always been above 73% in the past five years. Any break-down in business relations with top five clients will pose a significant risk to DTIL.  Rapidly changing preferences and advancement in technology may cause obsolesce and disruption in the EMS market. A case in point being, any rapid shift in demand from semi-automatic to fully-automatic washing machines will impact DTIL’s home appliance business. DTIL is mitigating this risk by foraying into top-load fully automatic washing machines.  Slowdown in Indian economy and consumer durable demand will impact growth outlook of DTIL and will keep its capacity utilisation suppressed.  Failure in product development and design or any defect in manufacturing will impact DTIL’s ODM as well as OEM business.  Sharp increase in labour cost in India or scarcity of raw materials could adversely impact DTIL’s business prospects.  Any adverse government policies that may favour imports instead of local manufacturing or any unforeseen and irrational rise in competition could impact DTIL’s ability to source business from OEMs.

Company background DTIL was incorporated by Mr. Sunil Vachani in 1993 with its first product offering of colour television. Since then DTIL has developed into a fully integrated end-to-end product and solution provider in the EMS industry. It currently manufactures products under six verticals namely consumer electronics, home appliances, mobile phones, lighting products, reverse logistics and security systems. DTIL works as per two business models - OEM and ODM. In the OEM model, raw materials and product designs are provided by the OEM brand while DTIL mainly does assembly as per the client’s specifications. In this model, DTIL essentially earns a conversion charge per unit and hence margins are lower, but the volume could be large. In the ODM model, product development, designing, raw material sourcing and manufacturing is done in-house by DTIL using its own design expertise, R&D and technical knowhow to manufacture products for its clients. ODM is a much more profitable model as DTIL’s scope of work is much bigger. Currently, DTIL manufactures and supplies lighting products, LED TVs and semi-automatic washing machines for the ODM segment in India. ODM accounted for 21.8% of FY18 sales which DTIL intends to grow faster. DTIL has nine manufacturing units located in Dehradun (Uttarakhand), Noida (Uttar Pradesh) and Tirupati (Andhra Pradesh). As of FY18-end, DTIL had 780 permanent employees, of which 31 are part of the R&D team. Over FY14-FY18, DTIL posted strong revenue/EBITDA/PAT CAGR of 27%/44%/65%, respectively.

Exhibit 57: Timeline of product evolution

Source: Company, Nirmal Bang Institutional Equities Research

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Exhibit 58: Key management personnel Name Profile

Mr. Sunil Vachani is the founder and executive chairman of DTIL. He holds a degree of Associate of Applied Arts in business administration from the American College in London. He has over two decades of experience in the EMS industry. He has Mr. Sunil Vachani – Executive held positions like chairman of the Electronics and Computer Software Export Promotion Council of India and co-chair of the Chairman CII ICTE Committee. He has been awarded the ‘Man of Electronics’ award by CEAMA in 2015, ‘Outstanding Citizen Award 2012’ by the Sindhi Chamber of Commerce and one of the ‘Top 100 people influencing EMS’ in 2012 by ventureoutsource.com. He is currently the vice-president of CEAMA.

Mr. Atul B. Lall is the managing director of DTIL and has been associated with the company since inception. He holds a master’s degree in management studies from the Birla Institute of Technology and Science, Pilani. He has more than 26 years of experience in the EMS industry. He has served as a member of the Technical Evaluation Committee for Electronic Mr. Atul B. Lall – Managing Director Manufacturing Services under M-SIPS constituted by the DeitY. He has also served as a representative of ELCINA on the Committee for Reliability of Electronic and Electrical Components and Equipment of the BIS. He has also authored a book, ‘Gita and India Inc.’ Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 59: Plant location

Source: Company, Nirmal Bang Institutional Equities Research Exhibit 60: Shareholding pattern

Shareholding pattern (%)

Promoter 38.92 Sunil Vachani 37.05 Others , 26.7 Promoters, 38.9 Geeta Vaswani 1.87 Mutual funds 16.92 DSP Blackrock 2.85 Kotak Mahindra Mutual Fund 1.50 Invesco India Mutual Fund 1.15 Financial Institutions, 2.3 SBI Mutual fund 7.86 Other mutual funds 3.56 Foreign portfolio investors 15.12 Foreign Portfolio Investors, 15.1 Mutual Goldman Sachs India 1.93 funds, 16.9

Steadview Capital Mauritius 3.26 GMO 3.00 Nomura 1.34 Other foreign portfolio investors 5.59 Financial institutions and insurance companies 2.32 ICICI Prudential Life Insurance Company 2.06 Others 26.72 Kamla Vachani 9.40 Atul B. Lall 4.12

Note: Data as on 30 June 2018, Source: , Company

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Financial statements Exhibit 1: Exhibit 61: Income statement Exhibit 3: Exhibit 62: Cash flow Y/E March (Rsmn) FY17 FY18 FY19E FY20E FY21E Y/E March (Rsmn) FY17 FY18 FY19E FY20E FY21E Net sales 24,570 28,416 33,010 40,237 48,001 EBIT 805 975 1,200 1,637 2,079 % growth 76.8 15.7 16.2 21.9 19.3 (Inc.)/dec. in working capital (198) (235) (56) (284) (325) Raw material costs 21,801 24,870 28,718 34,906 41,565 Cash flow from operations 607 740 1,144 1,353 1,753 Staff costs 639 728 858 1,046 1,248 Other income 14 42 46 60 72 Other overheads 1,218 1,692 2,062 2,442 2,862 Depreciation 107 152 172 206 248 Total expenditure 23,658 27,289 31,637 38,394 45,674 Tax paid (-) (164) (230) (354) (500) (646) EBITDA 912 1,127 1,372 1,843 2,327 Net cash from operations 564 703 1,009 1,119 1,427 % growth 55.5 23.5 21.8 34.3 26.2 Capital expenditure (-) (373) (716) (664) (700) (600) EBITDA margin (%) 3.7 4.0 4.2 4.6 4.8 Net cash after capex 191 (13) 345 419 827 Depreciation 107 152 172 206 248 Interest paid (-) (155) (135) (141) (134) (132) Interest costs 155 135 141 134 132 Dividends paid (-) (79) (27) (68) (122) (204) Other income 14 42 46 60 72 Inc./(dec.) in short-term borrowing 81 (4) - (50) (150) Profit before tax 664 882 1,105 1,562 2,019 Inc./(dec.) in long-term borrowing (396) (19) - - - Tax 188 273 354 500 646 Inc./(dec.) in total borrowings (314) (23) - (50) (150) Net profit 476 609 751 1,062 1,373 (Inc.)/Dec. in investments 1 (111) - - - % growth 54.1 28 23.4 41.4 29.2 Equity issue/(buyback) 456 571 - - - PAT margin (%) 1.9 2.1 2.3 2.6 2.9 Cash from financial activities (92) 275 (209) (306) (485) EPS (Rs) 43.3 53.8 66.3 93.8 121.2 Others (20) 26 - - - (0) No. of shares (mn) 11 11.3 11.3 11.3 11.3 Opening cash balance 75 153 441 577 689 Source: Company, Nirmal Bang Institutional Equities Research Closing cash balance 153 441 577 689 1,031 Change in cash 79 288 136 112 341 Source: Company, Nirmal Bang Institutional Equities Research Exhibit 2: Exhibit 63: Balance sheet Y/E March (Rsmn) FY17 FY18 FY19E FY20EExhibit FY21 E4: Exhibit 64: Key ratios Share capital 110 113 113 113 113 Y/E March FY17 FY18 FY19E FY20E FY21E Reserves & surplus 1,861 3,036 3,720 4,660 5,829 Per share (Rs) Net worth 1,971 3,150 3,833 4,773 5,942 EPS 43.3 53.8 66.3 93.8 121.2 Short-term loans 331 326 326 276 126 Book value 179.4 278.1 338.5 421.5 524.7 Long-term loans 99 80 80 80 80 Valuation (x) Total loans 430 406 406 356 206 P/E 58.1 46.8 37.9 26.8 20.7 Deferred tax liability (net) (3) 41 41 41 41 P/BV 14.0 9.0 7.4 6.0 4.8 Total liabilities 2,398 3,597 4,280 5,170 6,189 EV/EBITDA 31.6 25.3 20.7 15.3 11.9 Gross block 1,472 2,084 2,873 3,573 4,173 EV/sales 1.2 1.0 0.9 0.7 0.6 Depreciation 106 259 432 638 886 Return ratios (%) RoCE 33.6 27.1 28.0 31.7 33.6 Net block 1,366 1,824 2,442 2,935 3,287 RoE 24.1 19.3 19.6 22.3 23.1 Capital WIP 20 125 - - - RoIC 35.9 32.0 33.4 37.5 41.2 Investments - 111 111 111 111 Profitability ratios (%) Inventories 2,822 3,223 3,541 4,208 5,011 EBITDA margin 3.7 4.0 4.2 4.6 4.8 Debtors 2,802 3,007 3,437 4,079 4,734 EBIT margin 3.3 3.4 3.6 4.1 4.3 Cash 153 441 577 689 1,031 PAT margin 1.9 2.1 2.3 2.6 2.9 Other current assets 722 1,126 1,419 1,811 2,160 Turnover ratios Total current assets 6,499 7,798 8,974 10,787 12,936 Fixed-asset turnover (x) 16.2 16.0 13.3 12.5 12.4 Creditors 5,030 5,147 5,980 7,173 8,427 Debtor days 42 39 38 37 36 Other current liabilities & provisions 456 1,114 1,266 1,490 1,718 Inventory days 47 47 45 44 44 Total current liabilities 5,487 6,262 7,246 8,663 10,145 Creditor days 84 76 76 75 74 Net current assets 1,013 1,536 1,728 2,124 2,791 Solvency ratios (x) Total assets 2,398 3,597 4,280 5,170 6,189 Debt-equity 0.2 0.1 0.1 0.1 0.03 Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research

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DISCLOSURES

This Report is published by Nirmal Bang Equities Private Limited (hereinafter referred to as “NBEPL”) for private circulation. NBEPL is a registered Research Analyst under SEBI (Research Analyst) Regulations, 2014 having Registration no. INH000001436. NBEPL is also a registered Stock Broker with National Stock Exchange of India Limited and BSE Limited in cash and derivatives segments.

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Analyst Certification: I/We, Mr. Chirag Muchhala the research analysts is the author of this report, hereby certify that the views expressed in this research report accurately reflects my/our personal views about the subject securities, issuers, products, sectors or industries. It is also certified that no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst(s) principally responsible for the preparation of this research report and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations.

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Disclaimer Stock Ratings Absolute Returns

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