Dixon Technologies Limited On a strong growth trajectory
Powered by the Sharekhan 3R Research Philosophy Capital Goods Sharekhan code: DIXON Result Update Update Stock
3R MATRIX + = - Summary Right Sector (RS) ü We retain Buy on Dixon Technologies (Dixon) with a revised PT of Rs4800, with an increased valuation multiple driven by strong earnings growth outlook. Right Quality (RQ) ü Dixon Technologies (Dixon) reported mixed Q4FY2021 performance wherein revenues came in higher than estimates, OPM were tad below our estimate and net earnings lower Right Valuation (RV) ü than estimate on account of higher tax outgo. The company is in process of getting PLI approvals for IT, Telecom, lighting and AC + Positive = Neutral - Negative components. It is also expanding capacities in existing business segments. The company remains one of the key beneficiaries from government impetus on increasing What has changed in 3R MATRIX domestic manufacturing through PLI schemes. Old New Dixon Technologies (Dixon) reported mixed Q4FY2021 performance wherein revenues came in higher than estimates, OPM was a tad below our estimate and net earnings lower than RS estimate on account of higher tax outgo. The consolidated revenues for Q4FY2021 rose 146% y-o-y to Rs. 2110 crore led by growth across key segments viz. consumer electronics (revenues RQ up 3x y-o-y), Mobile phones (up 4.8x y-o-y), Lighting (up 1.5x y-o-y), Home appliances (up 1.6x y-o-y) and Security systems (up 2x y-o-y). The operating margins contracted by 273bps y-o-y RV to 3.8% as lighting and Home appliances felt the pressure of increased raw material price rise and mobile phones had increased overhead and manpower costs. Hence, operating profit grew by 42.8% y-o-y to Rs. 79.8 crore. Strong revenue growth aided in PBT growth of 65% y-o-y to Rs. 61.4 crore. However, higher effective tax rate (27.9% vs 26% in Q4FY2020) led Reco/View Change to consolidated net profit growth of 60.5% y-o-y to Rs. 44.3 crore which was lower than our estimate. The management remained optimistic on high growth for FY2022 with increased Reco: Buy share of global revenues although did not quantify the same on account of COVID-led impact on domestic demand in near term. Domestically, the management is hopeful of demand pick CMP: Rs. 3,994 up from May 2021 end as more states come out of COVID led restrictions. The management reiterated its three to four year guidance of tripling its size. Dixon has applied for PLI in Price Target: Rs. 4,800 á IT (laptops, tablets, hardware) for which approval is expected in a month and production expected in Q3FY2022. It is also applying for PLIs in Lighting and AC components for which á Upgrade Maintain â Downgrade production is expected to start next fiscal year. It will be applying for PLI in Telecom (modems, routers, IoT devices) through the JV route (76% stake) for which it is awaiting guidelines. Even Company details if does not get PLI in telecom, it would start production in Q3FY2022. In consumer electronics, Dixon will be increasing capacities of TV sets, PCBAs, apart from plans of backward Market cap: Rs. 23,390 cr integration and new vertical LED monitors. In lighting, it would be increasing capacity of downlighters from 600k to 1.5mn. In home appliances, it would start production at 6 lakh p.a. 52-week high/low: Rs. 4,588/906 Top loading washers unit at Tirupati. In mobile phones it has aggressive target of reaching 50mn p.a. capacity from current 3.5-4mn. We believe Dixon is on a strong growth trajectory NSE volume: led by broadening and deepening its product portfolio along with applications for new PLI 0.3 lakh schemes in its domain. We introduce FY2024 earnings estimate in this note. We maintain our (No of shares) Buy rating on the stock with a revised PT of Rs. 4,800 increasing our valuation multiple on account of a strong earnings growth outlook. BSE code: 540699 Key positives NSE code: DIXON Healthy revenue growth outperformance led by growth across almost all segments. Free float: Venturing into new segments within the domain viz. Telecom, IT and AC components 3.8 cr (No of shares) Key negatives OPM affected by increase in raw material price in lighting and home appliances. Shareholding (%) Our Call Promoters 35.0 Valuation – Retain Buy with a revised PT of 4,800: Dixon Technologies had been one of the key beneficiaries from the government’s impetus on increasing domestic manufacturing FII 19.8 through PLI schemes. The company has been continuously expanding capacities in its existing verticals and is now in process of venturing into other verticals within the domain through PLI DII 11.0 schemes. The company is on a strong growth trajectory over the next three to four years with management targeting to triple its size. We have introduced FY2024 earnings estimate in this Others 34.1 note. We maintain our Buy rating on the stock with a revised PT of Rs. 4,800 increasing our valuation multiple on account of strong earnings growth outlook. Price chart Key risk
4550 Delay in the commissioning of its capex project, slowdown in consumer discretionary spends, and discontinuation of business from key customers might affect revenue growth. 3550 Adverse raw-material prices, delay in the ability to pass on price hikes adequately, and adverse forex fluctuations might affect margins. 2550
1550 Valuations (Consolidated) Rs cr Particulars FY21 FY22E FY23E FY24E 550 Revenue 6,448 9,608 12,993 17,678 20 21 20 21 - - - -
Jan OPM (%) 4.4 4.5 4.5 4.6 Sep May May Adjusted PAT 159 253 350 540 Price performance % y-o-y growth 32.7 58.5 38.4 54.5 (%) 1m 3m 6m 12m Adjusted EPS (Rs.) 27.2 43.1 59.7 92.2 P/E (x) 146.7 92.6 66.9 43.3 Absolute -1 43 68 338 P/B (x) 31.7 24.0 17.8 12.7 Relative to -5 35 52 277 EV/EBITDA (x) 81.5 54.1 39.5 28.2 Sensex RoNW (%) 24.9 29.5 30.6 34.3 Sharekhan Research, Bloomberg RoCE (%) 27.4 32.3 35.2 38.6 Source: Company; Sharekhan estimates
May 27, 2021 1 Powered by the Sharekhan
3R Research Philosophy Update Stock
Mixed Quarter: Dixon Technologies (Dixon) reported mixed Q4FY2021 performance wherein revenues came in higher than estimates. OPM was a tad below our estimate and net earnings was lower than estimate on account of higher tax outgo. The consolidated revenues for Q4FY2021 rose 146% y-o-y to Rs. 2110 crore led by growth across key segments viz. consumer electronics (revenues up 3x y-o-y), Mobile phones (up 4.8x y-o-y), Lighting (up 1.5x y-o-y), Home appliances (up 1.6x y-o-y) and Security systems (up 2x y-o-y). The operating margins contracted by 273bps y-o-y to 3.8% as Lighting and Home appliances felt the pressure of increased raw material price rise and mobile phones had increased overhead and manpower costs. Hence, operating profit grew by 42.8% y-o-y to Rs. 79.8 crore. Strong revenue growth aided in PBT growth of 65% y-o-y to Rs. 61.4 crore. However, higher effective tax rate (27.9% vs 26% in Q4FY2020) led to consolidated net profit growth of 60.5% y-o-y to Rs. 44.3 crore which was lower than our estimate.
Growth momentum to remains intact: The management remained optimistic on high growth for FY2022 with increased share of global revenues although did not quantify the same on account of COVID- led impact on domestic demand in near term. Domestically, the management is hopeful of demand pick up from May 2021 end as more states come out of COVID-led restrictions. The management reiterated its three to four guidance of tripling its size. Dixon has applied for PLI in IT (laptops, tablets, hardware) for which approval is expected in a month and production expected in Q3FY2022. It is also applying for PLIs in Lighting and AC components for which production is expected to start next fiscal year. It will be applying for PLI in Telecom (modems, routers, IoT devices) through JV route (76% stake) for which it is awaiting guidelines. Even if does not get PLI in Telecom, it would start production in Q3FY2022. In consumer electronics, Dixon will be increasing capacities of TV sets, PCBAs, apart from plans of backward integration and new vertical LED monitors. In lighting, it would be increasing capacity of downlighters from 600k to 1.5mn. In home appliances, it would start production at 6 lakh p.a. Top loading washers unit at Tirupati. In mobile phones it has aggressive target of reaching 50mn p.a. capacity from current 3.5-4mn. We believe Dixon is on a strong growth trajectory led by broadening and deepening its product portfolio along with applications for new PLI schemes in its domain.
Dixon Technologies Q4FY2021 Concall Highlights Guidance: The management expects significant growth for FY2022 despite the pandemic although it has e not quantified the same. It expects large share of global revenues while the domestic side needs to be watch. Since the second week of April 2021, the growth has slowed down deteriorating in May 2021. The management is hopeful of a pickup in demand from May 2021 end as more states come out of covid restrictions. It targets to triple its size over next three to four years. PLI application: The company is applying for PLI schemes in 1) IT (laptops, tablets, hardware) 2) Lighting (extrusions, batons, plastics, mechanicals) 3) AC components and 4) Telecom (modems, routers, IoT devices). The capex for the same would be Rs. 5 crore per annum for IT, Rs. 10-15 crore per annum each for lighting and telecom and Rs. 20 crore per annum for Telecom. The management expects production for IT to start from Q3FY2022, for lighting and AC components in next fiscal year while guidelines are awaited for telecom (although it would start production from Q3FY2022 without PLI). PLI market size: In Telecom (Router, Modem, IoT devices), it estimates Rs. 1600-1800 crore per year opportunity. For ACPCB units, currently it is Rs. 110-120 crore per year business which can reach Rs. 400- 500 crore per annum. LED lighting is of a small value for captive consumption. Margin contraction: The gross margins and operating margins contracted substantially on account of change in mix (higher share of LED TVs which has lower margins) and steep increase in raw material prices since November 2020. There was Rs. 8 crore ESOP expense. Cost pass through: In ODM (lighting & Washing Machines), there is lag in passing through raw material price increase. In lighting, the increase has been largely passed in Q4FY2021. In Home appliances, the increase will be passed in Q1FY2022. The company is confident of maintaining ODM margins.
May 27, 2021 2 Powered by the Sharekhan
3R Research Philosophy Update Stock
Consumer Electronics: The company has 4.4 mn TV set capacity. It has started production of higher inches TV sets. The capacity will increase to 5.5 mn TV set capacity in few months. PCBA capacity will be increased from 1.8mn to 2.8mn. It is setting up injection moulding unit for backward integration. The company has tied up with two largest brands for manufacturing of LED monitors, the production for which would start in Q3FY2022. It will be adding 1mn LED monitors capacity. In year one, it will manufacture 0.5mn units. It expects a strong order book in the second year. The LED monitor would have 2.7 to 2.9 OPM. Lighting: The rising input costs contracted OPM. It has LED bulbs capacity 300mn. It has increased baton capacity to 3mn per month. Downlighters capacity will be increased from 600k to 1.5mn. It has 5mn per month decorative lamps capacity. It expects July-August to start production and launch in Q2FY2022. Home appliance: The company has 140 models of 6 to 12 kg. The capacity will be increased from 1.5mn to 2mn. The top loading washers facility at Tirupati is ready having 6 lakhs per annum capacity for which it has submitted samples to Bosch. It starts production to start in early September. Mobile phones: The company entered into agreement with Motorola in mid-March and with Nokia in February. It targets to increase capacity to 50mn per annum from current 3.5-4mn phones. The company has received 5 acres land in Noida to set up plant. For set top boxes, it has 0.5mn/per month order book. However, there has been challenges in availability of chips and display which is continuing as of date. Hence it expects production of 0.35mn/per month from Q2FY2022. The company is on target to achieve PLI targets for mobile. Capex: The company will ramp up its washer capacity from 0.6mn to 1mn. It has applied for 10 acres land in Noida for manufacturing. It would commence production from Q3 next fiscal year. The company has formed JV with Bharti Airtel (74% Dixon stake) for submitting PLI application for Telecom and networking devices such modems, routers, IoT devices. The company is in discussion with Japanese partner for PCB assembly for its PLI application for AC components. It incurred Rs. 167 crore capex in FY2021 and Rs. 200 crore plus for FY2022.
Results (Consolidated) Rs cr Particulars Q4FY21 Q4FY20 YoY (%) Q3FY21 QoQ (%) Revenues 2,109.7 857.4 - 2,182.8 (3.3) Operating Expenses 2,029.9 801.5 - 2,082.3 (2.5) Operating profits 79.8 55.9 42.8 100.5 (20.6) Other Income 1.0 (0.0) - 0.1 - Interest 7.1 7.7 (7.2) 7.7 (7.5) Depreciation 12.3 10.9 12.6 11.3 9.2 PBT 61.4 37.3 64.7 81.7 (24.9) Tax 17.1 9.7 76.8 20.1 (14.8) Reported PAT 44.3 27.6 60.5 61.6 (28.1) Adj PAT 44.3 27.6 60.5 61.6 (28.1) Adj EPS 38.3 23.8 60.5 53.2 (28.1) bps bps OPM 3.8% 6.5% (273) 4.6% (82) NPM 2.1% 3.2% (112) 2.8% (72) Tax rate 27.9% 26.0% - 24.6% - Source: Company; Sharekhan Research
May 27, 2021 3 Powered by the Sharekhan
3R Research Philosophy Update Stock
Outlook and Valuation n Sector View – Demand outlook encouraging, healthy growth prospects The Indian electronics and consumer durable industry is ~Rs 4,00,000 crore and growing rapidly. Manufacturing can be a significant growth driver from a medium to long-term perspective, providing enormous opportunities owing to the shift in manufacturing bases outside China and the government’s incentives to enhance manufacturing through the Make in India initiative like the PLI scheme which aims to kick-start the process, with strong industry participation. n Company Outlook – Promising outlook ahead Dixon’s leadership position is a key benefit in the electronic outsourcing business. The company’s Tirupati facility is expected to add a new dimension to growth prospects as it will foray into new business verticals, expand product portfolio of existing business verticals, and penetrate further into South India by forging an alliance with original equipment manufacturers (OEMs) and add them as clients. Expanded capacity in consumer electronics and home appliances coupled with a PLI scheme licence for mobile phones is likely to drive revenue growth momentum, while margin may expand due to economies of scale and automation in the lighting business. The company is also applying for PLI schemes in 1) IT (laptops, tablets, hardware) 2) Lighting (extrusions, batons, plastics, mechanicals) 3) AC components and 4) Telecom (modems, routers, IoT devices) which augurs well for long term growth opportunities. n Valuation – Retain Buy with a revised PT of 4800 Dixon Technologies had been one of the key beneficiaries from the government’s impetus on increasing domestic manufacturing through PLI schemes. The company has been continuously expanding capacities in its existing verticals and is now in process of venturing into other verticals within the domain through PLI schemes. The company is on a strong growth trajectory over the next three to four years with management targeting to triple its size. We have introduced FY2024 earnings estimate in this note. We maintain our Buy rating on the stock with a revised PT of Rs. 4800 increasing our valuation multiple on account of strong earnings growth outlook.
One-year forward P/E (x) band
100.0
80.0
60.0
40.0
20.0
- 18 19 20 18 19 20 19 20 21 18 19 20 21 18 19 20 19 20 21 ------Jul Jul Jul Jan Jan Jan Sep Sep Sep Nov Nov Nov Mar Mar Mar May May May May
1yr Fwd PE (x) Avg 1yr fwd PE Source: Sharekhan Research
May 27, 2021 4 Powered by the Sharekhan
3R Research Philosophy Update Stock
About company Founded by Mr. Sunil Vachani, Dixon is a leading manufacturer of products for key consumer durable brands in India. The company currently has 10 state-of-the-art manufacturing units, four in Noida (Uttar Pradesh) and three each in Dehradun (Uttarakhand) and Tirupati (Andhra Pradesh). The company manufactures products with a capacity of 3.4 million LED TVs per year in the consumer durables segment, 20 million LED bulbs per month in the lighting segment, 1.2 million washing machines per year in home appliances, mobile phones, 7 lakh CCTVs, and 1.5 lakh DVDs per month in the security devices segment in India. The company also provides solutions in reverse logistics i.e., repair and refurbishment services of STBs, mobile phones, and LED TV panels. Based on a report, ‘Project Rise’ by Frost & Sullivan India, Dixon is the largest home-grown, design-focused products and solutions company.
Investment theme Local manufacturing is expected to get a boost given the strong 17% CAGR in demand during FY2016-FY2021 in the consumer electronics market in India. The EMS industry is expected to witness a higher CAGR of 30.8% during the same period, as players scale up their offerings from assembly-only to design-led manufacturing. Dixon stands to benefit in the electronic outsourcing business with a leadership position in key business segments. The company’s Tirupati facility is expected to add a new dimension to the company’s growth prospects, as it will foray into new business verticals, expand product portfolio of existing business verticals, and penetrate further into southern Indian market by forging alliance with OEMs and add them as clients. Moreover, eyes are on the PLI scheme in the mobile phones vertical for which the company has filed two applications.
Key Risks Delay in commissioning of capex project, slowdown in consumer discretionary spends, and discontinuation of business from key customers might affect revenue growth. Adverse raw-material prices, delay in the ability to pass on price hikes adequately in time, and adverse forex fluctuation might affect margins.
Additional Data
Key management personnel Sunil Vachani Executive Chairperson Atul B. Lall Executive Director Saurabh Gupta Chief Financial Officer Abhijit Kotnis Chief Operating Officer Ashish Kumar Company Secretary & Compliance Officer Source: Company Website
Top 10 shareholders Sr. No. Holder Name Holding (%) 1 SBI Funds Management Pvt Ltd. 6.83 2 Reliance Capital Trustee Co Ltd. 5.7 3 Steadview Capital Mauritius Ltd. 3.87 4 Goldman Sachs Group Inc 1.73 5 ICICI Prudential Asset Management 1.60 6 ICICI Prudential Life Insurance Co 1.50 7 Mankani Sunita 1.47 8 Vaswani Geeta 1.44 9 Sippy Shobha 1.32 10 Edelweiss Asset Management 1.07 Source: Bloomberg
Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.
May 27, 2021 5 Understanding the Sharekhan 3R Matrix Right Sector Positive Strong industry fundamentals (favorable demand-supply scenario, consistent industry growth), increasing investments, higher entry barrier, and favorable government policies Neutral Stagnancy in the industry growth due to macro factors and lower incremental investments by Government/private companies Negative Unable to recover from low in the stable economic environment, adverse government policies affecting the business fundamentals and global challenges (currency headwinds and unfavorable policies implemented by global industrial institutions) and any significant increase in commodity prices affecting profitability. Right Quality Positive Sector leader, Strong management bandwidth, Strong financial track-record, Healthy Balance sheet/cash flows, differentiated product/service portfolio and Good corporate governance. Neutral Macro slowdown affecting near term growth profile, Untoward events such as natural calamities resulting in near term uncertainty, Company specific events such as factory shutdown, lack of positive triggers/events in near term, raw material price movement turning unfavourable Negative Weakening growth trend led by led by external/internal factors, reshuffling of key management personal, questionable corporate governance, high commodity prices/weak realisation environment resulting in margin pressure and detoriating balance sheet Right Valuation Positive Strong earnings growth expectation and improving return ratios but valuations are trading at discount to industry leaders/historical average multiples, Expansion in valuation multiple due to expected outperformance amongst its peers and Industry up-cycle with conducive business environment. Neutral Trading at par to historical valuations and having limited scope of expansion in valuation multiples. Negative Trading at premium valuations but earnings outlook are weak; Emergence of roadblocks such as corporate governance issue, adverse government policies and bleak global macro environment etc warranting for lower than historical valuation multiple. Source: Sharekhan Research Know more about our products and services
For Private Circulation only
Disclaimer: This document has been prepared by Sharekhan Ltd. (SHAREKHAN) and is intended for use only by the person or entity to which it is addressed to. This Document may contain confidential and/or privileged material and is not for any type of circulation and any review, retransmission, or any other use is strictly prohibited. This Document is subject to changes without prior notice. This document does not constitute an offer to sell or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. Though disseminated to all customers who are due to receive the same, not all customers may receive this report at the same time. SHAREKHAN will not treat recipients as customers by virtue of their receiving this report. The information contained herein is obtained from publicly available data or other sources believed to be reliable and SHAREKHAN has not independently verified the accuracy and completeness of the said data and hence it should not be relied upon as such. While we would endeavour to update the information herein on reasonable basis, SHAREKHAN, its subsidiaries and associated companies, their directors and employees (“SHAREKHAN and affiliates”) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance, or other reasons that may prevent SHAREKHAN and affiliates from doing so. This document is prepared for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Recipients of this report should also be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. We do not undertake to advise you as to any change of our views. Affiliates of Sharekhan may have issued other reports that are inconsistent with and reach different conclusions from the information presented in this report. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject SHAREKHAN and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. The analyst certifies that the analyst has not dealt or traded directly or indirectly in securities of the company and that all of the views expressed in this document accurately reflect his or her personal views about the subject company or companies and its or their securities and do not necessarily reflect those of SHAREKHAN. The analyst further certifies that neither he or its associates or his relatives has any direct or indirect financial interest nor have actual or beneficial ownership of 1% or more in the securities of the company at the end of the month immediately preceding the date of publication of the research report nor have any material conflict of interest nor has served as officer, director or employee or engaged in market making activity of the company. Further, the analyst has also not been a part of the team which has managed or co-managed the public offerings of the company and no part of the analyst’s compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this document. Sharekhan Limited or its associates or analysts have not received any compensation for investment banking, merchant banking, brokerage services or any compensation or other benefits from the subject company or from third party in the past twelve months in connection with the research report. Either SHAREKHAN or its affiliates or its directors or employees / representatives / clients or their relatives may have position(s), make market, act as principal or engage in transactions of purchase or sell of securities, from time to time or may be materially interested in any of the securities or related securities referred to in this report and they may have used the information set forth herein before publication. SHAREKHAN may from time to time solicit from, or perform investment banking, or other services for, any company mentioned herein. Without limiting any of the foregoing, in no event shall SHAREKHAN, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind.
Compliance Officer: Mr. Joby John Meledan; Tel: 022-61150000; email id: [email protected]; For any queries or grievances kindly email [email protected] or contact: [email protected]
Registered Office: Sharekhan Limited, 10th Floor, Beta Building, Lodha iThink Techno Campus, Off. JVLR, Opp. Kanjurmarg Railway Station, Kanjurmarg (East), Mumbai – 400042, Maharashtra. Tel: 022 - 61150000. Sharekhan Ltd.: SEBI Regn. Nos.: BSE / NSE / MSEI (CASH / F&O / CD) / MCX - Commodity: INZ000171337; DP: NSDL/CDSL-IN-DP-365-2018; PMS: INP000005786; Mutual Fund: ARN 20669; Research Analyst: INH000006183;
Disclaimer: Client should read the Risk Disclosure Document issued by SEBI & relevant exchanges and the T&C on www.sharekhan.com; Investment in securities market are subject to market risks, read all the related documents carefully before investing.