Institutional Equities

Dixon Technologies () 28 May 2021

Reuters: DIXO.BO; Bloomberg: DIXON IN

Strong quarter; New growth opportunities priced in ACCUMULATE Dixon Technologies (Dixon) reported consolidated revenue of Rs21.1bn (+146% YoY) broadly Sector: inline with ours/consensus estimates. Gross margin was down 570bps YoY at 10.1%. EBITDA came at Rs798mn (+43% YoY) with margin of 3.8% (-270bps YoY), below ours/consensus CMP: Rs3,994 estimate of 4.7%/4.9%. PAT at Rs443mn was below ours/consensus estimate of Rs605mn/Rs546mn. Management highlighted that lower margin resulted due to substantial Target Price: Rs3,850 change in segment-mix with higher share of LED TVs business (OEM business) and also Downside: 4% increase in commodity cost (impacted ODM business). EBITDA also factored in ESOP expense

of Rs80mn. In ODM business (lighting and washing machine), the company has seen negative Mayank Bhandari impact on margin as price increase are passed on with a time-lag. From 2nd week of April Research Analyst growth has slowed and it has further deteriorated in May. Management believes that June [email protected] month will see a gradual revival in demand. The growth outlook over the next few years remains robust led by (1) PLI revenue booking (already started from 4QFY21) (2) +91 99457 58662 value and volume growth in LED TV (3) international business opportunities in lighting (4) foray into new verticals (fully automatic top-load washing machine, refrigerators, wearables) and (5) Update Rahulkumar Mishra further diversification prospects through upcoming PLI schemes (IT products like laptops and Research Associate tablets, telecom equipment). While the EBITDA margin profile will decline due to rising share of mobile PLI and LED TV business (long term EBITDA margin 4.2-4.5% range), robust growth in [email protected] value terms will adequately compensate it. We increase our FY22E-FY23E earnings estimates +91-22-6273 8028

by 1%-13% and retain Accumulate rating on the stock with a revised target price of Rs3,850 (from Rs3,502 earlier) based on 45x FY23E earnings. Key Data

Consumer Electronics update: Consumer Electronics (LED TV) segment sales jumped 200% YoY to Current Shares O/S (mn) 58.6 Rs11.8bn with EBITDA margin of 2.4% (-10bps YoY). The company has capacity of 4.4mn TV sets and the Mkt. Cap (Rsbn/US$bn) 233.9/3.2 company has started production of large TV sets like 75 inches TVs. It is expanding its capacity to 5.5mn in next couple of months and its adding new automated lines for 65 inches TV sets. PCBA capacity is also 52 Wk H / L (Rs) 4,588/905 going to increase from 1.8mn to 2.8mn. The company is further investing in injection molding for backward Daily Vol. (3M NSE Avg.) 350,352 integration in LED TV sets. It is getting into a new product SKU -"LED monitor” and it has already tied up with QFY21 Result Result QFY21 two large global brands. Production is expected to start from 3QFY22 with initial capacity of 1mn LED 4 Monitors. Profitability is expected to be in the range of 2.7-2.9%. Price Performance (%)

Lighting update: Lighting segment revenue grew 50% YoY at Rs3.8bn with an EBITDA margin of 8.1% (- 1 M 6 M 1 Yr 190bps YoY). Margin has contracted due to lag in passing of commodity price increase. In case of lighting, Dixon Tech (1.0) 68.1 338.7 most of cost increase has already been passed on in Q4 itself. Dixon is India's largest ODM player in lighting. Its LED bulb capacity of 300mn bulbs is 45% of Indian requirement. It has expanded its capacity of baton to Nifty Index 3.2 18.3 61.6 3mn a month (Indian requirement is 7mn a month). In Down lighter, it has expanded its capacity from 600k Source: Bloomberg per month to 1.5mn per month (Indian requirement is 3mn). It is also developing outdoor lighting solutions and expected to launched in 2QFY22. Dixon is closely studying the PLI scheme for Lighting. It will take part in PLI for mechanicals, plastics and extrusions (for batons).

Outlook and valuation: Led by the strong scale-up opportunities across multiple product categories, we expect 79% earnings CAGR for Dixon over FY20-FY23E. Robust growth prospects, healthy return ratios, lean working capital cycle and high fixed-asset turnover will continue to support Dixon’s valuation. The stock is currently trading at 47x FY23EPS.

Y/E March (Rsmn) 4QFY20 3QFY21 4QFY21 YoY (%) QoQ (%) FY20 FY21 YoY (%) Net revenues 8,574 21,828 21,097 146.1 (3.3) 44,001 64,482 46.5 Raw material costs 7,222 19,740 18,960 162.5 (4.0) 38,602 57,697 49.5 Staff costs 308 377 437 41.9 16.1 1,180 1,371 16.2 Other expenses 485 706 902 85.8 27.7 1,989 2,548 28.1 Total expenditure 8,015 20,823 20,299 153.3 (2.5) 41,771 61,616 47.5 EBITDA 559 1,005 798 42.8 (20.6) 2,231 2,866 28.5 EBITDA margin (%) 6.5 4.6 3.8 - - 5.1 4.4 - Interest costs 77 77 71 (7.2) (7.5) 350 274 (21.5) Depreciation 109 113 123 12.6 9.2 365 437 19.7 Other income (0) 1 10 NA 600.0 52 16 (69.6) PBT 373 817 614 64.7 (24.9) 1,568 2,170 38.4 Tax 97 201 171 76.8 (14.8) 363 572 57.7 PAT 276 616 443 60.5 (28.1) 1,205 1,598 32.6 PAT margin (%) 3.2 2.8 2.1 - - 3 2 - EPS (Rs) 4.8 10.6 7.6 58.6 (29.0) 21 27 31.0 Source: Company, Nirmal Bang Institutional Equities Research

Institutional Equities

Exhibit 1: Financial summary Y/E March (Rsmn) FY19 FY20 FY21 FY22E FY23E Net revenues 29,845 44,001 64,482 125,945 182,779 EBITDA 1,349 2,231 2,866 5,465 7,897 Net profit 634 1,205 1,598 3,404 5,091 PAT growth (%) 4.0 90.2 32.6 113.0 49.6 EPS (Rs) 10.6 20.3 26.9 57.2 85.6 EBITDA margin (%) 4.5 5.1 4.4 4.3 4.3 P/E (x) 375.0 197.2 148.7 69.8 46.7 P/BV (x) 12.0 42.7 31.7 23.1 16.3 EV/EBITDA (x) 176.9 106.4 83.2 43.6 30.1 Dividend yield (%) 0.1 0.1 0.0 0.3 0.4 RoCE (%) 21.4 29.2 26.8 40.5 43.9 RoE (%) 16.7 22.3 21.7 33.6 35.5 Source: Company, Nirmal Bang Institutional Equities Research

Home Appliances update: Home Appliances Segment revenue was up 63% YoY at Rs1.5bn with EBITDA margin of 7.0%, down 400bps YoY. As commodity price rise is passed on with a lag, margin has declined. Price increases has been passed on in 1QFY22. The company has 140 models ranging from 6-12kg across semi-automatic category. It is expanding its capacity to 1.5mn (from 1.2mn) by Aug-Sep 2021 in semi-automatic category. New facility for full automatic plant in Tirupati is now ready and product trials have been completed. The new plant will have an annual capacity of 0.6mn. At 80% utilization rate, the company can realize revenues of Rs5-6bn per year with lower double digit operating margin. Product have been submitted to anchor customer Bosch to go through reliability cycle. Commercial production will start from end Aug or early Sep 2020.

Mobile Phone & EMS update: Mobile Phones Segment revenue came at Rs2.9bn, up 381% YoY with EBITDA margin of 2.5% (vs. 14.1% in 4QFY20). A new factory is being set-up under PLI scheme and initial ramp-up cost is adversely impacting the margins. The company has already started production for and . It is confident of achieving ceiling revenues for FY22 under mobile PLI. It is targeting to take capacity to 15mn per annum vs 3.5mn per annum now. It will export 60-65% of Motorola's total requirement catered by Dixon. It expect export to start by first week of July to US for Motorola. Dixon is capable of building 5G phones for any global player. Revenue of set- top box was Rs460mn in current quarter. It manufactured 2.1mn set-top boxes in FY21 (0.6mn in Q4FY21). Order book in this vertical is healthy with 0.5mn set-top box a month with 3% operating margin. However, due to shortage of components, the company will be able to do 0.35mn a month starting Q2FY22. In medical electronics, the company has manufactured 550 units of RT-PCR units which generated revenue of Rs130mn with an operating margin of 28%.

Other growth opportunities: 1) Dixon has finalized a technology partner for manufacturing DC (Direct cool) refrigerator. It will initially create a capacity of 0.6mn which will be ramped up to 1mn (10% of Indian requirement). Commercial production will start from Q3 of next fiscal. 2) In laptop/IT hardware, approval under PLI is likely to come in a month (applied in April 2021). It has signed an MOU to manufacture laptop for a large global brand. 3) Under telecom and networking products, the company has entered into an MOU with Bharti enterprises to form a JV. It will submit application under PLI scheme. Dixon is awaiting the guidelines for PLI scheme in Telecom equipments. It will be for IT devices, modems, routers and various other telecom products. Dixon will own 76% in this JV. Irrespective of the PLI scheme, it has finalized an agreement with a principal to manufacture modems and routers from Q3 of this fiscal year for supplying to telecom operators 4) The company is also persuing PLI scheme for AC components (PCBA for Controllers in AC). It is in discussion with a Japanese partner for JV on this. Management expects global partner's supply chain in China will gradually be shifted to India for servicing both domestic and international markets. Others : 1) Next year capex is expected to be Rs2bn. Capex in FY20 was Rs1.6bn. Under PLI, capex requirement in Lighting is ~Rs100-150mn a year, IT product : ~Rs50mn a year and Telecom : ~Rs200mn a year. It expects overall capex for Rs1bn for DC refrigerator. 2) Long term EBITDA margin range is 4.2-4.5%. Margin may increase gradually for exports. 3) All new production lines are fungible. 4) All of Motorola's business is 5) FY21 volume in consumer electronics : 2.79mn (vs 2.1mn in FY20), Washing machine : 0.89mn (vs 0.8mn in FY20), lighting bulb : 185mn, 14mn baton, 3.4mn down-lighter, 0.9mn smartphone, 2.4mn 2G phones, 3.3mn CCTV, 0.8mn DVR and 2.2mn of set-top box

2 Dixon Technologies (India)

Institutional Equities

Exhibit 2: ODM revenue trend

(Rsmn) 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500

-

3QFY18 1QFY18 2QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 Lighting Consumer electronics Home appliances Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 3: ODM sales as a percentage of total sales

(%) 100

80

60

40

20

0

2QFY20 3QFY21 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 3QFY20 4QFY20 1QFY21 2QFY21 4QFY21 Lighting Consumer electronics Home appliances Consolidated Source: Company, Nirmal Bang Institutional Equities Research

3 Dixon Technologies (India)

Institutional Equities

Exhibit 4: Segment-wise analysis Y/E March 4QFY20 3QFY21 4QFY21 YoY (%) QoQ (%) FY20 FY21 YoY (%) Revenues (Rsmn) Lighting 2,548 3,486 3,817 49.8 9.5 11,397 11,037 (3.2) Consumer electronics 3,930 13,598 11,786 199.9 (13.3) 20,952 38,426 83.4 Home appliances 900 1,152 1,465 62.7 27.2 3,963 4,312 8.8 Reverse logistics 47 45 38 (18.3) (14.1) 156 133 (14.3) Mobile phones 603 2,992 2,899 380.7 (3.1) 5,369 8,398 56.4 Security systems 546 555 1,092 99.8 96.6 2,164 2,176 0.5 Total 8,574 21,828 21,097 146.1 (3.3) 44,001 64,482 46.5 Revenue mix (%) Lighting 29.7 16.0 18.1 - - 25.9 17.1 - Consumer electronics 45.8 62.3 55.9 - - 47.6 59.6 - Home appliances 10.5 5.3 6.9 - - 9.0 6.7 - Reverse logistics 0.5 0.2 0.2 - - 0.4 0.2 - Mobile phones 7.0 13.7 13.7 - - 12.2 13.0 - Security systems 6.4 2.5 5.2 - - 4.9 3.4 - EBITDA (Rsmn) Lighting 254 332 307 21.0 (7.3) 977 974 (0.3) Consumer electronics 98 394 282 188.8 (28.5) 504 1,028 104.2 Home appliances 99 118 103 4.0 (12.7) 461 397 (13.9) Reverse logistics 4 5 1 (76.7) (78.3) 26 10 (62.7) Mobile phones 85 138 74 (13.6) (46.6) 191 396 107.3 Security systems 19 20 31 65.3 61.0 72 61 (15.1) Total 559 1,005 798 42.8 (20.6) 2,231 2,866 28.5 EBITDA margin (%) Lighting 10.0 9.5 8.1 - - 8.6 8.8 - Consumer electronics 2.5 2.9 2.4 - - 2.4 2.7 - Home appliances 11.0 10.2 7.0 - - 11.6 9.2 - Reverse logistics 9.2 10.3 2.6 - - 16.9 7.4 - Mobile phones 14.1 4.6 2.5 - - 3.6 4.7 - Security systems 3.5 3.5 2.9 - - 3.3 2.8 - Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 5: Actual performance versus our estimates 4QFY21(Rsmn) Actual Our estimate Deviation (%) Consensus est. Deviation (%) Revenues 21,097 21,494 (1.8) 20,153 4.7 EBITDA 798 1,017 (21.6) 982 (18.7) PAT 443 605 (26.9) 546 (18.9) Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 6: Change in our estimates (Rsmn) Old New Deviation (%) Y/E March FY22E FY23E FY22E FY23E FY22E FY23E Revenues 124,180 168,173 125,945 182,779 1.4 8.7 EBITDA 5,303 6,925 5,465 7,897 3.1 14.0 PAT 3,377 4,502 3,404 5,091 0.8 13.1 Source: Company, Nirmal Bang Institutional Equities Research

4 Dixon Technologies (India)

Institutional Equities

Financials (consolidated)

Exhibit 1: Exhibit 7: Income statement Exhibit 3: Exhibit 8: Cash flow Y/E March (Rsmn) FY19 FY20 FY21 FY22E FY23E Y/E March (Rsmn) FY19 FY20 FY21 FY22E FY23E Net sales 29,845 44,001 64,482 125,945 182,779 EBIT 1,132 1,865 2,429 4,791 7,035 % growth 5.0 47.4 46.5 95.3 45.1 (Inc.)/dec. in working capital (1,152) 1,095 (51) (1,109) (2,981) Raw material costs 26,093 38,602 57,697 115,188 167,991 Cash flow from operations (20) 2,961 2,378 3,682 4,055 Staff costs 839 1,180 1,371 2,015 2,742 Other income 56 52 16 18 21 Other overheads 1,564 1,989 2,548 3,277 4,150 Depreciation 217 365 437 674 861 Total expenditure 28,496 41,771 61,616 120,480 174,882 Tax paid (-) (202) (359) (536) (1,145) (1,712) EBITDA 1,349 2,231 2,866 5,465 7,897 Net cash from operations 52 3,019 2,295 3,229 3,224 % growth 20.4 65.4 28.5 90.7 44.5 Capital expenditure (-) (853) (1,926) (2,431) (2,000) (1,500) EBITDA margin (%) 4.5 5.1 4.4 4.3 4.3 Net cash after capex (801) 1,093 (136) 1,229 1,724 Depreciation 217 365 437 674 861 Interest paid (-) (250) (350) (274) (261) (253) Interest costs 250 350 274 261 253 Dividends paid (-) (27) (278) (59) (644) (878) Other income 56 52 16 18 21 Inc./(dec.) in short-term borrowing 973 (581) (5) - - Profit before tax 938 1,568 2,170 4,549 6,803 Inc./(dec.) in long-term borrowing (19) 49 689 - - Tax 305 363 572 1,145 1,712 Inc./(dec.) in total borrowings 954 (533) 685 - - Net profit 634 1,205 1,598 3,404 5,091 (Inc.)/Dec. in investments 35 76 (953) - - PAT margin (%) 2.1 2.7 2.5 2.7 2.8 Equity issue/(buyback) 0 2 1 0 0 EPS (Rs) 10.6 20.3 26.9 57.2 85.6 Cash from financial activities 712 (1,081) (599) (905) (1,131) % growth 4.0 90.2 32.6 113.0 49.6 Others 15 623 423 (0) 0 (0) Source: Company, Nirmal Bang Institutional Equities Research Opening cash balance 441 367 1,002 689 1,013 Closing cash balance 367 1,002 689 1,013 1,606 Change in cash balance (74) 634 (313) 324 593 Exhibit 2: Exhibit 9: Balance sheet Source: Company, Nirmal Bang Institutional Equities Research Y/E March (Rsmn) FY19 FY20 FY21 FY22E FY23E Share capital 113 116 117 117Exhibit 117 4: Exhibit 10: Key ratios Reserves & surplus 3,669 5,298 7,256 10,016 14,228 Y/E March FY19 FY20 FY21 FY22E FY23E Net worth 3,782 5,413 7,373 10,133 14,346 Per share (Rs) Short-term loans 1,299 718 713 713 713 EPS 10.6 20.3 26.9 57.2 85.6 Long-term loans 61 110 800 800 800 Book value 333.8 93.6 125.9 173.1 245.0 Total loans 1,361 828 1,513 1,513 1,513 Valuation (x) Deferred tax liability (net) 144 148 184 184 184 P/E 375.0 197.2 148.7 69.8 46.7 Total liabilities 5,287 6,389 9,070 11,830 16,042 P/BV 12.0 42.7 31.7 23.1 16.3 Net block 2,362 4,016 5,381 7,431 8,069 EV/EBITDA 176.9 106.4 83.2 43.6 30.1 Capital WIP 188 96 724 0 0 EV/sales 8.0 5.4 3.7 1.9 1.3 Goodwill / Intangibles 47 125 122 122 122 Return ratios (%) Investments 76 0 953 953 953 RoCE 21.4 29.2 26.8 40.5 43.9 RoE 16.7 22.3 21.7 33.6 35.5 Inventories 4,084 4,978 7,433 14,832 21,171 RoIC 23.4 34.6 32.7 48.6 52.2 Debtors 6,650 5,151 10,891 15,527 23,035 Profitability ratios (%) Cash 367 1,002 689 1,013 1,606 EBITDA margin 4.5 5.1 4.4 4.3 4.3 Other current assets 1,135 1,602 2,266 4,030 6,397 EBIT margin 3.8 4.2 3.8 3.8 3.8 Total current assets 12,235 12,733 21,278 35,403 52,210 PAT margin 2.1 2.7 2.5 2.7 2.8 Creditors 8,976 9,391 17,097 27,771 39,121 Turnover ratios Other current liabilities & provisions 646 1,190 2,290 4,307 6,190 Fixed-asset turnover (x) 12.2 11.4 11.2 15.7 18.0 Total current liabilities 9,622 10,581 19,387 32,079 45,311 Debtor days 81 43 62 45 46 Net current assets 2,614 2,153 1,891 3,325 6,899 Inventory days 57 47 47 47 46 Total assets 5,287 6,389 9,070 11,830 16,042 Creditor days 126 89 108 88 85 Source: Company, Nirmal Bang Institutional Equities Research Solvency ratios (x) Debt-equity 0.4 0.2 0.2 0.1 0.1 Source: Company, Nirmal Bang Institutional Equities Research

5 Dixon Technologies (India)

Institutional Equities

Rating track Date Rating Market price Target price (Rs) 21 August 2018 Buy 2,515 3,285 9 October 2018 Buy 2,348 3,285 2 November 2018 Buy 2,115 2,990 9 January 2019 Buy 2,095 2,990 31 January 2019 Buy 2,218 3,020 9 April 2019 Buy 2,377 3,190 16 April 2019 Buy 2,348 3,190 27 May 2019 Buy 2,425 3,090 9 July 2019 Buy 2,223 3,090 14 August 2019 Buy 2,000 2,925 12 September 2019 Buy 2,596 3,000 23 September 2019 Buy 2,889 3,230 7 October 2019 Buy 2,972 3,230 14 November 2019 Buy 2,992 3,520 9 January 2020 Buy 4,166 3,520 30 January 2020 Accumulate 4,253 4,505 26 March 2020 Buy 3,255 4,150 9 April 2020 Buy 3,819 4,150 12 June 2020 Buy 4,976 5,790 9 July 2020 Buy 6,230 5,790 5 August 2020 Accumulate 7,940 7,970 23 September 2020 Accumulate 8,620 9,300 9 October 2020 Accumulate 8,492 9,300 2 November 2020 Accumulate 9,317 9,970 7 January 2021 Accumulate 14,461 14,935 3 February 2021 Accumulate 15,717 17,510 9 April 2021# Accumulate 3,759 3,502 28 May 2021* Accumulate 3,994 3,850 # adjusted for 5:1 stock split *The coverage on the stock has been transferred to Mr. Mayank Bhandari

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6 Dixon Technologies (India)

Institutional Equities

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NBSPL or its associates have not been debarred / suspended by SEBI or any other regulatory authority for accessing / dealing in securities Market. NBSPL, its associates or analyst or his relatives do not hold any financial interest (Except Investment) in the subject company. NBSPL or its associates or Analyst do not have any conflict or material conflict of interest at the time of publication of the research report with the subject company. NBSPL or its associates or Analyst or his relatives may or may not hold beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of this research report.

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7 Dixon Technologies (India)

Institutional Equities

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8 Dixon Technologies (India)