March 29, 2021

S__tock___ TALES

Stock Tales are concise, holistic stock reports across wider spectrum of sectors. Updates will not be periodical but based on significant events or change in price. Dixon Technologies () (DIXTEC)

CMP: | 3624 Target: | 4270 (18%) Target Period: 15 months BUY

March 29, 2021 Rising star in domestic manufacturing space...

Dixon Technologies (DTL) is India’s leading electronic manufacturing service Stock Data (EMS) provider to various multinational/domestic companies in India. The company is one of the biggest beneficiaries of the government’s production Particular Amount

linked incentive (PLI) scheme for mobile phones and other electronic Market Cap (| Crore) 21,222.1 products. We believe PLI benefits will start flowing in from Q4FY21E Total Debt (FY20) (| Crore) 82.8

onwards while in future DTL’s mobile revenue will grow multi-fold (~14x Cash & Inv (FY20) (| Crore) 100.1 jump) over FY20-23E. DTL has also applied for PLI in the lighting, electronic EV (| Crore) 21,204.8 wearables and other electronic products (laptop/notebooks). This opens up 52 week H/L 4588/ 624 a significant growth opportunity for DTL, going forward (we see 4x jump in Equity capital (| Crore) 11.6 Stock Tales Face value (|) 2.0 revenue FY20-23E). Further, prudent working capital management and Price Performance future expansion through internal accruals will keep balance sheet light and `f

return ratios elevated (RoE: 39%, RoCE: 44%) for DTL, going forward. 5000 20000 Strong play in emergent domestic EMS industry 4000 15000 3000 10000 The Indian electronic manufacturing services (EMS) industry is likely to grow 2000 at a CAGR of 45% over the next five years to become a ~US$152 billion (bn) 1000 5000 industry. We believe the China+1 strategy by various MNCs alongside 0 0 various government measures will help boost domestic EMS industry, going

forward. DTL being one of the largest EMS players, is well set to reap the

Oct-18

Jan-20

Jun-20

Nov-20

Aug-19 Mar-19 benefits of said growth opportunities. The company’s manufacturing May-18

capacity in the LED TV, washing machines and LED lighting can serve ~26%, Dixon NSE

28% and 45% of total domestic requirements (in volume term), respectively.

Focus to improve ODM for customer retention Key Highlights  Strong play in government approved DTL’s share of original design manufacturer (ODM) revenue has increased PLI scheme for mobile phones manufacturing. revenue from 22% in FY17 to 34% by FY20, which has also helped in ~140 bps would see ~14x jump over FY20-23 expansion in EBITDA margin. DTL plans to increase ODM revenue share in from current 6% to 15% in the next two years, which  Lean Balance sheet, strong return will help drive segment EBITDA margin higher. However, overall EBITDA rations and quality management

margin is expected to remain flat in FY20-23E considering a significant rise

Retail Equity Research Equity Retail in revenue from mobile business (OEM model). Risk to our call  Delay/less volume offtake by key – Lean balance sheet supports strong RoEs, RoCEs clients in mobile segment

DTL has registered healthy RoE, RoCE of 22%, 26%, respectively, in FY20.  Strong competition from global and The future capex will largely be funded through internal accruals. We believe domestic EMS player restrict margin movement prudent working capital management and higher asset turn in the mobile business will result in higher RoE, RoCE, going forward. Valuation & Outlook Research Analyst Securities ICICI Sanjay Manyal We believe significant future growth potential in domestic electronic [email protected] manufacturing coupled with DTL’s plan to increase backward integration can bring in more customers and would lead to a revenue & earnings CAGR of Hitesh Taunk [email protected] 56% & 66%, respectively, in FY20-23E. We believe DTL may continue to command premium valuation due to its significant future growth opportunities, high return ratios and lean working capital days. We assign a BUY rating to the stock with a target price of | 4270/share, valuing the company at 45x FY23E earnings. Key Financial Summary

| Crore FY19 FY20E FY21E FY22E FY23E (CAGR 20-23E) Net sales 2984.5 4400.1 6268.2 11843.8 16539.2 55.5 EBITDA 134.9 223.1 302.5 554.1 814.5 54.0 EBITDA Margin(%) 4.5 5.1 4.8 4.7 4.9 Net Profit 63.3 120.5 173.1 367.6 549.5 65.8

EPS (|) 11.2 20.6 29.6 62.8 93.9 P/E(x) 324.0 176.1 122.6 57.7 38.6 RoE (%) 16.7 22.3 25.4 37.6 38.6 RoCE (%) 22.4 26.3 26.3 40.1 43.9

Source: ICICI Direct Research, Company Stock Tales | Dixon Technologies (India) ICICI Direct Research

Company Background

Business profile Dixon Technologies (DTL) was started in 1993. In 1994, the company commenced manufacturing of colour . At present, DTL’s six business segments 1) consumer electronics (mainly TV), 2) lighting solutions (LED lights), 3) home appliances (washing machines), 4) mobile & EMS, 5) security devices (CCTV, DVR), 6) reverse logistics contribute 48%, 26%, 9%, 12%, 5% and 0.4%, respectively, to the company’s total topline. The company mainly operates through two business models: 1) original equipment manufacturer (OEM), 2) original design manufacturer (ODM). The ODM revenue contribution for the company increased from 22% in FY17 to 38% in FY20. This is largely due to expansion in backward integration and improved ability in designing & developing products through in-house R&D. While a significant chunk of the business comes from the OEM business, the company has increased focus on increasing the mix of ODM share in consumer electronics and lighting business in future. Marquee clients include global MNCs such as , , , , Phillips, etc and domestic majors such as -Beko, -Lloyd, Godrej, Bajaj Electricals, Crompton Greaves, etc. DTL recorded strong revenue CAGR of 39% in FY17-20 to | 4400 crore led by 35%, 28% and 27% revenue CAGR in the consumer electronics, home appliances and lighting segments, respectively. The company has a strong balance sheet with a stringent working capital cycle of a mere six days along with RoCE & RoE of 26% and 22%, respectively.

Exhibit 1: DTL’s business profile Revenue ODM Share Production Capacity FY20 Capacity % of Product Product discription EBITDA contr. % of (%) of Revenue CAGR (mn units/annum) Revenue total industry (| crore) Margin total segment (FY17-20) Smart TVs, ultrahigh Consumer definition,commercial 3.6 2095 2.4% 48% 6% 35% 26% Electronics and signage display Bulb- 240 Lighting Indoor lighting and LED Batens- 24 1140 8.6% 26% 87% 27% LED- 45% Solutions bulbs Downlighters- 6 Washing machines- Home Semi auto-1.2 Semi automatic, top 396 11.6% 9% 100% 28% 28% appliances Top loading- 0.6 loading Mobile & Feature phones Feature- 27 537 3.6% 12% Nil NM 10%** EMS Smart Phones Smart phone- 3 CCTV, Digital Video Security CCTV- 27 Recorders 216 3.3% 5% 100% 93%* 25%^ Devices DVR- 1.8 (DVRs). Repair & Refurbishment - Reverse Set up box, Mobile - 16 16.9% 0.4% NM NM _ Logistics phones, LED Tv Source: Company, ICICI Direct Research, * YoY growth in FY20, ** plans 5x expansion in smart phone capacity in next two years, ^ value market share

ICICI Securities | Retail Research 2 Stock Tales | Dixon Technologies (India) ICICI Direct Research

Exhibit 2: Major clientele as on FY20

Source: Company, ICICI Direct Research,

Exhibit 3: Journey of Dixon so far

Mid to late 90's 2000-2008 2008-2010 Last 10 years

Assembly CTV and VCR Added assembly of PCBs, Added ODM for CTV, Started LCD/LED TVs, Capability assembly started DVDs, CFL bulbs & STBs DVD & CFL bulbs Mobile Phones, CCTVs Joined hands with Acquired leading Indian 1st Indian company PLI, Significant client addition, Achievements the Global Consumer Consumer Durable brands to develop STB-ODM exploring export oppertunities Electronics Giants as Customers solution First manufacturing Washing Machine & LED Established Multilocation Started Sheet metal & Manufacturing facility operational at Lighting, Magnetic and power footprint plastic moulding supplies , Security Cameras Prescriptive ODM & Operational High Value- Added EMS Backward Sophistication Products Operations Integration Source: Company, ICICI Direct Research,

ICICI Securities | Retail Research 3 Stock Tales | Dixon Technologies (India) ICICI Direct Research

Investment Rationale

Indian EMS industry: Ready to fly According to the Electronic Industries Association of India (ELCINA), the Indian electronic manufacturing services (EMS) industry is valued at ~US$23.5 bn (in FY20) and represents ~3% of the global EMS industry (valued at US$832 bn). Globally, EMS service providers offer consumer durable brands flexibility in product design updates, faster time to market, cost effectiveness, avoid manufacturing challenges besides offering value added services like design services. In India, the EMS industry is likely to record robust growth of 45% in the next five years to cross ~ US$152 billion mark by 2025. This is largely supported by various government measures to boost domestic manufacturing in addition to China +1 strategy of various multinational companies. Over the last many years, India has remained dependent on import to fulfil its domestic requirement of electronic goods. However, domestic production of electronic goods reported phenomenal growth of ~19% in the last five years. In FY20, India produced ~US$75 billion worth of electronic goods of which EMS value contribution was at ~US$23.5 billion. India also imported ~US$53.5 billion worth of electronic goods in FY20 of which ~US$17 bn was of EMS value .We believe with strong domestic demand and significant export opportunities of electronic goods (electronic goods production to surpass the US$400 bn mark by 2025, and ~US$100 billion worth of mobile phone to be exported from India), the EMS industry in India is likely to receive a significant fillip (~45% growth) in the next five years.

Exhibit 1: EMS share in production of domestic electronic goods 450 US $ 400 bn 400

350 EMS value, 152 300

250

US $ $ bn US 200

150

100 US $ 75 bn EMS value, 23.5 50

0 FY20 FY25

Domestic production EMS value

Source: ELCINA, Meity ICICI Direct Research

Significant growth opportunity for DTL in EMS industry At present, DTL’s market share is at ~3% of India’s total EMS opportunity. Considering the future growth of the EMS industry in India and DTL’s strong presence across product verticals, we reckon DTL has the potential to grow by 4x (in revenue terms) in FY20-23. The future growth driver for the company will be mobile & EMS segment (includes medical device, wearables), which we expect to grow at a phenomenal rate of 145% over FY20-23E. The revenue contribution from the mobile and EMS segment is also expected to increase from 12% in FY20 to 50% by FY23E. Other segments such as consumer electronic (TV), lighting products and home appliances (washing machines), are also expected to see robust revenue CAGR of 35%, 28%, 23% respectively. We believe, strong performance by key segment would help drive overall revenue at 56% CAGR in FY20-23E.

ICICI Securities | Retail Research 4 Stock Tales | Dixon Technologies (India) ICICI Direct Research

Domestic mobile production to grow 5x under PLI The central government aims to create a self-reliant India (Atmanirbhar Bharat) in the field of electronic manufacturing wherein India will not only stand to fulfil its domestic requirements but also be a manufacturing hub of the world. To make India a global manufacturing hub for electronics the government launched three schemes on April 2020, which are production linked incentives (PLI) scheme, scheme for promotion of manufacturing of electronic components and semiconductors (SPECS) and modified electronic manufacturing cluster (EMC). PLI for large scale electronics manufacturing proposes a financial incentive to boost domestic manufacturing and attract large investments in the electronics value chain (including components and semiconductor packaging). In case of mobile phones, the scheme will extend an incentive of 4% to 6% on incremental sales (over base year) of goods manufactured in India for five years subsequent to the base year (FY20 will be treated as base year). The government has outlined ~ | 40, 951 crore under the PLI for a tenure of five years. Similarly, the SPECS notified for manufacturing of electronics components and semiconductors has a budget outlay of | 3,285 crore spread over eight years. The notified EMC 2.0 has a total incentive outlay of | 3,762 crore spread over eight years with the objective to create 10 lakh direct and indirect jobs under the scheme.

Exhibit 2: PLI scheme eligibility criteria

Source: PLI Presentation Government of India, ICICI Direct Research On the domestic front, Padget Electronic (100% of subsidiary of Dixon Technologies), Lava, Bhagwati (Micromax), UTL Neolyncs and Optiemus Electronics have received approval under PLI schemes for the manufacturing of mobile phones (invoice value below | 15,000). These domestic companies have proposed a production output of | 1.25 lakh crore over the next five years.

International companies such as Samsung, Hon Hai, Rising Star, and have received PLI approvals (for manufacturing mobile invoice value | 15,000 and above). Apple (37%) and Samsung (22%) together account for nearly 60% of global sales of mobile phones. In the last four years, domestic mobile production witnessed strong growth of ~34% to | 2.25 lakh crore backed by strong domestic demand and import curb by central government (through increased custom duty). Further, with China + 1 strategy of global brands/manufacturers and increased value addition (to 35-40% from 15-20% currently) through PLI, domestic

ICICI Securities | Retail Research 5 Stock Tales | Dixon Technologies (India) ICICI Direct Research

production of mobile phone is expected to see a multi-fold jump (~5x) in the next five years to | 10.3-10.5 lakh crore. Of this, ~| 6.5 lakh crore worth of mobile phones would be for export markets.

Exhibit 3: Nearly 5x jump in mobile production under PLI Exhibit 4: Significant jump in mobile export 1200000 700000 CAGR ~36% CAGR ~87% 1000000 600000 500000 800000 650000

1050000 400000 600000

300000

(| crore) (| crore) (| 400000

225000 200000

132000 170000

200000 94000 100000

27225

1367

1149 11396

0 0

FY17 FY18 FY19 FY20 FY17 FY18 FY19 FY20

FY25E FY25E

Source: Commerce ministry, Meity ICICI Direct Research Source: commerce ministry, Meity ICICI Direct Research

DTL to see ~14x jump in Mobile revenue in FY20-23E The mobile & EMS segment of DTL constitutes mobile phones, electronic wearables and medical devices and contributes ~12% to overall sales of company (i.e. ~| 537 crore). DTL has a manufacturing capacity of 30 mn mobile phones annually (27 mn feature phones, 3 mn smart phones). After getting PLI approval, the company now plans to increase the manufacturing capacity of smart phones by 5x by FY22E. DTL has already signed major customers such as Samsung, Motorola, for manufacturing their mobile phones. Further, the company is also in talks with other global players for manufacturing mobile phones. Apart from mobile, Dixon has also ventured into contract manufacturing of set up box (for Reliance Jio, Dish TV and City Cable), medical device (RT-PCR machine) and wearables (for boAt). The company has a strong order book in set up box with revenue potential of | 1000 crore in the next two years while the opportunity size for the overall wearable market is | 5000 crore in India. We believe the mobile & EMS division of DTL will see revenue CAGR of ~145% in FY20-23E to ~| 7931 crore, led by ~14x jump in the revenue of mobile division (| 7270 crore FY23E, contribution of 92% to mobiles & EMS division). Post this, segment contribution in total topline is also expected to increase to 44% by FY23, from the current 12%.

ICICI Securities | Retail Research 6 Stock Tales | Dixon Technologies (India) ICICI Direct Research

Exhibit 5: PLI schemes to support nearly strong growth in Exhibit 6: Mobiles & EMS division margin expected to mobile & EMS division revenues normalise post FY21 6 9000 8000 CAGR ~145% 5 5.2 7000

7931 4 6000 4.0 4.2

5000 3 3.6 (%)

4000 (| crore) (|

4817 2 3000 2.1

2000 1

670

811 537

1000 355 1.0 1074 0 0 0.6

FY17 FY18 FY19 FY20 FY21E FY22E FY23E

FY17 FY18 FY19 FY20

FY21E FY22E FY23E

Source: Company, ICICI Direct Research Source: Company, Meity ICICI Direct Research

Consumer electronics: Import restrictions, customer addition to drive segment sales The Indian LED TV market is estimated to grow at a CAGR of 10% in FY19- 23E from 14 million units in FY19 to 21 mn units by FY23. In value terms, the industry is expected to grow at | 32,200 crore in FY23E from | 22,000 crore in FY19 supported by an improved mix and volume growth. The demand is expected to be largely driven by higher internet penetration, rising content consumption, falling price of entry level smart TVs, low levels of multi-TV homes in urban markets and rising work from home culture. This, along with restrictions on import of LED TVs by government (import value of TV set in FY19 was at ~| 7000 crore) is expected to boost domestic manufacturing of LED TV, which is a significant positive for Dixon Technologies.

Dixon is a market leader in the LED TV manufacturing. DTL has LED TV manufacturing capacity of 3.6 mn units by the end of FY20, which has increased to 4.4 mn in FY21E i.e. 22% YoY growth. The company further plans to increase LED TV manufacturing capacity by 25% in FY22E to 5.5 mn units. The 52% increase in LED TV manufacturing capacity in two years was mainly due to rising demand from existing customers (for new SKUs) and addition of new clients. Dixon has marquee customers in this segment including both domestic & global brands. The major customers in this segment are Xiaomi, Samsung, Panasonic, TCL, Lloyd, Flipkart, , , Vu, One Plus, etc. Unlike lighting and home appliances segment (where ODM revenue share is 87% and 100%, respectively), the ODM share in consumer electronics is at 6%. With increased backward integration (increased SMT line by 80% YoY to 1.8 mn in FY20) the company is looking to increase ODM share in consumer electronics from the current 6% to 15- 20% in the next two to three years, which would help increase the EBITDA margin of the segment, going forward. We build-in revenue CAGR of 35% for the consumer electronic segment in FY20-23E.

ICICI Securities | Retail Research 7 Stock Tales | Dixon Technologies (India) ICICI Direct Research

Exhibit 7: TV industry to continue to grow at CAGR 10% Exhibit 8: India’s TV import increases 11% in FY15-19 35000 8000 CAGR ~10% CAGR ~11% 30000 7000 6000 25000 7120 32104.2 5000 20000

4000 22189

15000 4658

(| crore) (|

(| crore) (| 4709 19776 3000

10000 18291

2000 3636

5000 3071 1000

0 0

FY17 FY18 FY19

FY23E FY15 FY16 FY17 FY18 FY19

Source: commerce ministry, ICICI Direct Research Source: Commerce ministry, ICICI Direct Research

Exhibit 9: Customer addition to help drive growth for DTL Exhibit 10: Expect marginal improvement in EBITDA margin 4.0 6000 3.5 5000 CAGR ~35% 3.0 4000 5167 3.1 3.0 2.9 4479 2.5 2.8 3000 (%)

3527 2.4 (| crore) (| 2.0 2000 2.2 2.1 1.5

1000 2095

1073 1194 845 1.0

0 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

FY17 FY18 FY19 FY20

FY22E FY23E FY21E

Source: Company, ICICI Direct Research Source: Company, Meity ICICI Direct Research

Lighting segment: Focus on improving product mix, export opportunities According to industry estimates, the global LED lighting market is valued at ~US$76 billion in 2020 and is expected to continuously grow at ~14% CAGR to cross US$160 billion by 2026 supported by growing needs of energy efficient products across the globe. The Indian LED lighting industry, which is valued at | 18,000 crore, recorded phenomenal growth of 29% in FY15-20 mainly due to replacement of conventional lighting products to LED lights. The LED lighting industry is likely to continue to grow at a CAGR of 11% in FY20-23E backed by government’s Unnat Jyoti by Affordable LEDs for All (Ujala) and Street Lighting National Programme (opportunity size of | 8000 crore).

Dixon is the key supplier to Signify (earlier Phillips), Panasonic Life solutions, , Bajaj, Syska, Orient, Havells, Polycab, Luminous etc for their lighting requirements (LED bulbs, battens and down lighters). Dixon has ~ 240 million (mn) LED bulbs manufacturing capacity (which is ~45% of India’s total LED bulb requirements) and 24 mn & 14.4 mn manufacturing capacity of battens & down lighters, respectively (~25% of India’s total requirements). While the company sees commercial LED lightings and LED street lighting as a big opportunity for future growth drivers in the domestic markets, it is also exploring export opportunities for lighting products. The central government aims to promote domestic manufacturing of LED lights in India for which a PLI has also been approved (a PLI worth | 6238 crore has been approved for AC and LED lighting products).

ICICI Securities | Retail Research 8 Stock Tales | Dixon Technologies (India) ICICI Direct Research

Dixon’s ODM share of lighting revenue is 87% due to its backward integration capabilities (in sheet metal, plastic moulding & wound components) and strong R&D backup to develop low cost products. As a result, the lighting division segment EBITDA margin at 8.6% (in FY20) is much higher compared to company level EBITDA margin of ~5%. Further, for FY20-23E we build in ~28% revenue CAGR for lighting segment revenue and margin improvement of ~100 bps over the same period.

Exhibit 11: Better mix, export opportunities to drive growth Exhibit 12: Improved product mix to drive EBITDA margin in of lighting division FY20-23E 12.0 3000 10.0 2500 CAGR ~28% 9.7 8.0 9.3 9.6

2000 8.6 2386 6.0 7.2 1500 (%)

6.1 (| crore) (| 1657 4.0

1000 1140

1084 2.0 3.2

500 919

774 551 0 0.0

FY17 FY18 FY19 FY20 FY21E FY22E FY23E

FY17 FY18 FY19 FY20

FY21E FY22E FY23E

Source: Company, ICICI Direct Research Source: Company, Meity ICICI Direct Research

Home appliances: New capacity, client addition to drive future growth The home appliances segment of the company mainly comprises washing machines. DTL was mainly present in the semi-automatic washing machines category until FY20. However, the company has now started manufacturing top loading automatic washing machines with initial capacity of ~0.6 million units annually (revenue flow will start from FY21). The company currently has 140 models from 6.0 Kg to 10 Kg in the semi-automatic machine category and has the largest capacity in India of ~1.2 million units (almost 28% of the Indian market requirement). The home appliances business is a 100% ODM business and DTL has acquired in-house capabilities for designing the complete range of semi-automatic washing machines. Also, the company has in-house development of new design concepts with additional features like magic filter, water fall, side scrubber and air dry. The major customers in this segment are Samsung, Godrej, Panasonic, Lloyd, Flipkart, Haier, Voltas- Beko, , etc.

The Indian washing machine industry is pegged at | 10,600 crore and is likely to surpass the | 15000 mark by FY23 at a CAGR of ~12%. The growth would largely be driven by growing working population, increasing in number of nuclear families, absence of domestic helps (amid pandemic) and rising trend of working women to drive urban consumption. We believe the home appliances segment of the company will grow at a CAGR of 23% in FY20- 23E to | 740 crore led by addition of newer top loading washing machine categories and client additions in the existing product category. On the margin front, we believe EBITDA margin is likely to normalise from FY20 level and settle at ~10.6% in FY23.

ICICI Securities | Retail Research 9 Stock Tales | Dixon Technologies (India) ICICI Direct Research

Exhibit 13: Client addition to drive growth in home appliance Exhibit 14: Gradual margin improvement FY21-23 18.0 800 700 CAGR ~23% 16.0 16.3 600 739 14.0

500 619 12.0 12.3 400 (%) 10.0 11.6 10.6 (| crore) (| 10.3 300 409 396 9.9 10.1 374 8.0 200

250 6.0

100 188 0 4.0

FY17 FY18 FY19 FY20 FY21E FY22E FY23E

FY17 FY18 FY19 FY20

FY21E FY22E FY23E

Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

Security Systems: Improved discretionary spend to drive segment performance DTL entered into a security surveillance system in FY18 through a JV with Aditya Infotech for manufacturing security devices including CCTVs & digital video recorders (DVRs). “CP Plus”, trademark owned by Aditya Infotech, is one of the leading industry players in the field of physical security with a marker share of 24% and has been No.1 security and surveillance brand for the past six years. DTL’s security systems contribute ~5% to the company’s overall revenue (FY20 revenue at ~ | 216 crore). The Indian security industry is consistently growing and expanding with opportunities emanating from the government and private sector verticals. The key drivers of this growth are increase in organised real estate sector, rise in threat perception, growing crime rates, data thefts, remote monitoring, growth of public infrastructure. Growth would be aided by government initiatives leading to rise in demand for security equipment. We build in ~11% revenue CAGR for security system in FY20-23E with a slight improvement in EBITDA margin at 3.3%.

Exhibit 15: Moderate growth in segment Exhibit 16: Margin to remain at FY20 level 4.0 350 CAGR ~11% 3.5 300 3.0 3.3 3.3 3.3

250 297 3.1 2.5

200 254

2.0 (%) 150 216 (| crore) (| 1.5 100 161 1.0

112 1.1 50 0.5 0 0.0

FY19 FY20 FY21E FY22E FY23E

FY19 FY20

FY21E FY22E FY23E

Source: Company, ICICI Direct Research Source: Company, Meity ICICI Direct Research

Reverse logistics: Expect flattish revenue growth The reverse logistics business of the company involves repair & refurbishment of set top boxes, LED TV panels & mobile phones. It is one of the few companies to have panel repairing and LED TV refurbishment facilities. This business is more strategic in nature, more to enhance the stickiness with customers and provide them end-to-end solution. The segment’s contribution in topline is miniscule at 0.4% (| 16 crore in FY20). We build in flattish revenue for the segment with improvement in EBITDA margin at ~10%.

ICICI Securities | Retail Research 10 Stock Tales | Dixon Technologies (India) ICICI Direct Research

Focus to increase share of ODM business Dixon Technologies operates under two business models, original equipment manufacturer (OEM) and original design manufacturer (ODM). In OEM, Dixon provides fully integrated end-to-end product and solution suite to original equipment manufacturers ranging from global sourcing, manufacturing, quality testing and packaging to logistics. Here R&D and designing portion is done by the customers themselves. In the ODM model, the complete value chain is controlled by the EMS player on behalf of a leading brand. The scope of work starts right from design and development of products, manufacturing and supply. While the OEM business is less capital intensive, the ODM business requires additional investment in R&D as well as working capital. However, the ODM model commands significantly high margin compared to OEM and increased customer stickiness. While at present Dixon has a meaningful revenue contribution from OEM segment (~66% of revenue in FY20), the revenue contribution of ODM has grown notably. In the last four years, ODM revenue contribution to total revenue increased from 22% in FY17 to 34% in FY20. Dixon’s share in ODM is higher in the home appliances i.e. washing machine (100%), lighting (~9870%) and consumer electronics i.e. TV (6%). Dixon further aims to increase share of ODM in the lighting and consumer electronic segment to 95-96% and 15-20%, respectively, in the near future.

Exhibit 17: Strong growth in ODM revenue Exhibit 18: ODM share of business 1600 120% CAGR ~41% 100% 1400 100% 87%

1200 1514 80% 1000 60%

1135 40% 800 20% 6% (| crore) (| 600 0%

400 624 537

200

Lightings Consumer

0 Electronics

FY17 FY18 FY19 FY20 appliances Home

Source: Company, ICICI Direct Research Source: Company, Meity ICICI Direct Research

ICICI Securities | Retail Research 11 Stock Tales | Dixon Technologies (India) ICICI Direct Research

Financials

Revenue CAGR of 56% in FY20-23 led by mobile & EMS division DTL is likely to see consolidated revenue CAGR of 56% to | 16,539 crore in FY20-23E led by the company’s mobile & EMS division, which is likely to grow strongly at ~145% CGAR during the same period. We believe opportunities in the newer segment (like wearables, top loading automatic washing machines) addition of new clients and increased wallet share from existing clients would help drive revenue for DTL.

Exhibit 19: Strong revenue growth over FY20-23E 18000 16000 CAGR ~56%

14000 16539 12000 10000

8000 11844 (| crore) (| 6000

4000

6268

2984 2842

2000 2457 4400

0

FY18 FY19 FY20 FY17

FY21E FY23E FY22E

Source: Company, ICICI Direct Research

Operating leverage, higher ODM share of lighting & consumer electronics to help maintain EBITDA margin DTL recorded an EBITDA margin expansion by ~140 bps in FY17-20E led by higher operating leverage and sharp increase in revenue contribution of the ODM business. The ODM revenue of the company recorded phenomenal growth of 41% in FY17-20E while its contribution in revenue increased from 22% to 34% during the same period. The EBITDA margin of the ODM business was up ~600-700 bps compared to the OEM segment margin. However, for FY20-23E, we believe the EBITDA margin will remain at ~5% given a significant rise in the contribution of mobile & EMS business (which will be OEM in nature). Finally, strong revenue growth coupled with saving in interest cost would help drive PAT at a CAGR of 66% in FY20-23E.

Exhibit 20: EBITDA to grow strongly in FY20-23 Exhibit 21: Robust PAT CAGR of 66% in FY20-23E 900 814 6.0 600 800 5.0 700 500 CAGR ~66% 554 550 600 4.0 500 400 3.0 400 305 (%)

(| crore) (| 300 300 223 2.0 368

200 113 135 crore) (| 91 1.0 200 100 0 0.0

100 173

48 61 63

121

FY17 FY18 FY19 FY20

FY22E FY23E

FY21E 0

FY18 FY19 FY20

EBITDA EBITDA Margin FY17

FY21E FY22E FY23E

Source: Company, ICICI Direct Research Source: Company, Meity ICICI Direct Research

ICICI Securities | Retail Research 12 Stock Tales | Dixon Technologies (India) ICICI Direct Research

Robust profitability, lean b/s lead to strong RoCE, RoE DTL posted healthy RoE, RoCE of 22%, 26%, respectively, in FY20. The company is aiming at a capex of ~| 150-160 crore in the next two years, which will largely be used to increase the capacity of mobile & EMS (mobile manufacturing capacity will increase from current 30 mn to 50 mn by FY23). The capex will largely be funded through internal accruals. This, coupled with prudent working capital management, going forward, is likely to result in strong RoE, RoCE of 39% and 44% in FY23E.

Exhibit 22: Trend of return ratios, going forward

50 44 45 40 40 34 35 39 28 38 30 26 26 22

25 (%) 20 24 25 22 15 19 17 10 5 0 FY17 FY18 FY19 FY20 FY21E FY22E FY23E RoCE RoE

Source: Company, ICICI Direct Research

Exhibit 23: Valuation Matrix (Peer) Mcap Sales EBITDA margin PAT D/E RoE RoCE PE | crore FY20 FY21E FY22E FY23E FY20 FY21E FY22E FY23E FY20 FY21E FY22E FY23E FY20 FY21E FY22EFY23E FY20FY21E FY22E FY23E FY20FY21E FY22E FY23E FY20 FY21EFY22E FY23E Dixon Tech 21,222 4400.1 6268.2 11843.8 16539.2 5.1 4.8 4.7 4.9 120.5 173.1 367.6 549.5 0.2 0.3 0.2 0.1 22.3 25.4 37.6 38.6 26.3 26.3 40.1 43.9 176.1 122.6 57.7 38.6 Amber Ent 9,670 3962.8 3277.1 5375.8 6695.2 7.8 7.1 8.2 8.7 164.1 100.5 229.8 328.7 0.3 0.2 0.2 0.1 14.5 6.5 13.0 15.8 14.3 8.4 15.3 18.7 58.9 103.0 45.1 31.5 Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 13 Stock Tales | Dixon Technologies (India) ICICI Direct Research

Risks & Concerns

Higher dependence on key customers At present, the company has high dependency on a few customers on its key products consumer electronic (Samsung and Xiaomi contribute ~75% in segment revenue) and mobile division (new customers signed are Motorola and Nokia under PLI). While the company is planning to add more customers for said divisions, buy no renewal or delay/cancelation of orders from existing customers poses risk on revenue growth going forward.

Competition from global EMS players The international companies such as Foxconn Hon Hai, Rising Star, Wistron and Pegatron have received PLI approvals along with the world’s largest players in the EMS industry. Their scale and strong backward integration in the component manufacturing capacity (in mobile phones) could be a risk for Dixon in getting large margin orders.

Global shortage of semiconductor may delay order execution Globally, electronic manufacturing services providers are facing shortage of chips (semiconductors) for manufacturing electronic goods. This is largely due to trade war with China and a significant rise in demand for cell phones, laptops, other work-from-home devices amid pandemic. This coupled with shortage of containers may lead to delay in procurement of key electronic inputs. This may delay order execution for EMS providers like Dixon Technologies.

Margin risk amid volatility in input prices The company is largely dependent on import for key components (~55% of total COGS is imported) for its products (for example open cell panels make up for ~60% of the cost of manufacturing LED TV sets, which is fully imported. While the company works with complete pass through mechanism of cost to its customers, we believe a delay in passing on of raw material prices amid high volatility scenario may dent margins.

ICICI Securities | Retail Research 14 Stock Tales | Dixon Technologies (India) ICICI Direct Research

Financial Summary (consolidated)

Exhibit 24: Profit & Loss Statement Exhibit 25: Cash Flow Statement (Year-end March) FY20 FY21E FY22E FY23E (Year-end March) FY20 FY21E FY22E FY23E Revenue 4,400.1 6,268.2 11,843.8 16,539.2 Profit after Tax 120.5 173.1 367.6 549.5 Growth (%) 47.4 42.5 88.9 39.6 Add: Depreciation 36.5 42.6 47.4 67.8 Raw material expense 3,913.3 5,547.5 10,697.5 14,858.9 (Inc)/dec in Current Assets 27.3 -524.9 -1350.3 -1107.2 Employee expenses 118.0 126.5 204.3 284.5 Inc/(dec) in CL and Provisions 7.0 430.4 1312.1 1071.2 Other expenses 198.9 226.7 387.9 581.3 Others 35.0 28.7 19.3 17.8 Total Operating Exp 4,177.1 5,962.9 11,289.7 15,724.8 CF from operating activities 226.3 149.9 396.1 599.2 EBITDA 223.1 305.3 554.1 814.5 (Inc)/dec in Investments 7.6 0.0 -120.0 -170.0 Growth (%) 65.4 36.8 81.5 47.0 (Inc)/dec in Fixed Assets -192.3 -150.0 -150.0 -150.0 Depreciation 36.5 40.7 47.4 67.8 Others 67.4 19.3 5.0 5.0 Interest 35.0 28.7 19.3 17.8 CF from investing activities -117.2 -130.7 -265.0 -315.0 Other Income 5.2 0.7 3.6 5.0 Issue/(Buy back) of Equity 0.2 0.1 0.0 0.0 PBT 156.8 236.5 491.0 733.9 Inc/(dec) in loan funds -53.3 120.0 -20.0 -10.0 Total Tax 36.3 60.4 123.3 184.3 Dividend paid & dividend tax -8.3 -35.1 -70.3 -105.4 PAT 120.5 176.2 367.6 549.5 Others 15.7 -27.6 -19.3 -17.8

Source: Company, ICICI Direct Research CF from financing activities -45.6 57.4 -109.5 -133.2 Net Cash flow 63.4 76.6 21.5 151.0 Opening Cash 36.7 100.1 176.8 198.3 Closing Cash 100.1 176.8 198.3 349.3

Source: Company, ICICI Direct Research

Exhibit 26: Balance Sheet Exhibit 27: Key Ratios (Year-end March) FY20 FY21E FY22E FY23E (Year-end March) FY20 FY21E FY22E FY23E Liabilities Per share data (|) Equity Capital 11.6 11.7 11.7 11.7 EPS 20.6 29.6 62.8 93.9 Reserve and Surplus 529.8 668.9 966.2 1,410.3 Cash EPS 26.8 36.9 70.9 105.4 Total Shareholders funds 541.3 680.6 977.9 1,422.1 BV 92.5 116.2 167.0 242.9 Total Debt 82.8 202.8 182.8 172.8 DPS 1.4 6.0 12.0 18.0 Other non current liabilities 104.4 106.4 111.4 116.4 Operating Ratios (%) Total Liabilities 728.5 989.8 1,272.1 1,711.3 EBITDA Margin 5.1 4.8 4.7 4.9 Assets PAT Margin 2.7 2.8 3.1 3.3 Gross Block 488.4 638.4 788.4 938.4 Asset Turnover 9.0 9.8 15.0 17.6 Less: Acc Depreciation 82.5 125.1 172.5 240.3 Inventory Days 41.3 47.0 43.0 44.0 Total Fixed Assets 415.5 522.8 625.5 707.7 Debtor Days 42.7 43.0 45.0 42.0 Investments 0.0 0.0 120.0 290.0 Creditor Days 77.9 79.0 80.0 80.0 Inventory 497.8 807.1 1,395.3 1,993.8 Return Ratios (%) Debtors 515.1 738.4 1,460.2 1,903.1 RoE 22.3 25.4 37.6 38.6 Loans and Advances 0.0 0.0 0.0 0.0 RoCE 26.3 26.3 40.1 43.9 Other CA 133.1 125.4 165.8 231.5 RoIC 31.0 32.0 51.9 67.0 Cash 100.1 176.8 198.3 349.3 Valuation Ratios (x) Total Current Assets 1,246.2 1,847.7 3,219.6 4,477.8 P/E 176.1 122.6 57.7 38.6 Creditors 939.1 1,356.7 2,595.9 3,625.0 EV / EBITDA 95.1 70.2 38.1 25.5 Provisions 10.9 15.7 64.9 87.0 EV / Net Sales 4.8 3.4 1.8 1.3 Other CL 18.7 26.7 50.4 70.4 Market Cap / Sales 4.8 3.4 1.8 1.3 Total Current Liabilities 968.7 1,399.1 2,711.2 3,782.5 Price to Book Value 39.2 31.2 21.7 14.9 Net current assets 277.5 448.6 508.4 695.3 Solvency Ratios Other non current assets 35.6 18.3 18.3 18.3 Debt / Equity 0.2 0.3 0.2 0.1 Total Assets 728.5 989.8 1,272.1 1,711.2 Current Ratio 1.2 1.2 1.1 1.1

Source: Company, ICICI Direct Research Quick Ratio 0.7 0.6 0.6 0.6

Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 15 Stock Tales | Dixon Technologies (India) ICICI Direct Research

RATING RATIONALE ICICI Direct endeavors to provide objective opinions and recommendations. ICICI Direct assigns ratings to its stocks according to their notional target price vs. current market price and then categorizes them as Buy, Hold, Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock

Buy: >15% Hold: -5% to 15%; Reduce: -15% to -5%; Sell: <-15%

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai – 400 093 [email protected]

ICICI Securities | Retail Research 16 Stock Tales | Dixon Technologies (India) ICICI Direct Research

ANALYST CERTIFICATION

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