Stock Fundamentals

Dixon Technologies IPO: Sound prospects, steep cost

Rajalakshmi Nirmal | Updated on January 10, 2018 Published on September 02, 2017





While good revenue visibility and high return on capital are positives, the offer is pricey

The IPO of Dixon Technologies comprises a fresh issue of ₹60 crore and an offer-for-sale of ₹539 crore by private equity funds, bringing the total size of the issue to ₹599 crore. The price band is ₹1,760-1,766.

At the upper end of the price band, the stock’s market capitalisation, post-listing, will be about ₹2,000 crore.

The company is a fully integrated contract manufacturer in consumer electronics, offering services including sourcing, manufacturing, quality testing, packaging and logistics to original equipment manufacturers (OEMs) such as Panasonic India, Philips Lighting India, Haier Appliance, Gionee, Intex Technologies and Surya Roshni. It is also an original design manufacturer (ODM) of lighting products, LED TVs and semi-automatic washing machines. As an ODM, the company develops and designs products in-house and supplies them to companies which, in turn, distribute them under their own brands.

According to a Frost & Sullivan report, among the EMS (electronics manufacturing service) companies, Dixon enjoys market leadership in manufacturing flat panel display TVs, washing machines, LED and CFL lights in India.

At the higher end of the price band, the company is asking for a valuation of 40 times its earnings of 2016-17. This is expensive, given that OEMs such as Whirlpool and Blue Star themselves trade at only 40-50 times on trailing earnings.

But given the company’s long standing in the consumer electronics industry, leadership position in a few products, and the country’s growing middle-class, whose disposable incomes are rising, investors with a high appetite for risk can consider investing in the Dixon Technologies’ IPO.

The favourable policy environment for manufacturing products domestically following the Centre’s push for ‘Make in India’ campaign, which is encouraging OEMs to enter into partnerships with EMS companies, is also a plus.

Dixon intends to use money from the fresh issue of shares to repay some of its debt and build backward integration capabilities, IT infrastructure and put up a manufacturing unit of LED TVs.

Promising business

The company was incorporated in 1993. It began as a manufacturer of TVs and moved ahead to making LCDs by 2007, CFLs by 2008, LED TVs and washing machines by 2010 and other LED products by 2016. Recently, it has also started making mobile phones through a joint venture.

Dixon has six manufacturing facilities — three in Noida, Uttar Pradesh and three in Dehradun, Uttarakhand. To reduce dependency on third-party suppliers, the company has also invested in backward integration over the last few years. LED panel assembly, plastic moulding and making of sheet metal products are done at the company’s manufacturing facilities in Dehradun.

In 2016-17, the company made total revenue of ₹2,456.7 crore, with 34 per cent from manufacture of consumer electronics and 33 per cent from mobile phones. Lighting products contributed 22 per cent and home appliances 7.6 per cent. Revenue from reverse logistics services, where the company provides repair and refurbishment services for set top boxes, mobile phones and LED TV panels, was about 2.5 per cent.

Dixon’s revenue has grown at a compounded annual rate of 34 per cent over the last four years. But profits have jumped 78 per cent annualised over the past four years, thanks to the operating leverage, increased backward integration in operations and change in revenue mix with a higher share from ODM business.

ODM business contributed about 22 per cent of revenue in 2016-17, up from 14 per cent in 2013-14.

ODM revenue in lighting products increased from 12.4 per cent of the segment’s revenue in 2014-15 to 45.3 per cent in 2016-17 and in consumer electronics from 4.2 per cent to 11.79 per cent.

Given that in the ODM business, Dixon gets better control over all aspects of manufacturing and higher margins too, it intends to focus more on this in the next few years.

One concern with Dixon’s business is that large portion of its revenue is dependent on a few clients. Over 50 per cent of the revenue in 2016-17 was from Panasonic and Philips Lighting. The top five clients accounted for 82.93 per cent of revenue in the year.

The company doesn’t have a long-term purchase agreement with any of its clients, says the offer document.

Dixon’s management though, is looking to expand the client base now, and says that the initial responses have been good.

Low margin, high ROCE

Dixon’s margin at the operating level was 3.7 per cent in 2016-17 and 2 per cent at the net level. Given that the company is in the business of contract manufacturing, the low margin is not a surprise. In the OEM business, all its costs are passed through and there is no risk from higher raw material costs or fluctuations in currency rates.

The OEMs in the consumer electronics space themselves make an operating margin of about 10-12 per cent; so for Dixon as as EMS company, operating margin of about 4 per cent seems reasonable.

Profitability for the business of EMS companies such as Dixon is better captured in the ROCE (return on capital employed) ratio.

In 2016-17, return on capital employed for Dixon stood at 36.5 per cent, up from 14.7 per cent in 2013-14 as per the IPO document, indicating improving profitability from higher operating leverage and better working-capital management.

Published on September 02, 2017
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