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25 November 2017

New Issue Details

Dixon Technologies (India) Click here for Rating Reckoner
OPM of 4%, P/E of 40
(05 Sep 2017)
CM RATING 40/100
Dixon Technologies(India), promoted by Sunil Vachani, is the largest home-grown design-focused and solutions company engaged in manufacturing products in the consumer durables, lighting and mobile phones markets in India (Source: Frost & Sullivan Report). The company's diversified product portfolio includes (i) consumer electronics like Led TVs; (ii) home appliances such as washing machines; (iii) lighting products like LED bulbs and tubelights, downlighters and CFL bulbs; and (iv) mobile phones. It also provides solutions in reverse logistics i.e. repair and refurbishment services of set top boxes, mobile phones and Led TV panels. Key customers include Panasonic India Pvt Ltd, Philips Lighting India Limited, Haier Appliance (I) Pvt. Ltd., Gionee, Surya Roshni Limited, Reliance Retail Limited, Intex Technologies (I) Ltd., Mitashi Edutainment Pvt. Ltd., Dish Infra Services Private Limited.

The company offers a fully integrated end-to-end product and solution suite to original equipment manufacturers (OEMs) ranging from global sourcing, manufacturing, quality testing and packaging to logistics. It also a leading original design manufacturer (ODM) of lighting products, Led TVs and semi-automatic washing machines in India (Source: Frost & Sullivan Report). As an ODM player, it develops and designs products in-house at its R&D centre. It manufactures and supplies these products to well-known companies in India who in turn distribute these products under their own brands.

In line with its focus to provide end to end product solutions, it has backward integrated its major manufacturing processes by developing in-house capabilities in plastic molding products, sheet metal products, wound components and Led panel assembly. It believes that this improves its cost efficiency, reduces dependency on third party suppliers and gives better control on production time and quality of critical components used in the manufacturing of products.

The company's in-house R&D centre, apart from undertaking electronics hardware designing, system architecture, mechanical design, component engineering and optics design, also assists customers in cost reduction through product engineering. This enables it to address consumer requirements across geographies, introduce new and unique products in the market and enhance existing products with emerging technologies. As on July 31, 2017, its R&D team consisted of 22 employees, including electrical engineers. It has recently applied to the Department of Scientific and Industrial Research for recognition of its R&D centre and are currently awaiting approval.

As on July 31, 2017 the company has 682 permanent employees on the payroll of the company, Subsidiary and Joint Ventures. The company has six state-of-the-art manufacturing facilities which are strategically located in the states of Uttar Pradesh and Uttarakhand meeting the quality requirements of its customers, including global brands. Out of its six manufacturing facilities, three are located in Noida in the state of Uttar Pradesh and manufacture CFL as well as Led lamps and drivers and mobile phones, while the other three are located at Dehradun in the state of Uttarakhand and manufacture CFL as well as Led lamps and drivers, electronic ballasts, LED TVs and washing machines. The backward integration process like plastic molding, sheet metal, wound components and LED panel assembly are carried out at the manufacturing facilities in Dehradun. Most of manufacturing facilities have been accredited with quality management systems and environmental management systems certificates for compliance with ISO 9001-2008, ISO 14001-2004 and 14001:2015 requirements respectively. Further, few of products are also certified to be compliant with quality standards issued by the Bureau of Indian Standards. The company is in the process of setting up a new manufacturing facility in Tirupati, Andhra Pradesh.

The company's reverse logistics services are carried out from Noida III facility and 17 other service centers located across India.

The company's two units in Dehradun, Uttrakhand, has specific tax benefits. In accordance with and subject to the conditions specified in Section 80-IC of the Act, the Company may be entitled for a deduction of 30% profits or gains for assessment year 2018-19 to 2019-20 derived from an industrial undertaking located at Dehradun.

Also as per the order GO MS.No. 170, dated 09-12-2016, received from the government of Andhra Pradesh (AP), the company will be granted for 100% net VAT/SGST/CST reimbursement for eight years without any investment limit (from the date of commencement of commercial production) under mega projects. However, if the company doesn't fall within the criteria of mega project then benefits will be available for five years from the date of commencement of production for products manufactured in AP and sold in AP as fiscal incentive on the lines of Sri Venkateshwara Mobile & Electronics Manufacturing Hub and Electronics Policy, 2014-20, till further notification.

Issues Size and Purpose

The company is coming out with an initial public offering (IPO) with a fresh issue amounting to Rs 60 crore at a price band of Rs 1760-1766 per share of face value Rs 10 each. Out of Rs 60 crore, the company will spend Rs 22 crore for repayment/pre-payment of certain borrowing, Rs 7.6 crore for setting up a unit for manufacturing of Led TVs at the Tirupati facility, Rs 8.86 crore for finance the enhancement of backward integration capabilities in the lighting products vertical at Dehradun I facility, Rs 5.3 crore for up-gradation of the information technology infrastructure of company and rest for general corporate purpose.

Beside the fresh issue of shares, there is also offer for sale of 30.54 lakh equity shares by selling shareholders comprising up to 6.34 lakh equity Shares by Sunil Vachani, up to 14.46 lakh equity shares by Indian Business Excellence Fund I and up to 4.95 lakh equity shares by Indian Business Excellence Fund, and up to 4.77 lakh equity shares by Atul B. Lall, Kamla Vachani, GeetaVaswani, Sunita Mankani and Shobha Sippy collectively. The offer for sale size is Rs 537-539 crore.

Strengths

It is a leading player in most verticals it operates in. According to the Frost & Sullivan report, it enjoyed market leadership in manufacturing of FPD TVs, washing machines, Led and CFL lights in India in FY 2016. Its market share of the total production by electronic manufacturing services (EMS) /ODM players in India: FPD TVs is 50.4%, washing machines is 42.6% and Led and CFL lights is 38.9%.

The company has strong relationships with a diverse top-tier customer base. It has established and will continue to focus on strengthening long-standing relationships with well-known customers across product verticals.

The end-to-end solutions provider has dedicated research and development capabilities.

The company has gradually backward integrated its services by setting up in-house manufacturing of plastic molding for lighting products, Led TVs and washing machines; wound components for lighting products and back light unit clean room for Led TVs. Backward integration provides the benefit of greater control on the manufacturing process, quality and the corresponding benefits of cost efficiencies thereby improving margins.

The company is expanding existing relationships with customers into other product verticals. It plan to continue to focus on customers with whom it has long-standing relationships in order to develop and supply more sophisticated, higher margin products. For example, it started manufacturing TVs for Panasonic India Pvt Ltd and is now also manufacturing washing machines and mobile phones (through their supplier) for them. Similarly, it started manufacturing color televisions for Philips India in 2007 and over the years has expanded its offerings with DVD players, home theatres and currently manufacturing lighting products both as an OEM and ODM

Weaknesses

The company operates in a competitive industry, with participants in the organized and the unorganized sector. It continues to compete with international and domestic manufacturers engaged in the manufacture and supply of Led TVs, lighting (CFL and Led), home appliances and mobile phones as well as from players in the unorganized sector.

The company is highly dependent on certain key customers for a substantial portion of revenues. Loss of relationship with any of these customers may have a material adverse effect on profitability and results of operations. In the aggregate, its top five customers accounted for 82.93%, 79.43%, 73.28%, 76.95% and 79.67% of revenue from operations (net) for the years ending FY 2017, FY 2016, FY2015, FY2014 and FY2013, respectively. Its largest customer (across business verticals) accounted for 38.46% (including sales made to a supplier of largest customer) of consolidated revenue from operations (net) in FY2017 and 35.19%, 24.79%, 30.10% and 29.09% of revenue from operations (net) for FY2016, FY 2015, FY 2014 and FY2013, respectively.

The profitability also depends on the performance and business of key customers. In the ODM and OEM verticals in which it operates, its revenues are directly affected by the resales of its products by its customers under their own brand names. It relies on the success of its customers in marketing and selling these products and therefore any negative impact on their reputation may also have an effect on its business.

It is essentially a contract manufacturer, without owning the brand, it operates on very slim margin.

It does not get firm and long-term volume purchase commitments from its customers. If its customers choose not to renew their agreements with it or continue to place orders, its business and results of operations will be adversely affected.

The markets in which its customers compete are characterized by consumers and their rapidly changing preferences, advancement in technology and other related factors including lower manufacturing costs and therefore as a result company may be affected by any disruptions in the industry. These conditions frequently result in short product life cycles. Some of the customers for whom it manufacture products may also chose not to continue operations in India for many reasons which can also include customer preferences, among others.

Industry-wide competition for market share of various products can result in aggressive pricing practices by its customers and, therefore, its customers may also choose to import some of these products which provide them better cost benefits as compared to it or source the products from its competitors. This price pressure from its customers may adversely affect the prices of the products which it supply, which may lead to reduced revenues, lower profit margins or loss of market share, any of which would have a material adverse effect on business, financial condition and results of operations

It is subject to fluctuations in the prices of raw material and component prices and this may result in a decline in the stated value of inventory thereby affecting inventory management which may adversely affect business.

It may be subject to financial and reputational risks due to product quality and liability issues which may have an adverse effect on business, financial condition and results of operations

Some of manufacturing facilities located in Dehradun are availing certain tax benefits which are available for a specified period of time. Expiry or early withdrawal of such tax benefits may adversely affect its results of operations and prospects. Further, certain exemptions available earlier have been withdrawn under the GST regime.

Operating results may fluctuate from period to period or be subject to seasonality.

Success of the products manufactured by it is driven by user preferences. Obsolescence arising from the changes in technology may affect on the demand of its products which may result in price declines

Valuation

 The company's consolidated net sales for year ended March 2017 (FY 2017) increased 77% to Rs 2456.76 crore. The sales of lighting division increased by 28% to Rs 550.80 crore, consumer electronics by 10% to Rs 844.54 crore, home appliances by 44% to Rs 188.03 crore, reverse logistic by 60% to Rs 62.69 crore and mobiles phones more than 999% to Rs 810.71 crore. The OPM decreased by 50 bps to 3.7%. The net profit after share of associates and MI has increased by 18% to Rs 50.38 crore.

 At the lower price band of Rs 1760 per equity share of Rs 10 face value, the P/E works out to 39.6 times the FY2017 consolidated EPS of Rs 44.5 (on post-IPO equity) and at upper band of Rs 1766, P/E works out to 39.7 times FY2017 consolidated EPS of Rs 44.5 (on post-IPO equity).

 There is no direct comparable listed company. Rough comparison can be drawn with AC manufacturer Leel Electricals (formerly Lloyd Electric) whose 1/3rd of Rs. 3000-crore FY 2017 top line came from manufacture of OEM and packaged AC (other than own brand Lloyd) and is currently trading at a PE of just 12x, based on FY 2017 EPS of Rs 17.35.

Dixon Technologies (India): IPO Highlights 

Fresh shares offer size (in Rs crore) 60
Price Band (Rs) 1760-1766
No. of fresh shares on offer at Rs 1760 per share(crore) 0.03
No. of fresh shares on offer at Rs 1766 per share (crore) 0.03
Offer for share sales (in crore) 0.31
Offer for share sales size at Rs 1760 per share (in Rs crore) 537.45
Offer for share sales size at Rs 1766 per share (in Rs crore) 539.28
Total issue size (Rs crore) 597-599
Post issue equity at Rs 1760 per share(Rs crore) 11.33
Post issue equity at Rs 1766 per share(Rs crore) 11.33
Post-issue promoter and promoter group stake at Rs 1760 per share (%) 38.92%
Post-issue promoter and promoter group stake at Rs 1766 per share (%) 38.93%
Issue open date 6th September 2017
Issue close date 8th September 2017
Listing NSE & BSE
Rating: 40/100

 Dixon Technologies(India) Ltd: Consolidated Financials

Particulars 1303(12) 1403(12) 1503(12) 1603(12) 1703(12)
Net Sales 766.92 1093.72 1201.34 1389.42 2456.76
OPM (%) 2.6 2.4 2.7 4.2 3.7
OP 20.12 25.99 32.21 58.69 90.74
Other Income 1.12 3.37 1.79 1.76 1.50
PBDIT 21.24 29.36 33.99 60.44 92.24
Interest 11.47 11.23 9.85 13.11 12.77
PBDT 9.77 18.14 24.15 47.34 79.48
Depreciation and Amortization 4.70 5.34 6.90 8.44 10.64
PBT before EO 5.06 12.80 17.25 38.90 68.84
EO 0.00 5.43 0.00 11.70 0.00
PBT after EO 5.06 18.23 17.25 50.60 68.84
Tax 1.53 3.52 4.22 8.03 18.46
PAT 3.53 14.71 13.04 42.57 50.38
Share of associate and JV 1.92 -0.23 -0.28 0.00 0.00
MI 0.47 0.97 0.90 0.00 0.00
Net Profit 4.98 13.51 11.86 42.57 50.38
EPS (Rs)* 4.4 8.1 10.5 28.9 44.5
* Annualised on post-issue Equity of Rs 11.33 crore; Face value Rs 10
EPS excludes EO (extra ordinary items) and relevant tax
Figures in crore
Source-Capitaline corporate database

Dixon Technologies(India) Ltd: Consolidated Segmental Financials

Business vertical 1303(12) 1403(12) 1503(12) 1603(12) 1703(12)
Revenue from operations (net) breakup
Lighting 261.42 307.73 300.61 429.51 550.80
Consumer electronics 451.52 698.28 775.53 770.12 844.54
Home appliances 51.60 84.88 106.74 130.65 188.03
Reverse logistics 2.38 2.83 18.44 39.14 62.69
Mobile phones 0.00 0.00 0.00 20.01 810.71
Total 766.92 1093.72 1201.32 1389.42 2456.76
EBIDTA
Lighting 4.91 8.74 9.05 22.14 17.87
Consumer electronics 12.09 11.35 13.45 15.94 24.96
Home appliances 2.58 5.31 6.17 13.96 30.63
Reverse logistics 0.54 0.59 3.53 7.07 12.28
Mobile phones 0.00 0 0 -0.43 4.99
Total 20.12 25.99 32.21 58.69 90.74
EBIDTA Margin
Lighting 1.88% 2.84% 3.01% 5.15% 3.25%
Consumer electronics 2.68% 1.63% 1.73% 2.07% 2.96%
Home appliances 5.00% 6.26% 5.78% 10.69% 16.29%
Reverse logistics 22.69% 20.71% 19.14% 18.07% 19.58%
Mobile phones 0.00 0.00 0.00 -2.16% 0.62%
Total 2.62% 2.38% 2.68% 4.22% 3.69%
Segment contribution to total Revenue
Lighting 34% 28% 25% 31% 22%
Consumer electronics 59% 64% 65% 55% 34%
Home appliances 7% 8% 9% 9% 8%
Reverse logistics 0% 0% 2% 3% 3%
Mobile phones 0% 0% 0% 1% 33%
Total 100% 100% 100% 100% 100%
Figures in crore
Source-Capitaline corporate database

Dixon Technologies (India): Product range

Product/Vertical Installed capacity p.a. (in units) Sales in Fiscal 2017 (in units)
Consumer Electronics
LED TVs 1,200,000 747,383
Lighting products 260,400,000 102,592,760
LED bulbs 126,000,000 50,303,492
Downlighters 1,200,000 439,912
Tubelights and battens 3,600,000 676,834
LED drivers 6,000,000 2,544,909
CFL lamps 48,000,000 26,494,167
Electronic ballasts 15,600,000 11,287,347
Others (CFL PCB, Deco lamp) 60,000,000 10,846,099
Home Appliances
Washing machines 550,000 376,842
Mobile phones 10,080,000 3,476,423
Reverse logistics 3,660,000 1,408,474
Set top boxes 2,400,000 1,325,186
Mobile phones 1,200,000 78,702
LED TV panels 60,000 4,586

Dixon Technologies (India): Capacity utilised

Key Products / vertical Capacity utilised (as a % of total installed capacity)
FY2015 FY2016 FY2017
LED TVs 51.76% 48.09% 62.60%
Lighting products 59.28% 54.00% 53.48%
Washing machines 45.33% 52.86% 68.12%
Mobile phones N.A. 7.32% 34.31%
Reverse logistics 52.17% 61.09% 37.49%
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