Chinese supplies disrupted, but low debt could help Dixon fight covid infection
by Suhani Adilabadkar Dixon Technologies reported strong growth momentum in its December quarter FY20. The stock has been marred by the coronavirus related slowdown since early March, declining 27% over the past 15 days. Dixon is a leading electronic services manufacturer (EMS) offering consumer products in India through leading domestic and global retail brands. Commencing operations as a colour TV manufacturer, Dixon is currently the largest home-grown design-focused company manufacturing products in consumer durables, lighting, mobile phones and security surveillance equipment. The company is also the original design manufacturer (ODM) of lighting products, LED TVs and semi automatic washing machines in India. It is powered by its ten state-of-the-art manufacturing facilities located in the states of Uttar Pradesh, Uttarakhand and Andhra Pradesh, aided by 3 R&D; centres, 2 in India and 1 situated in China. Quick Takes: Dixon Technologies is the largest home-grown, design-focused company manufacturing products in consumer durables, lighting and mobile phones. Revenue growth was reported at 25% YoY at Rs. 994 crore with operating profit at 32% YoY. Net profit stood at Rs. 26 crore in December quarter FY20 growing 49% YoY. Voltas Beko, Havells and Reliance Jio are its latest customer wins. All players big and small, as a whole, import 70-80% of their raw material or components from China Subdued spending in the upcoming quarters due to the effects of the coronavirus is likely to impact Dixon’s customers, and point to a longer recovery. On the upside, Dixon’s strengths include being among Indian companies with low debt, enabling it to weather a period of low growth if needed. A strong December quarter December was another quarter of resilient growth for Dixon with key parameters moving in the double digits. Revenue growth was reported at 25% YoY at Rs. 994 crore for Q3FY20 against Rs 794 crore in the same period last year. Operating profit came out at Rs. 52 crore in December FY20 compared to Rs. 39 crore in the corresponding quarter last year, rising 32% YoY. Operating margin came out at Rs. 5.2% expanding 28 bps YoY in Q3FY20. PAT or net profit stood at Rs. 26 crore in December quarter FY20 growing 49% YoY compared to Rs. 18 crore in the same period, previous year. With respect to strong quarterly numbers, Mr. Atul B. Lall, MD, Dixon Technologies said, “Our strategy is simple..to achieve the scale to generate operating leverage, migrate more and more towards ODM categories, focus on low capex backward integration, for margin expansion and sharing other customers, new customer acquisition and strengthening the stickiness with our existing customers to get a larger share of the pie. Across all our verticals, we have been able to do this and this is what has helped us in generating and operating leverage and the improved results”. Impact of Coronavirus: disruptions in supply chain, but diversified revenue China has all the critical components of the electronics industry in its supply chain, giving policymakers sleepless nights. All players big and small, as a whole, import 70-80% of their raw material or components from China, such as smartphone components, open cell TV panels, LED chips, chemicals, mobile displays, capacitors and other parts for printers, inverters, set-up boxes, etc. This has led to loss of investor wealth in India as China had shut down its industrial hubs to fight against the coronavirus pandemic. Dixon Technologies too has high China dependence and speaking in this regard, Mr. Lall clarified, “In lighting almost 45% to 50% of raw material is imported from China, in washing machines around 40% - 45%. In the case of mobiles because our main customer is Samsung today I do not see much impact there, televisions almost 80% is from China, so there is a huge dependency”. The stock has been on a steady decline since mid-February, losing 17% over the past three months and 28% over the past 15 days. Though the company has clarified that there are no supply issues from China as production has been restored there since March 15, India’s leading contract manufacturer has been suffering due to its raw material supply concerns and rising coronavirus cases in India leading to shutdowns and lockdowns announced by various state governments. This has resulted in loss of production activity and overall subdued consumer sentiment. Diversified Revenue Stable Leaving aside the current precarious situation, the company has a robust product portfolio catering to top notch customers both in India and globally. Dixon has diversified its product portfolio across six divisions - consumer electronics (LED TV), lighting products (LED bulbs, battens, downlighters), home appliances (semi & fully automatic washing machines), mobile phones, security systems (for railways, shopping malls, housing societies etc) and reverse logistics engaged in repair and refurbishment of set-top box, LED TV, mobile phones, CCTVs, modems and computer peripherals. Consumer electronics constitute 45% of revenues for which the company plans to increase its capacity of 3.6 mn to 4.8 mn in television. Revenues from the segment have increased 58% YoY in Q3FY20 catering to customers such as Xioami, Panasonic, Llyod, Flipkart, Philips, Koryo. Next in line, lighting division, 28% revenue mix reported decent growth of 18% YoY and the clientele line up is pretty impressive comprising Philips, Bajaj, Wipro, Panasonic, Syska, Jacquar and Polycab. Dixon is the largest OEM in the lighting vertical with a capacity of 20 million bulbs which is almost 45% of the entire Indian requirement. Security systems division, about 5% of revenue mix generated almost 100% jump in revenues and reverse logistics with just Rs. 5 crore revenue is primarily for strategic reasons to enhance stickiness of the customers reported 46% YoY increase in revenues. Along with this double-digit growth run, home appliances reported a de-growth of 26% YoY constituting 7% of revenue basket and in this regard, Mr. Lall clarified, “Home appliance segment was under pressure because of the market situation post Diwali. There is de-growth of 26%. This specifically also happened because one of our customers had large inventory in trade”. Mobile phone segment too, was on the lower side reporting 8% YoY negative growth for Q3FY20. The company manufactures both feature phones and smart phones and commenced SMT Line for mobile phone PCBA manufacturing in November 2018. With such a robust and diversified portfolio, Dixon has reduced the seasonality factor from its revenue base by adding new business lines and also consistently enhancing its clientele base. Among the latest customer acquisitions, top of the list is the prestigious Voltas Beko for semi-automatic washing machines, acquiring LED TVs and feature phone production for Samsung, the entire range of lighting products for HPL Electric & Power and two jackpots, Havells as a customer for LED Lighting product and Reliance Jio for manufacturing its cable set top boxes and dual tuner cable set up boxes. It remains to be seen how much the covid epidemic flattens consumer spending in the coming months, even after the lockdowns have been removed. Subdued spending in the upcoming quarters is likely to impact Dixon’s customers, and point to a longer recovery. On the upside, Dixon’s strengths include having substantially low debt, enabling it to weather a period of low growth if needed. Overall, it’s a wait and watch policy both for the promoters and investors amid strong support from the government through ‘Electronic Hub Scheme’ approved by the Union Cabinet allocating Rs. 40,995 crore to boost domestic electronic manufacturing and reduce China dependence.26-03-2020
