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Dixon Technologies

I just came across this company " Dixon Technologies" , could not find any thread about it so starting this new thread.
Dixon is in to contract manufacturing of consumer durables ( LED TV , Lighting ( LED , CFL bulbs ) and Semi Auto washing machines and Mobile phones ).
The manufacture for Panasonic, Philips , Lloyd , Geone etc. brands.
Company derives 78% of its revenues from OEM division which basically is pure play contract (design given by OEMs ) manufacturing and remaining 22% revenues form ODM segment where they design ,R&D , make the products which in turn gets distributed by others under their own individual Brand names.
they seems to be the largest player for LED , CFL and they supply to all the known brands such as Crompton , Philips , Syska , other few.
They are also largest player for security camera and DVR , they have their JV with another company whose name I am not able to recall but have seen their Ad on TV ( tagline - upper wala dekh raha hai )

Company came out with its IPO around a year back ( Aug,2017 ) at around 1760 rs / share. the stock got listed at around 50% listing gain.
currently stock is trading at 2500 rs.

company is growing 30% / year since last 3-4 years and expected to continue the growth momentum for another 3-4 years.
At current price the Market cap is ~2900 cr and annual sales of the company is ~2800 cr.

the operating margin of the company is very low at around 4.5% , however according to management they have done the backward integration for manufacturing of various product line and that along with operating leverage will help improve and increase the OPM.

According to their CFO ( x-VP at PVR ) , while they source/import their raw material but currency depreciation doesn’t impact their OPM much as they have clauses in the contract which allows them to pass it on to the OEMs with leg effect of 2-3 months max.

Management and Board members seems all professionals ( none of the members shares their last name with other members ::slight_smile: . seems none from chairman’s family is on the board or at an of the key management position.

I haven’t done too much of research on financials , but it appears to be generating positive cash flows and capable of funding it capex. ( all most all the debts are paid out from the IPO proceeds ). and it does not have any significant debt as of now.
all the expansion required for next 2 years is already planned and expected to go live by next 2-3 months max.

according to their MD ( one one of the interview on CNBC Awaz ) has mentioned that they managing it with negative working capital of 2 days during Q1FY19.
I don’t consider myself very good at analyzing financials so request seniors to please look in to it to validate/suggest.

I could not come up with any significant negative except that , it being a technology business things changes very fast and leader of today can become laggard of tomorrow very quickly , however they aren’t in to niche are as most of the products in the consumer durables are more of a commodity now a days and if they have survived for last 24 years there is no reason they cant survive for another 20 years , specially at the time when the consumer durable segment is expected to grow at 20% CAGR over next few years.

Govt. spend on security camera , LED etc. can provide additional additional impetus to the growth.

this is my first post as I have joined VP just around a week back so would appreciate any suggestion w.r.t it so can work to improve details etc. to be covered in posts.

looking forward to your views.

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During the time of ipo, I had studied the details and noted that their net margin was v low w r to the P/E they were seeking

Yes, while OPM has improved a little from 3.7% to 4.25% its still very low.
however if management is to be believed, it is going to get improved ( don’t know how much ) due to backward integration that they have done at their new MFG facilities for some of the product lines and also due to operating leverage playing out.

another possible trigger could be they launching their own brand ( Management has not made any comments about it ) . but if they do that by investing in to brand building and launching some of the products ( i.e. LED , Washing machine ) then it may improve the margin going forward but that’s just a speculation at this stage as management has not made any comments about it.

We have been giving too much importance to the advise of Investment gurus. Many times it is not practical or not relevant to many industries. Brand means Moat is a wrong construct. Mobile and Consumer electronics is a highly competitive industry with dozens of brands. On top of it technologies change every now and then. Companies can’t fight the battle on both fronts. That’s why most brands leave out manufacturing to others and concentrate on brands. Dixon is a market leader ODM/OEM provider to almost all big brands. If they even give a hint of starting there own brand, there customer will be threatened and move out. Rise of organized retailors have further made brands irrelevant. Most retailors like Flipkart, Amazon, Dmart etc will all start sourcing directly from ODM providers like dixon.
I will exit this stock if they decide to launch there own brand or start focusing too much on increasing margins. Low cost, low margin manufacturing is their real moat.

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They have JV with Aditya Group(CP Plus) for CCTV division

The status for JV with Karbonn mobiles in not known. The revenue was falling for Mobile division.

Lighting division and Washing machine division doing good.Growth is taping down due to various factors. If growth does not continue PE contraction may happen.

Disc: Was tracking closely for few quarters.

According to AR 2017-18, the mobile phone segment of the company contributes 23.5 percent to company’s total revenue. Their key customers in mobile segment included Gionee, Intex. Both these customers are struggling in market, and as a result the revenue from mobile phone segment dropped from Rs. 298.56 Crore in June 2017 to Rs. 73.21 Crore in June 2018. The company is entering into production of mother boards and PCBs for mobile phones by end of this month to increase margins, but they need to get more customers for mobile phone segment to perform. They have added a feature phone company called ‘Tambo’ as customers in last quarter. I searched for tambo phones on Flipkart and Amazon, while the products are available on Amazon, but there are no reviews or ratings available to know how successful the products are.

They have also started production for flipkart’s in-house brand named MarQ. These are ODM products, which are higher in margin from OEM products. The reviews were good.

In security services, they are manufacturing camera and DVRs. They supply to CP plus, which has about 40% market share in cctv cameras. This sector is witnessing very good growth, but is relatively small segment for company.

In Lighting Dixon has almost all major companies in clients. Jaguar, Syska, Orient, usha, Crompton, Wipro, Phillips, Panasonic, Surya are among major clients. This sector is also growing well.

The main issue with the company is Mobile phone division, which until it gets new big clients or the business of Gionee and Intex revives, will remain in pressure.

Has any one checked about Amber enterprises ?
It’s in to contract manufacturer of AC.
From 0.75 ton to 2 tons for room,windows ,split AC etc for all top brands ?

Just to give a different perspective - the key challenge Dixon could face would be losing a key client which would affect both its topline and bottomline. Since the profit margin Dixon enjoys is very marginal, loosing a key client could be severe blow. In that context, owning a consumer brand such as Havells or whirlpool Vs Dixon would be better play. Just to add, if you look at the current PE multiples, Havells is slightly cheaper than Dixon. Whirlpool trades on similar PE multiples as that of Dixon.

Disclosure: Not invested in Dixon.

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I like Dixon as a business. But I feel that the valuations are expensive.

Also a brand that is market leader today will not remain so in a decade. Look at Nokia in Mobiles and Daikin in ac’s or Sony in television. So if a customer loses business, Dixon will take a bigger hit due to thin margins.

Also, even considering that Dixon is a white goods maker, the fate of BPL, Onida and Videocon is enough for me to think thrice before buying this stock. Indian appliance makers are facing global heat now so unless they are able to penetrate export markets successfully, I will stay away.

Positives will be if Dixon starts/purchases own brand business like Lloyd’s for Havells or just plain purchase Videocon or Onida which are up for sale at throwaway prices right now. Even a contract from a major global brand will be a plus.

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Xiaomi India currently manufactures Mi TVs locally in Tirupati, in partnership with Dixon Technologies. The factory will result in a production capacity of 100,000 Mi LED TVs per month by Q1 2019, said Reddy.

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I liked the below aspect in slide 30

“Continue to be the most cost-efficient player in each of the product verticals through initiatives like having large manufacturing capacities, backward integration and being a sizeable player in the industry”

Disc:No holdings

Latest Investor Presentation

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Dixon has commissioned a new facility of 250000 sq ft, which has a capacity to produce 2 million smartphones. It will produce Samsung feature phones.

It has a cost based model but also has a design model for its washing machine department.

They are targeting 40% growth from now on.

New contracts other than Samsung have been Bajaj, Wipro and Philips. They already have a relationship with Philips.

What is interesting, P/E ratio of Dixon has come down and is the lowest it has been since listing. It is earnings that is driving the growth of the market capitalisation of the company.

A very interesting story to watch out for.

Disclosure: Interested

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Things seem to be getting better for Dixon. But I am not able to gain good conviction due to the risk in customer concentration. I guess a few global brands have a significant contribution. It would be good to know if anyone else has better insights on this.

Disc:- Invested (< 5% of PF)

I think it’s very expressive now… mcap is 4800 cr andpbt is only 50 cr around.

about Dixon history

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Concall Highlights

Investor Conference Call Highlights

  1. The delivery of the set-top boxes for Jio Cable will start from March 2020.
  2. The company is going to be using one of its mobile plants which had low utilization to make these set-top boxes. The company will be using the same machinery as before and it has to do minimal Capex to make the plant ready to make these new products.
  3. The company is expanding its capacity from 3.6 to 4.8 million units in Consumer Appliances. The capacity expansion is expected to be done by May 2021.
  4. The company is also doubling its capacity for PCA to 2 million units.
  5. The company is in discussion with 2 MNC brands for further orders.
  6. The company saw margin expansion in the lighting division to 8.6% in the current quarter. All the brands for the company are on the Original Design Manufacturer (ODM) basis.
  7. The company now boasts of a large capacity of 20 million bulbs per month in the lighting division which is around 25% of the industry requirement.
  8. The company has added Havells as a customer for its lighting business where it provides Havells with emergency bulbs.
  9. The company has seen good margin expansion in washing machines as a result of the company’s internal initiatives.
  10. The company is going to add a facility of 600k capacity top loading fully automatic washing machines in Tirupati plant.
  11. The management is confident that a large portion of the Voltas Beko washing machine requirements will be met by the company.
  12. The focus on LED segment is to include emergency bulb solutions in the smart portfolio. In the industrial engineering side, the focus is to be on automation to reduce labour intensity in business.
  13. The company is also looking to develop its product portfolio and supply chain skillset for global customers. The first shipment for international customers is going out in March 2020.
  14. In baton lights, the company is around 1 million in capacity and the market is around 6-7 million. The company expects to raise its market share to this proportion.
  15. In downlighters, the company was making 100-150k per month for one large customer. The market for this segment is around 5 million units. Here the company is expanding capacity to almost 1 million a month.
  16. The company is targeting 20-25% in the next 2 years in the lighting division.
  17. The capex for FY21 is expected to be around Rs 60-65 Cr.
  18. The company’s China dependent supply chain has not been affected too much since the company does not have much activity in this area till March. Thus any impact if possible will be reflected in the next quarter onwards only.
  19. The LED sales volumes were around 4.5 lacs, washing machines were 1.4 lacs, security systems were 11.6 lacs. The company also sold almost 4.6 Cr LED bulbs in the quarter.
  20. The management remains confident of delivering current margins going forward.
  21. The Capex expected in the expansion of the washing machine segment is expected to be around Rs 50-55 Cr in total over two years.
  22. The company is expecting cash flows of Rs 30-35 Cr more in Q4.
  23. The debt levels should thus go down along with interest payments going forward. The management has also mentioned that the company will be funding its Capex from internal accruals only.
  24. The management has said that Q4 order book is good and the production for the 10 kg machines for Samsung will start from FY21 onwards.
  25. The management expects the share of products made for Samsung should rise in the future for the company.
  26. The management expects that it will take some time but by FY22, exports shall emerge as a major contributor for the company.
  27. The management has mentioned that the drop in working capital is mainly due to increased efficiency and processes on part of the company.
  28. The working capital intensity is expected to be at current levels.
  29. The management expects Samsung TV volumes to be around 500k-600k this year. The Voltas Beko volumes is difficult to estimate and Havells volumes are going to be small as the business arrangement between the companies has just started. The Jio order size is around Rs 150 Cr.
  30. The management expects growth in LED bulbs should be >10% while the baton and other segments should grow a lot faster. This is because the company will be looking to expand export sales in the LED bulb segment which may take time to scale.
  31. In the semi-automatic washing machine segment, the company is now making around 830-840k volumes and next year this can go up to 1.1 million. Most of this is expected from the existing customer set which already represents a significant portion of the outsourcing companies in the market.
  32. The company is also looking to supply products to Reliance under the Kelvinator brand and orders from Flipkart are also coming in. The company is also getting orders from Croma which is in small volumes at present.
  33. The management has confirmed that around 60-70% of capacity of fully automatic machines (0.6 million capacity) for the company is already booked with orders from MNCs and the company is in talks with other brands to book complete capacity after the capacity expansion is over.
  34. The management has guided that margins of 11.5-12% in home appliances are sustainable for the company and the final say will be dependent on commodity prices.
  35. The management has mentioned that the reason for the drop in home appliances revenues for the quarter is a seasonal drop in demand for washing machines after Diwali. In the case of mobile revenues falling, the management has mentioned that the 2 main customers that were being serviced through most of its capacity had a bad performance which impacted the company’s orders.
  36. The new plant for Samsung was operational in November and was not able to bring up the total volumes for the division significantly. The capacity utilization for Samsung plant has been 110% since opening.
  37. The management is confident of more than doubling the sales volumes in the LED TV segment as compared last year. Going forward, the consumer electronics division will see addition of a few marquee customers in FY21 which should help the company bring this business on the growth track with the rest of the company.
  38. In mobile sales volumes, 10.6 lacs phones were sold split between feature and smartphones vs 9 lacs last year. The proportion of smartphones has gone down due to the customers Gionee and Panasonic not doing well this year.
  39. In LED bulbs, the total capacity is around 16-17 million/month. Downlighter capacity is 200k/month which is set to be expanded to 1 million/month. Baton capacity is at 1 million/month and is expected to be expanded to 1.5 million/ month by April after which it will expand again to a final capacity of 2 million/month.
  40. The baton capacity utilization is around 100% currently. The market share of LED business is around 14-15%.
  41. The company expects major growth in the near future to be coming from batons and downlighter and exports. This is because the company is looking to expand capacity in these segments to rapidly capture market share.
  42. The company is expecting sales volumes of around 2.2 million in LED TVs in FY20 and 35% growth in the next year.
  43. In the case of lights and washing machines, 40-45% of raw materials is imported from China. In TVs, 80% of raw materials is imported from China.
  44. In reverse logistics, the 2 main product lines are TV panel repair and set top boxes. The major customer in this business is Xiaomi. Because of the acquisition of Xiaomi as a customer in this business, the margin and numbers for this business has grown very fast in the year so far. As per the present order book visibility, the management expects this division to grow in the future.
  45. With the current order book size for the panel and TV repair division, the company is expecting a monthly run rate of Rs 70-80 Lac EBITDA. The total capital deployed in this business is Rs 7-8 Cr and thus this has turned into a good margin business for the company.
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Does the Corona outbreak in China effect Dixon? Many mobile phone and digital component manufacturers have stated spike in raw material.

Promoter sold 1.6% yesterday:

Disc: Fully sold off yesterday at 9:20 am, was hard decision to consolidate, 5% of portfolio. Saw (more) risk from covid-19, but still averaging Amber @ 7% (lower risk, both long term play).

“there is a major shortage of raw materials along with a sharp 20 per cent increase in open cell panel prices,” Avneet Singh Marwah, CEO of SPPL - which is the exclusive brand licensee of Thomson TVs in India - said.

He added that in view of the current market scenario, there could be production loss of up to 30-50%.

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