Fundamental Analysis of Dixon Technologies Ltd

Welcome back to Traders Ideology, In this article, we’ll do the fundamental analysis of Dixon Technologies Ltd where we’ll cover its business profile leadership key strengths, competitors, and future growth and then we’ll cover the financials of the company, finally, we’ll conclude if naukri.com are fundamentally strong or not.

The fundamentals of one this company have all the parameters of a multibagger stock. In fact, I wanted to discuss the fundamentals of this company for a long time, but this company has always traded at a very high valuation due to its bright growth prospects, but now the stock has fallen more than 40% in this declining market. So, I thought it is the right time to discuss the business of this company.

This company is one of the leading manufacturers of electronic equipment in India and currently holds a market cap of somewhere around 20,000 crore rupees.
Some of its clients include Samsung, Xiaomi, OnePlus, Philips, Havells, etc.
This company had its IPO in 2017 and within 5 years, the share price of this company had jumped 17 times, although, in recent correction, the stock tanked more than 40%; still, the share price is up nearly 10 times from its IPO price.

Introduction

Established in 1993, Dixon technology started its journey with the manufacturing of color TV in 1994. Since then, it has expanded its manufacturing in many electronics & lighting products under its portfolio including LED TV, mobile phones, washing machines, LED lights, CCTV cameras, set-top boxes, medical equipment, as well as wearable devices.
Dixon Technology is one of the largest manufacturers of TV sets in India, with a strong set of renowned brands like Samsung, Panasonic, Xiaomi, TCL, ONEPLUS, Flipkart, Lloyd, etc.
Some of its clients in the lighting product category include Philips, Havells, SYSHA, BAJAJ, Wipro, Orient, etc, all top lighting brands are clients of Dixon.
It is also the leading contract manufacturer of semi-automatic washing machines for clients like Godrej, Samsung, Lloyd, and Panasonic. Dixon provides a one-stop solution for its client requirements right from R&D to manufacturing the best product for the local market to sourcing the raw material to design the product to manufacturing and assembly to testing.
This end-to-end capability with backward integration is the biggest strength of the company that gives Dixon an edge over the competitors.

Leadership

If you look at the leadership of the company. Mr. Sunil Vachani is the founder and chairman of Dixon technology.
He is a second-generation entrepreneur with 29 years of experience in electronic manufacturing.
His father started manufacturing TVs for the brand called Western which was a market leader during the era of black and white TV.
Mr. Sunil Vachani completed his graduation from an American college in London and returned to India to engage in the family business.
He soon realized the huge potential in the electronics outsourcing business and started manufacturing color TVs.
Today, under his leadership, Dixon has grown to become one of the leading electronic manufacturers in India.
Overall, the leadership of Dixon is well experienced and competent.

The fundamental analysis of Dixon Technologies Ltd is as follows:

Business Model of Dixon Technologies

The company operates on 2-models,

1. Original Equipment Manufacturer (OEM)- Within the OEM model, Dixon acts as an executioner where they simply assemble the products based on the customer specification.

2. Original Design Manufacturer (ODM)- In ODM model Dixon will produce the product from scratch including the design and the selection of raw material using its in-house R&D. Hence, there is a higher operating margin in the ODM model.

Now let us look at each category within its business…

Consumer Electronics

Within consumer electronics, Dixon offers a wide range of products as an Original Equipment Manufacturer, and Original Design Manufacturer designing Smart TVs and Ultrahigh definition TVs, Dixon has the capacity to manufacture 4.4 million LED TVs every year.

Lighting Solution

Dixon Technologies is one of the top global manufacturers of indoor lighting and LED bulbs.
They have expanded their product offerings to include main electronic board designing, mechanical and light source, and package designing.
Dixon has the capacity to manufacture 300 million LED lights every year.

Home appliance

Dixon technology manufacture semi-automatic washing machine and has recently started manufacturing, fully automated washing machine, it has the capacity to manufacture 1.2 million washing machine every year.

Mobile phones & EMS

Dixon technology manufactures smartphones and has the capacity to manufacture 45 million mobile phones every year.
Dixon has also forced into other product categories like set-top box medical equipment, as well as wearable devices.

Security System

The fifth category is security systems. Dixon manufactures CCTV cameras and digital video recorders with a capacity to manufacture 8.4 million CCTVs and 1.8 million DVRs.
Dixon also provides repair and refurbishment services for products including set-top boxes, Mobile phones, LCD and LED TV, LCD panels, currency counting machines, and POS terminals.
Now if you look at the revenue breakdown by category for FY 22, consumer electronics accounted for 48% of its business. lighting products accounted for 12% of the business, home appliances accounted for 7%, Mobile phones accounted for 29%, and security systems accounted for 4%.
Here mobile phone is one of the fastest-growing segments in the business. If you look at the break up in terms of operating profit for FY 22, consumer electronics accounted for 33%, lighting products accounted for 18%, home appliances accounted for 14%, mobile phones accounted for 26%, and security systems contributed 4% in the operating margin.
Dixon technology has 17 manufacturing facilities located in UP, Uttrakhand, and Andhra Pradesh with 3 R&D centers in India and China.

Future Growth Prospect

As per reports, the size of the Electronics Manufacturing Systems (EMS) market was around $6 billion in FY20 and is expected to reach $40 billion by 2025 at a CAGR of 47%.
The electronics industry is in a sweet spot due to government initiatives like Make in India, Atmanirbhar Bharat, and Production Linked Incentive (PLI) scheme.
On top of this, every global company is now looking to de-risk the global supply chain with China plus one strategy. The Indian government has also rationalized the import tariff structure to promote domestic companies.
Moreover, the government is also investing in setting up a semiconductor manufacturing ecosystem in India. Due to all these factors, India has already seen a good amount of investment from both domestic and international companies to scale up manufacturing and a lot more CAPEX is expected over the next 3-5 years.
Moreover, India has a huge market of 140 crore people and currently, there is very low penetration of consumer durables but factors like rising per capita income, higher disposable income, and penetration of mobile phones across urban, semi-urban, and rural regions have opened the opportunity for doorstep deliveries of goods and services that requires the usage of electronic products that makes India a very lucrative market for both global and domestic companies.
On top of this, we have low-cost manpower for manufacturing electronic products in India, so all these factors would result in huge growth in the electronics manufacturing ecosystem to capture this fast-growing electronics market Dixon is on aggressive growth plans.
Last year, Dixon invested 600 Cr to build a new facility under the PLI scheme to build new capacity in mobile devices, laptops and tablets, telecom equipment, and LED component to cater to the domestic and global market.
This year, a few months ago, Dixon announced an investment of Rs 300 crore to expand its base in Punjab. Recently, it has also announced its joint venture with a Japanese company Rexxam for the manufacturing of printed circuit boards for air conditioners for domestic and international markets under the PLI scheme.
Dixon has also entered into a joint venture with Imagine marketing which manufactures wireless audio solutions under the brand name boAT.
In one of the recent interviews Dixon, MD, and Vice-chairman Mr. Atul Lal mentioned that Dixon is planning a CAPEX of somewhere around 400 to 500 Cr in FY 23, and they expect the revenue on the tune of 17,000 Crore to 17,500 Crore, in FY 22 Dixon revenue stood at around 10,700 Crore. So, that means, the company is expecting a growth of 60 to 65% in its revenue for FY 23.

Key Risk

Although the future growth prospects of Dixon Technology are great in the short term, there are a few challenges that could hinder its high growth of Dixon Technology.
For example, there are still challenges related to the supply chain, semiconductors, and chips and the commodity prices are still high.
Although the commodity prices have started to fall, in the near term, it may impact Dixon’s profitability.
Once the PLI incentive scheme is discontinued, which is for initial 5 years, the cost competitiveness of EMS players like Dixon will be tested against global manufacturers.
China is still the largest manufacturer of electronics in the world, and it won’t be easy for a company like Dixon to compete with China at the price point. As far as various brokers’ house views are concerned.
Recently, Morgan Stanley has given an underweight rating on Dixon Technology with a target price of Rs 2634 that’s nearly 25% below its current market price.
Although the majority of brokerage houses are overweight on Dixon. Credit Suisse has upgraded Dixon Technology’s share price to outperform from neutral with a target price of 4800, that’s around 35% upside potential, Jeffries has maintained a buy with a target of 5300, that’s nearly 50% upside potential from current levels.

Financials of Dixon Technology

The financials of Dixon technology are as follows:

fundamental analysis of dixon technologies ltd — Company Financials

Revenues

If you look at Dixon Technologies’ revenue, it has grown from 572 Crore in FY 12 to 10,697 Crore as of FY 22.
Between FY 12 to December 22, the growth rate has been a CAGR growth of 34%, which is brilliant.

Profit

If you look at the profitability of the company profits have grown from -7 Crore on March 12 to 190 Crore by March 22.
Again, year on year, there is a growth in profits.
It has been a great performance both in terms of revenue and profit growth, the CAGR growth is 40%.

OPM

If you look at the profitability of the company, the operating margin of Dixon technology is on the lower side.
The reason is that for a company that is into the manufacturing of electric goods, the margins are very low.
These are the industry standards and Dixon has been able to maintain these margins.

ROE & ROCE

If you look at the ROE and ROCE, for the last 5 to 6 years, consistently, both ROE and ROCE are well about 20%.

Debt to equity ratio

If you look at the debt to equity, the debt levels of the company have fallen down significantly, it was 2.16 in FY 2012 then consistently fell down and currently, it is as low as 0.47.
Debt is well under control.

Reserves

If you look at the reserves of the company, reserves have grown from 52 Crore in FY 12 to levels of 985 Crore by FY22.
It has been an exponential growth in the reserves of the company.

Shareholding patterns

If you look at the shareholding pattern, promoter shareholding has slightly reduced from 38.92% in JUN 2019 to levels of 34.3% by MAY 2022, and if you look at the FIIs, they constantly increased their shareholding from 7.23% in JUN 2019 to 20.3% by DEC 2020 but since the last few quarters, there has been a slight fall in the shareholding of FIIs. And if you look at the DIIs as their shareholding has actually declined from 22.38% in JUN 2019 to levels of as low as 7.68% by MAY 2022.

Strengths and Limitations

Strengths and Limitations are as follows:

Strengths

The company has shown a good profit growth of 38.66% over the past 3 years.
The company has shown good revenue growth of 36.93% over the past 3 years.
The company has been maintaining healthy ROE of 22.60% over the past 3 years.
The company has been maintaining a healthy ROCE of 30.83% over the past 3 years.
The company has an efficient Cash Conversion Cycle of -1.46 days.

Limitations

The company has contingent liabilities of 1,564.20 Cr.
The company is trading at a high PE of 147.14.
The company is trading at a high EV/EBITDA of 79.11.

Valuation

If you look at the valuation, of course, the valuations are not cheap. But try to understand this Dixon is one stock that you won’t find in the PE ratio of 20-30, it is a growth stock.
As we discussed the revenue growth, the management has given a guideline of nearly 60-65% growth in the revenue in FY 23.
The growth prospects are very, very bright and that is the reason people are willing to pay a premium for Dixon share. Now at this point in time, if you ask me, this is a good point to make an entry since the stock has fallen quite a lot.
But I expect that there can be a further correction in the share price, although there’s no guarantee. But since there is a slowdown in the economy, there can be further corrections.
And if there’s any further fall in the share price is going to be a buying opportunity. So any correction in the share price of Dixon technology from current levels is only going to create a buying opportunity because in the short term there could be some ups and downs but the long-term growth prospects of the company are looking very very bright.

Conclusion

In this article, we discussed the fundamentals of Dixon technology, it has come a long way from making TVs as an OEM player to leading the Make in India electronic manufacturing story as an end-to-end solution provider for the world’s major brands, and it is constantly expanding its product portfolio along with adding new and innovative products to further strengthen its foothold in the market.
Electronics manufacturing has a very bright growth prospect both in India and globally. Especially India has a huge population with growing demand for electronic products and even the Indian government is supporting the manufacturing ecosystem in India. So Dixon would benefit from the government PLI scheme making India an admirable Bharat initiative, then global players are looking to decrease the global supply chain with China plus one strategy.
All these factors would boost the growth of Dixon technology in the future. Although in the near term, there could be some impact of global slowdown and supply chain issues along with higher commodity prices. But the long-term growth prospect for Dixon is intact.
Hence it is a good time to invest and systematically add Dixon technology over the next 6-12 months. So what is your viewpoint and Dixon technology? Are you interested in Dixon technology? Let me know in the comments.

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Fundamental Analysis of Dixon Technologies Ltd | Future Growth Stock