Dixon Technologies: A secular play on Indian consumer electronics; Accumulate on dips

Dixon Technologies, maker of consumer durables, lighting and mobile phones, reported a mixed set of numbers for the March quarter. Topline declined slightly, but margins improved, translating into a healthy growth in bottomline.

Despite the subdued topline performance, the company appears to be on a consistent growth path as it enjoys a strong order book, is adding new clients across product categories and focusing on margin expansion.

Revenues decreased 4 percent year-on-year (YoY) due to a weakness in the mobile phone segment. Earnings before interest, tax, depreciation and amortisation (EBITDA) rose 44 percent year-on-year.

Segment-wise, consumer electronics reported strong topline growth, but margin took a temporary hit as the company is the midst of shifting production from its Dehradun plant to the new Tirupati facility. Higher revenue contribution from Panasonic's electronic manufacturing service (low margin business) also crimped margins in this segment.

Lighting products grew a healthy double-digit rate in Q4 due to strong demand from its key clients: Crompton Greaves, Wipro, Panasonic, Anchor and Philips. Economies of scale helped increase margin. The management expects further margin improvement of 90-100 basis points (bps) in FY19.

Home appliance revenues almost doubled owing to healthy demand for washing machines. Dixon is expanding its washing machine manufacturing capacity to about one million per annum from 0.6 million per annum in FY19. The company has a strong order book in this vertical and expects to attain 80-85 percent utilisation on its expanded capacity.

The mobile phone segment continues to suffer from low capacity utilisation owing to low client demand during the quarter gone by. Performance is expected to improve in coming quarters as Gionee has restarted operations from April onwards. During Q4, Dixon added Tambo as a client for manufacture of feature phones. It is in advanced talks with a large customer that should close over the next few months. The company is also venturing into the manufacture of mobile motherboards.

Performance of its reverse logistics business was again a dampener. Profitability was affected due to a one-time write-off of Rs 1.5-1.6 crore. Dixon has appointed a new business head to revive this vertical and expects revenue and margins to recover in FY19.

It has forayed into security systems and manufactures CCTVs and digital video recorders. CP Plus, Dixon’s sole business partner for this segment, sees strong demand for security systems. As a result, the company is planning to enhance its camera manufacturing capacity to 400,000 units from 100,000 units at present.

Dixon’s business is at the forefront of the government’s ‘Make in India’ theme. The government’s proposal to increase custom duties will further boost manufacture of electronics. The business has additional tailwinds in the form of low electronic penetration and pick-up in domestic consumption.

The management is aiming for a 20 percent growth in topline by adding clients as well as mining relationships with existing clients. The company expects an even faster growth in profits because of better margins. The improvement in margin will be driven by higher capacity utilisation, focus on high margin original design manufacturing, backward integration and investing in low-cost automation to generate operating efficiencies. Shifting of production from Dehradun to Tirupati will be complete by July, and this will reduce expenses through better efficiencies. However, the rupee’s weakness against the dollar and higher commodity prices could hamper profitability.

Dixon is an interesting play on the domestic manufacturing space. However, its current valuations (32 times FY20 projected earnings) factor in most of the positives. Long-term investors interested in steady growth can look at accumulating this stock on dips.