IPO Note | Consumer Durable
Sep 5, 2017
Dixon Technologies Ltd
SUBSCRIBE
sue Open: Sep 6, 2017
Is
The trajectory of strong client base continues
Issue Close: Sep 8, 2017
Dixon Technologies (India) Ltd (DTIL) is the largest home grown design-focused
and solutions company engaged in manufacturing products in the consumer
Issue Details
durables, lighting and mobile phone segments in India. The company
manufactures electronics products for Panasonic, Philips Lighting India, Haier
Face Value: `10
Appliances, Gionee, Surya Roshni, Reliance Retail, Intex Technologies, Mitashi.
Present Eq. Paid up Capital: `11cr
Leading market position, strong customer relations to propel growth: DTIL is
Offer for Sale: **0.30cr Shares
the leading player in most of the verticals in which it operates and it enjoys
market leadership in manufacturing in India. DTIL is focused on expanding its
Fresh issue: `60cr
product basket, strengthening existing customer relationships and increasing
customer base. Strong relationship would help the company to expand
Post Eq. Paid up Capital: `11.3cr
market share, develop new products and enter newer market.
Original Design Manufacturer (ODM) & Reverse Logistics (RL) segments to
Issue size (amount): *`597cr -**600 cr
improve blended margin: EBITDA margin of DTIL has improved by 130bps
over the last 4 years, primarily due to the growing contribution from ODM
business (improved by 800bps), which has better margins than original
Price Band: `1760-1766
equipment manufacturing(OEM). Considering the management’s ability and
Lot Size: 8 shares and in multiple
execution skills, we believe that margin improvement would continue further.
thereafter
Moreover, many bigger brands in home appliance segment are expected to
Post-issue implied mkt. cap: *`1993cr -
collaborate with DTIL. Further, the company is also focusing on RL, which has
**`2000cr
higher margin and is growing fast over last 3 years.
Sufficient capacity and expansion into CCTV & DVR: DTIL manufactures and
Promoters holding Pre-Issue: 46%
assembles high growth products and has enough operating leverage, as its
Promoters holding Post-Issue: 35%
utilization levels remain comfortable (40-60%). This, we believe, is a near
term lever to improve the operating margins. Dixon is also setting up a new
*Calculated on lower price band
capacity of CCD televisions, which will commission in September 2017 and
** Calculated on upper price band
will add a new revenue stream in its business.
Healthy financials and return ratio: DTIL has reported healthy top-line of
Book Building
33.8% CAGR and bottom-line of 78.3% CAGR over FY2013-17. Further, the
QIBs
50% of issue
company had negligible debt (D/E-0.22), low working capital requirement
and reported ROE and ROCE of 25.5% and 33.3% for FY17.
Non-Institutional
15% of issue
Outlook & Valuation: DTIL would continue to report higher revenue and
improvement in margins owing to its presence in high growth segments,
Retail
35% of issue
experienced management and growing share of ODM segment. Despite the
company operating on thin margins, it has registered return on capital of a
whopping 33.3% in FY2017. Further, it has been generating positive cash
Post Issue Shareholding Patter
flow from operations over the last 5 years and negligible debt post IPO. At the
Promoters
35%
upper end of the price band, the pre issue P/E multiples works out be 38.5x
of FY2017 EPS, on P/B, it is valued at 9.8x of FY2017 book value. We
Others
65%
recommend ‘SUBSCRIBE’ on the issue for a mid-to-long term period.
Key Financial
Y/E March (` cr)
FY2014
FY2015
FY2016
FY2017
Net Sales
1,094
1,201
1,389
2,457
% chg
43
10
16
77
Net Profit
14
12
43
50
% chg
171
(12)
259
18
EBITDA (%)
2
3
4
4
EPS (Rs)
12
11
39
46
P/E (x)
144
164
46
39
P/BV (x)
26
23
16
10
Jaikishan J Parmar
RoE (%)
18
14
35
25
RoCE (%)
13
15
25
33
+022 39357600, Extn: 6810
EV/EBITDA
80
64
35
22
[email protected]
Source: RHP, Angel Research; Note: Valuation ratios based on pre-issue outstanding shares and at upper end of the price band
Please refer to important disclosures at the end of this report
1
Dixon Technologies Limited | IPO Note
Company background
Dixon Technologies (India) Limited (DTIL) was incorporated as ‘Weston Utilities
Limited’ at Alwar, Rajasthan on January 15, 1993 under the Companies Act, 1956
as a public limited company. The company was converted to a public limited
company pursuant to a resolution of the shareholders on April 18, 2017 and a
fresh certificate was issued by the RoC on May 2, 2017 in the name of “Dixon
Technologies (India) Limited”.
In 1993, they commenced manufacturing of consumer electronics such as color
televisions and in 2007, manufacturing of LCD TVs and subsequently progressed
into manufacturing of LED TVs in 2010. They entered the lighting products
segment in 2008 with the manufacturing of CFL products and gradually increased
their product portfolio to LED products in
2016. In
2010, DTIL started
manufacturing semi-automatic washing machines. They also started providing
reverse logistics services in 2008. The most recent segment that DTIL has entered
into is the manufacturing of mobile phones through a JV. They have continuously
diversified their product portfolio to keep pace with changing consumer trends and
development in technology.
In 2008, IBEF I and IBEF, whose investments are advised and managed by MOPE
Investment Advisors Pvt Ltd., subsidiary of Motilal Oswal Financial Services Ltd,
invested in the company. IBEF I and IBEF currently hold 13.16% and 10.52% of the
pre-Offer Equity Share capital of the company respectively.
Exhibit 1: Long term business relationship with customers
% of total FY17 revenue
Duration of relationship
Top five customers
Products purchased
attributable to such
with the Company, not
customer (%)
less than
Consumer Electronics
22.4
Panasonic India
Home Appliances
1.6
4 years
Reverse Logistics
0.01
Mobile Phones
14.4
Philips lighting
Lighting
20.2
8 years
Gionee
Mobile Phones
16.6
1 Year
Intex Technologies
Consumer Electronics/Home Appliances/Reverse Logistics
4.4
2 Years
Reliance Retail Ltd
Consumer Electronics/Reverse Logistics
3.3
1 Year
Source: RHP, Angel Research
Sep 5, 2017
2
Dixon Technologies Limited | IPO Note
Issue Details
This IPO is a mix of OFS and issue of fresh shares. Issue would constitute fresh
issue worth of `60cr and OFS worth of `539cr. OFS largely would offer exit to IBEF
I and IBEF, whose investments are advised and managed by MOPE Investment
Advisors Pvt Ltd., subsidiary of Motilal Oswal Financial Services Ltd, invested in the
company. IBEF I and IBEF currently hold 13.16% and 10.52% of the pre-Offer
Equity Share capital of the company respectively.
Exhibit 2: Pre and Post-IPO shareholding pattern
No of shares (Pre-issue)
% No of shares (Post-issue)
%
Promoter
50,75,040
46%
39,62,879
35%
Public
5910278
54%
73,62,190
65%
1,09,85,318 100%
1,13,25,069
100%
Source: RHP, Angel Research; Note: Calculated on upper price band
Objects of the offer
Repayment/pre-payment, in full or in part, of certain borrowings availed by
the company (`22cr)
Setting up a unit for manufacturing of LED TVs at the Tirupati Facility (`7.6cr)
Finance the enhancement of backward integration capabilities in the lighting
products vertical at the Dehradun I Facility (`8.9cr)
Up gradation of the information technology infrastructure of the company
(`10.6cr)
General Corporate purpose
Key Management Personnel
Sunil Vachani is the Executive Chairman of the company. He is also the Promoter
of the company and has been associated with it since inception. He has over two
decades of experience in the EMS industry. He has been awarded as “Man of
Electronics” by CEAMA in 2015. He also acts as Vice President for Consumer
Electronics and Appliances Manufacturer Association.
Atul B. Lall is the Managing Director of the company. He has been associated with
the company since inception. He is responsible for the company’s overall business
operations. He has more than 25 years of experience in the EMS industry.
Ramesh Chandra Chopra is a Non-Executive Independent Director of the
company. He superannuated as Scientist 'G’-Group Coordinator from the
Department of Information Technology (presently known at MeitY) and has over 32
years of experience in the electronics industry.
Sep 5, 2017
3
Dixon Technologies Limited | IPO Note
Investment Rationale
Leading market position, strong customer relations to propel growth
DTIL is the leading player in most of the verticals in which it operates and it enjoys
market leadership in manufacturing in India. DTIL is focused on expanding its
product basket, strengthening existing customer relationships and increasing
customer base. Strong relationship would help the company to expand market
share, develop new products and enter newer market.
Exhibit 3: Time-line of product evolution
1994
Color TV
2007
LCD TV
2008
CFL Lighting, Reverse Logistics
2010
LED TV, Washing Machine
2016
Mobile Phones
2017
CCTV, Digital Video Recorder
Source: RHP, Angel Research
Original Design Manufacturer (ODM) & Reverse Logistics (RL) segments to improve
blended margin
EBITDA margin of DTIL has improved by 130bps over the last 4 years, primarily
due to the growing contribution from ODM business (improved by 800bps), which
has better margins than original equipment manufacturing(OEM). Considering the
management’s ability and execution skills, we believe that margin improvement
would continue further. Moreover, many bigger brands in home appliance
segment are expected to collaborate with DTIL. Further, the company is also
focusing on RL, which has higher margin and is growing fast over last 3 years.
Exhibit 4: Increasing ODM share in overall business
600
27%
30%
500
22%
25%
400
20%
15%
14%
300
15%
200
10%
100
5%
155.8
176.8
373.4
537.4
0
0%
FY14
FY15
FY16
FY17
ODM Revenue (` in cr)
ODM conribution as % of revenue
Source: RHP, Company, Angel Research
Sep 5, 2017
4
Dixon Technologies Limited | IPO Note
Over the last 4 years, the revenue trend of home appliance ODM business has
witnessed a surge and the EBITDA margin has improved by improved 1100bps
(Exhibit 5). In Home appliance, Dixon manufactures semi washing machine for
Panasonic, Haier and Intex. Considering the management’s experience and ability
to develop new products, we believe that bigger brands would also collaborate
with Dixon.
Exhibit 5: Home Appliance revenue & EBITDA trend
Exhibit 6: Reverse Logistic revenue & EBITDA trend
200
16.3%
18.0%
70
21.0%
180
16.0%
20.5%
60
20.7%
160
19.6%
14.0%
20.0%
50
140
10.7%
19.1%
19.5%
12.0%
120
40
19.0%
10.0%
100
18.1%
18.5%
8.0%
30
80
5.8%
5.8%
18.0%
6.0%
20
60
17.5%
40
4.0%
10
17.0%
2.8
18.4
39.1
62.7
20
85
2.0%
107
131
188
0
16.5%
0
0.0%
FY14
FY15
FY16
FY17
FY14
FY15
FY16
FY17
Revenure (` cr)
EBITDA
Revenure (` cr)
EBITDA
Source: Company, Angel Research
Source: Company, Angel Research
DTIL commenced the reverse logistics vertical in the year 2008 with a view to
complement their portfolio offerings and provide end-to-end solutions in the
industry they operate. This is extension of their existing skill set of manufacturing
electronics, and DTIL has been able to acquire new customers in this vertical as
well as expand the scope of their offerings to the existing customers.
DTIL currently offers repair and refurbishment services for STBs and repair of
mobile phones, LCD and LED TVs, LED panels, home theatres, printers, etc. The
reverse logistics vertical provides high return on capital employed and has a higher
potential for growth. As per a Frost & Sullivan Report, average return rates in
reverse logistics of electronic items are - mobile phones (9%), set top box (16%),
FPD TV (8%), washing machines (8%), and computer peripherals (10%).
Currently DTIL focuses only on B2B reverse logistics and does not have consumer
facing service centers which is in-line with their strategy of building relationships
with brand owners and OEMs.
Sep 5, 2017
5
Dixon Technologies Limited | IPO Note
Sufficient capacity and expansion into CCTV & DVR: DTIL manufactures and
assembles high growth products and has enough operating leverage as its
utilization levels remain comfortable (40-60%). This, we believe is a near term
lever to improve the operating margins. Dixon is also setting up a new capacity of
CCD televisions, which will commission in September 2017 and will add a new
revenue stream in its business.
Exhibit 7: Capacity Utilisation rate
Capacity Utilized
Aggregate annual installed
Key Products / Vertical
capacity as on 31.12.2017
Fiscal 2017
Fiscal 2016
Fiscal 2015
LED TVs
12,00,000
62.60%
48.09%
51.76%
Lighting Products
26,04,00,000
53.48%
54.00%
59.28%
Washing Machines
5,50,000
68.12%
52.86%
45.33%
Mobile Phones
1,00,80,000
34.31%
7.32%
Reverse Logistics
36,60,000
37.49%
61.09%
52.17%
Source: Company, Angel Research
Healthy financials and return ratio: DTIL has reported healthy top-line of 33.8%
CAGR and bottom-line of 78.3% CAGR over FY2013-17. Further, the company
had negligible debt (D/E-0.22) in FY2017 and low requirement of working capital.
For FY2017 the company has reported ROE and ROCE of 25.5% and 33.3%
respectively.
Exhibit 8: Return ratios improving
Exhibit 9: Revenue and EBITDA margin trend
40
3000
4.5
3.7
4.0
35
2500
4.2
3.5
30
2.6
2.7
2000
3.0
2.4
25
2.5
1500
20
2.0
15
1000
1.5
1.0
10
500
0.5
5
767
1094
1201
1389
2457
8
10
18
13
14
15
35
25
25
33
0
0.0
-
FY13
FY14
FY15
FY16
FY17
FY13
FY14
FY15
FY16
FY17
ROE (%) ROCE (%)
Revenue (` cr)
EBITDA (%)
Source: Company, Angel Research
Source: Company, Angel Research
Sep 5, 2017
6
Dixon Technologies Limited | IPO Note
Outlook and Valuation
DTIL would continue to report higher revenue and improvement in margins owing
to its presence in high growth segments, experienced management and growing
share of ODM segment. Despite the company operating on thin margins, it has
registered return on capital of a whopping 33.3% in FY2017. Further, it has been
generating positive cash flow from operations over the last 5 years and negligible
debt post IPO. At the upper end of the price band, the pre issue P/E multiples
works out be 38.5x of FY2017 EPS, on P/B, it is valued at 9.8x of FY2017 book
value. We recommend ‘SUBSCRIBE’ on the issue for a mid-to-long term period.
Key risks
Client concentration
The company is dependent on certain customers who have contributed to a
substantial portion of its total revenues. In the aggregate, 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 March 31, 2017, 2016, 2015, 2014 and
2013 respectively. Being dependent on specific clients holds a risk to revenue flow.
No clarity on renewal agreement with existing customers
The company enters into agreements with customers for specific products. The
agreement is generally valid for one to three years, and is renewed on a regular
basis if both the parties decide to do so. There is always an uncertainty regarding
the renewal of the agreement.
Changing preferences, advancement in technology
The markets in which company’s customers compete are characterized by
consumers and their rapidly changing preferences, advancement in technology
and other related factors including lower manufacturing costs. Hence, the
company may be affected by any disruptions in the industry.
Sep 5, 2017
7
Dixon Technologies Limited | IPO Note
Exhibit 10: Consolidated Income Statement
Y/E March (` cr)
FY14
FY15
FY16
FY17
Total operating income
1,094
1,201
1,389
2,457
% chg
43
10
16
77
Total Expenditure
1,068
1,169
1,331
2,366
Raw Material
996
1,084
1,212
2,180
Personnel
32
37
55
64
Others Expenses
39
48
63
122
EBITDA
26
32
59
91
% chg
29
24
82
55
(% of Net Sales)
2
3
4
4
Depreciation& Amortisation
5
7
8
11
EBIT
21
25
50
80
% chg
34
23
99
59
(% of Net Sales)
2
2
4
3
Interest & other Charges
11
10
13
13
Other Income
3
2
2
2
(% of Sales)
0
0
0
0
Extraordinary Items
-
-
-
-
Share in profit of Associates
-
-
-
-
Recurring PBT
13
17
39
69
% chg
153
35
125
77
Tax
4
4
8
18
PAT (reported)
14
12
43
50
% chg
171
(12)
259
18
(% of Net Sales)
1
1
3
2
Basic & Fully Diluted EPS (Rs)
12
11
39
46
% chg
171
(12)
259
18
Sep 5, 2017
8
Dixon Technologies Limited | IPO Note
Exhibit 11: Consolidated Balance Sheet
Y/E March (` cr)
FY14
FY15
FY16
FY17
SOURCES OF FUNDS
Equity Share Capital
3.1
3.1
3.1
11.0
Reserves& Surplus
70.5
81.7
119.7
186.7
Shareholders Funds
73.6
84.8
122.8
197.7
Minority Interest
2.1
3.0
-
-
Total Loans
86.9
79.9
77.1
42.9
Other Liab & Prov
7.4
7.9
9.6
14.2
Total Liabilities
169.9
175.6
209.4
254.8
APPLICATION OF FUNDS
Net Block
84.2
97.0
123.6
139.1
Capital Work-in-Progress
-
-
-
-
Investments
6.3
6.0
0.1
-
Current Assets
184.2
204.7
271.3
636.7
Inventories
93.3
113.0
136.3
282.2
Sundry Debtors
46.4
54.4
87.6
279.3
Cash
4.6
6.9
7.5
15.3
Loans & Advances
38.0
29.4
39.4
58.6
Other Assets
1.9
1.0
0.6
1.2
Current liabilities
121.3
148.8
207.8
544.3
Net Current Assets
62.9
55.9
63.5
92.4
Other Non Current Asset
16.5
16.6
22.2
23.2
Total Assets
169.9
175.6
209.4
254.8
Sep 5, 2017
9
Dixon Technologies Limited | IPO Note
Exhibit 12: Consolidated Cash Flow Statement
Y/E March (`cr)
FY14
FY15
FY16
FY17
Profit before tax
18.2
17.3
50.6
68.8
Depreciation
5.3
6.9
8.4
10.6
Change in Working Capital
(19.6)
14.5
(10.7)
(23.5)
Interest / Dividend (Net)
(0.8)
(0.9)
(0.9)
(1.2)
Direct taxes paid
2.5
(4.1)
(8.7)
(15.5)
Others
(4.8)
(10.8)
(3.5)
(15.3)
Cash Flow from Operations
10.4
44.5
42.3
54.6
(Inc.)/ Dec. in Fixed Assets
(8.5)
(22.1)
(27.0)
(39.1)
(Inc.)/ Dec. in Investments
-
0.5
17.6
0.1
Cash Flow from Investing
1.2
(22.3)
(21.6)
(43.1)
Issue of Equity
-
-
-
43.6
Inc./(Dec.) in loans
(0.8)
(11.3)
(2.7)
4.6
Others
12.0
11.0
17.4
58.6
Cash Flow from Financing
(12.8)
(22.3)
(20.1)
(10.4)
Inc./(Dec.) in Cash
(1.1)
(0.0)
0.6
1.0
Opening Cash balances
2.2
1.1
1.1
1.7
Closing Cash balances
1.1
1.1
1.7
2.7
Exhibit 13: Key Ratios
Y/E March
FY14
FY15
FY16
FY17
Valuation Ratio (x)
P/E (on FDEPS)
143.6
163.6
45.6
38.5
P/CEPS
130.7
148.9
41.5
35.1
P/BV
26.4
22.9
15.8
9.8
Dividend yield (%)
0.0
0.0
0.2
0.3
EV/Sales
1.9
1.7
1.5
0.8
EV/EBITDA
80.0
64.3
35.1
22.3
EV / Total Assets
12.2
11.8
9.8
8.0
Per Share Data (Rs)
EPS (Basic)
12.3
10.8
38.7
45.9
EPS (fully diluted)
12.3
10.8
38.7
45.9
Cash EPS
13.5
11.9
42.6
50.4
DPS
0.3
0.3
3.5
6.0
Book Value
67.0
77.2
111.8
180.0
Returns (%)
ROCE
12.9
15.4
25.1
33.3
Angel ROIC (Pre-tax)
13.0
15.6
26.3
33.7
ROE
18.4
14.0
34.7
25.5
Turnover ratios (x)
Asset Turnover (Gross Block)
9.3
9.0
8.9
13.0
Inventory / Sales (days)
31
34
36
42
Receivables (days)
15
17
23
41
Payables (days)
33
41
49
75
Working capital cycle (days)
14
10
10
8
Sep 5, 2017
10
Dixon Technologies Limited | IPO Note
Research Team Tel: 022 - 39357800
E-mail: [email protected]
Website: www.angelbroking.com
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11