2017 11 - Dixon Ic - Iifl

Dixon Technologies – BUY
Initiating coverage
27 November 2017 Institutional Equities

In a sweet spot Company update
Dixon Technologies (Dixon), India’s largest homegrown provider of CMP Rs3228 Price performance (%)

Electronic Manufacturing Services (EMS), is riding the urbanisation 12‐mth TP (Rs) 3491 (8%) 1M 3M 1Y
and consumption wave by leveraging its cost-competitive offerings,
Market cap (US$m) 565 Absolute (Rs) 16.9 ‐ ‐
strong client relationships, and technical know-how in growing
Absolute (US$) 17.6 ‐ ‐
consumer electrical businesses. Favourable GoI policies coupled Enterprise value(US$m) 553
with Dixon’s focus on customer acquisition, increasing share of in- Rel. to Sensex 13.7 ‐ ‐
Bloomberg DIXON IN
house designed products, backward integration, and entry into new Cagr (%) 3 yrs 5 yrs
segments with the core philosophy to remain asset light place Sector Consumer Electricals EPS 74.6 ‐
Dixon in a sweet spot. Strong growth metrics of industry-leading
ROE/ROCE of 27/36%, FA turns of 18-20x, and Shareholding pattern (%) Stock performance

revenue/Ebitda/PAT Cagr of 21%/34%/39% over FY17-20ii make Promoter 38.9 Vol('000, LHS) Price (Rs., RHS)
the stock attractive. We initiate with BUY and TP of Rs3491, at 20x FII 12.8 8,000 4,000
Sep19ii EV/Ebitda. DII 20.5
6,000 3,000
Others 27.8
Favourably placed in the growing EMS market: GoI’s thrust on “Make 4,000 2,000
in India” and a narrowing price differential vs. China are spurring growth in 52Wk High/Low (Rs) 3250/2506
2,000 1,000
outsourcing at ~2x the market, with benefits of higher flexibility and cost Shares o/s (m) 11
0 0
efficiencies. Further, ODM solutions enables competitive and value for Daily volume (US$ m) 0.0
Nov‐17
Sep‐17
money products to consumers, helping brands to focus on marketing and Dividend yield FY18ii (%) 0.0
distribution. Cost leadership in key categories, client IPR protection, and Free float (%) 61.1
deep client relationships have enabled Dixon to expand presence steadily in Financial summary (Rs m)
the Indian EMS market (No.2 with 9% market share), and lead in
Y/e 31 Mar, Consolidated FY16A FY17A FY18ii FY19ii FY20ii
lighting/SA washing machines/LED TVs with 39/50/43% share.
Revenues (Rs m) 13,894 24,568 32,060 37,662 43,492
Enviable cost leadership and diverse offerings: Diverse presence across Ebitda margins (%) 4.2 3.7 4.0 4.6 5.0
segments de-risks Dixon from sudden technological disruptions in a category. Pre‐exceptional PAT (Rs m) 309 504 705 1,005 1,344
Further, deep relationships with anchor customers not only helps attract new Reported PAT (Rs m) 426 504 705 1,005 1,344
clients (and reduce concentration; top 5 client 80% of sales), but also enables Pre‐exceptional EPS (Rs) 32.9 45.9 62.2 88.7 118.6
entry into new markets that are in synergy with its core strengths in SMT, Growth (%) 160.3 39.4 35.6 42.6 33.7
mechanicals and moulding. Its enviable cost leadership in lighting places it on IIFL vs consensus (%) 0.0 0.0 0.0
a strong footing to leverage global market through Philips. PER (x) 98.1 70.4 51.9 36.4 27.2
ROE (%) 29.7 31.4 26.8 26.9 28.1
Lean NWC, asset light model drive superior returns: Fungible SMT
Net debt/equity (x) 0.6 0.2 0.0 0.0 (0.1)
lines, moulding machines and other capex enable Dixon to work with an
asset-light model and draw cost leadership with scale. Entry into new EV/Ebitda (x) 52.8 39.4 29.0 21.2 16.3
segments, increase in ODM sales (22% in FY17), backward integration, Price/book (x) 24.7 17.9 11.1 8.7 6.8
and lean NWC cycle (15-20 days) should aid 39% EPS Cagr over FY17- Source: Company, IIFL Research. Priced as on 24 November 2017
20ii and sustain superior ROE/ROCE of ~27%/36% over FY18-20ii.
Renu Baid | renu.baid@iiflcap.com Nayan Parakh | nayan.parakh@iiflcap.com |
91 22 4646 4651 91 22 4646 4670
Institutional Equities Dixon Technologies – BUY
Table of contents
Particulars Page No.
Company Snapshot 3
Industry Analysis 7
Segmental performance and outlook
- Consumer Electronics 12
- Lighting Products 15
- Home Appliances 17
- Mobiles 20
- Reverse Logistics, Security Systems 22
Financial Analysis 23
Investment Arguments 28
Key Risks 29
Valuations 30
Global EMS Peers – Snapshot and Performance analysis 32
Dixon ‐ 1HFY18 performance snapshot 34
Financial Summary 36
renu. baid@iif lcap.com 2

Company snapshot Figure 2: Consumer electronics is the largest contributor to FY17 revenues; mobiles

segment was started in FY16 and forms 33% of sales mix
Dixon is a leading Indian electronics manufacturing company (EMS) FY17 sales mix

engaged in the manufacture of lighting and consumer electronics for
branded vendors and in development, design, and manufacture of Mobiles Lighting
products and components. Dixon’s primary products include lighting 33% 22%
(LEDs, CFLs, drivers), washing machines (semi-automatic), LED TVs, as
well as communication products such as smartphones and security
surveillance products like CCTV cameras and DVRs. Over the years, it
has backward-integrated major manufacturing processes with in-house Servicing
capabilities for plastic moulding products, sheet metal products, wound 3%
components, and LED panel assembly. Strong presence in reverse
logistics - repair (LCD-LED TVs, mobiles and set-top boxes) and Home Consumer
refurbishment (smartphone), makes it an end-to-end player. appliances Electronics
8% 34%
The company operates through two business models - “OEM” and Source: Company, IIFL Research
“ODM”. Under OEM model (prescriptive), it manufactures based on
design and specifications of its customers for a fixed conversion charge. Figure 3: Dixon’s capabilities in lighting products, LED TVs and washing machines
Under ODM model, it manufactures products based on in-house design
and bears the input risks. ODM business, thus involves higher value
addition and working capital than OEM, and generates better margins. Plastics, Others,
Circuit, 50% Glass, 28%
Dixon’s focus on growing ODM business has led to increase in its sales CFL Lamp 9% 12%
mix from 14% in FY13 to 22% in FY17. It has developed more than 20
ODM solutions during the past four years through in-house R&D. Dixon Imported/ Domestic
Plastics, Others,
Like other global peers, Dixon has high customer concentration, and its LED Lamp Circuit, 30%
30%
LED, 30%
10%
top five customers contribute ~75-80% of the revenues. Key customers
include Philips, Panasonic, Haier, Gionee, Intex, and Reliance Retail. Imported/ Domestic
Dixon
Circuit, Plastics, BLU, LED Glass, Others,
Figure 1: Diversified presence across different segments LED TV 12% 11% 9% 56% 12%
Dixon Technologies Gear Box,
Dixon Imported Domestic
5%
Washing Plastic parts, Electric motor, Timers, Others,
Machine 50% 25% 10% 10%
Consumer Home Security Reverse

Lighting Mobile (JV) Dixon Imported Domestic/
Electronics Appliances systems (JV) Logistics Imported
Source: Company, IIFL Research Source: Company, IIFL Research

Figure 4: Evolution from EMS to ODM model Figure 7: Washing machine contributes 34% to FY17 Ebitda despite 8% share in sales

OEM Back integration ODM Reverse logistics FY17 Ebitda mix
Mobiles
• Manufacture • Expands scope of • Manufactures • End to end 5.5% Lighting
based on work in related based on own servicing through 19.7%
customer designs areas design, supported repair and
Reverse
• No inventory / • Higher control on by in‐house R&D refurbishment
input risk components, • Higher margin, offerings logistics
• Carries negative supply chain and higher WC • Entry point to 13.5%
working capital quality • Economical for add new
(WC) • Margin expansion mass variants customers
• Gets assured per with efficiencies, • Helps customers • Provides cross‐ Home Consumer
unit conversion lower third party to focus on sell opportunities Appliances Electronics
charge dependence marketing (S&D) • High margin 33.8% 27.5%
Source: Company, IIFL Research
Figure 5: Focus on higher margin ODM business has led to increase in its sales mix from
14% in FY13 to 22% in FY17 Figure 8: Dixon has seven manufacturing facilities, located in Noida, Dehradun, and
Tirupati
ODM OEM
100% Facility Type Products manufactured Area Started
90% 14% 14% (sq. m) in
15% 27% 22%
80% Noida ‐ I facility Leasehold LED bulbs, LED drivers, 3,900 1996
70% PCB assembly of CFL lamps
60% Noida – II facility Leasehold Mobile phones 1,950 2016
50% 73% Noida ‐ III facility Leasehold Reverse logistics, CFL lamps 7,686 2009
40% 86% 86% 85% 78% Dehradun ‐ I facility Owned LED TVs, lighting products 16,188 2007
30%
20% Dehradun ‐ II facility Rented Semi ‐automatic washing machines 3,342 2010
10% Dehradun ‐ III facility Rented Backward integration of plastic parts, 7,689 2009
0% sheet metal components
FY13 FY14 FY15 FY16 FY17 Tirupati Leased LED TVs; Security systems (CCTVs, 18,500 2017
Source: Company, IIFL Research DVRs) by 4QFY18
Figure 6: Top five customers contribute 75‐80% of the sales
FY13 FY14 FY15 FY16 FY17 1HFY18
% share 79.7% 77.0% 73.3% 79.4% 82.9% 85.6%

Figure 9: Dixon has expanded capacities in recent years to support growth and Figure 11: Dixon’s India presence
maintain healthy utilisation levels
FY14 FY15 FY16 FY17

80%
70% Capacity utilisation
60%
50% Dehradun
Rajpura
40%
30%
Noida
20%
10% Jaipur Lucknow Guwahati
0% Patna
LED TVs (1.2m) Lighting Washing Mobile phones Reverse
Ahmedabad
products machines (10.1m) logistics (3.7m)
(260.4m) (0.55m) Bhopal Raipur Kolkata
Source: Company, IIFL Research. Note: Figures in brackets indicate installed capacity as at 31 Mar’17
Bhubaneswar
Figure 10:Experienced board of directors Pune
Name Designation Background Hyderabad
He has 20+ years of experience in EMS industry, and holds a Vijayawada
Promote,
Sunil business degree from the American College in London.
Executive
Vachani Currently the vice president of CEAMA, and has been a part
Chairman Tirupati
of other industry councils. Legend
Associated with Dixon since its inception. Bengaluru Manufacturing facility

Managing
Atul B. Lall Holds a master’s degree in management studies from the Chennai Service Centre for reverse logistics
Director
BITS, Pilani and has 25+ years of experience in EMS industry. Head Quarters
Kochi
Has over 32 years of experience in the electronics industry.
Ramesh Independent
Serving as a director on the board of Onicra Credit Rating
Chopra director
Agency of India Ltd and Onicra Credit Information Co Ltd.
Poornima Independent Completed global leadership program from the University of
Shenoy director Michigan. She is also founding president of the IESA.
Manuji Independent Doctor of philosophy from the IISc, Bangalore. He retired as
Zarabi director Chairman and MD of Semiconductor. Complex Ltd in 2005.
Member of the ICAI, ICSI and holds a postgraduate diploma
Manoj Independent
in business administration from Symbiosis. He has over 29
Maheshwari director
years of experience in finance functions

Figure 12: Segment‐wise summary
Rs bn Lighting Products Consumer Electronics Home Appliances Reverse Logistics Mobiles (started in FY16)
Revenues (FY17 mix, % YoY) 5.5 (22% of sales, 28% YoY) 8.4 (34 of sales, 10% YoY) 1.9 (8% of sales, 44% YoY) 0.6 (3% of sales, 60% YoY) 8.1 (33% of sales)
ODM:OEM mix 46:54 12:88 100% ODM 100% OEM 100% OEM
Ebitda margin (FY17 mix) 3.25% (20% of Ebitda) 3% (28% of Ebitda) 16.3% (34% of Ebitda) 19.6% (14% of Ebitda) 0.6% (6% of Ebitda)
Repair & refurbishment of
LED products, CFL Lamps, Lamp LED TVs‐ 19" to 60", PCBs for Semi‐automatic washing
Key products STBs and Mobile, repairs of Feature phones, smart phones
drivers inverter ACs machines (6.2‐8 kgs)
TVs, LED panel
LED panel assembly, PCB Plastic moulding, panel, control
Sheet metal, plastic moulding, NA ‐ Plans for mobile chargers, PCBs
Backward integration assembly, backlight unit, table base, twin tub, final
wound components in place (FY19)
plastic moulding light assemblies
Panasonic (21%),
Key customers Philips (90%), Surya (2%), Panasonic (65%), Reliance Haier (16%), Intex (16%), Airtel (60%), Tata Sky (7%) Gionee (50%),
(FY17 mix) Bajaj (2%), Wipro (1%) (10%), Intex (9%) Godrej (12%). Gionee (65% in 1HFY18) Panasonic (44%)
Samsung (FY18 onwards)
Key competitors NTL (30%), MEPL (8%), SVL (8%), Foxconn (35%), Flex (22%),
Noble (25%) ‐
(market share) Compact Lamps (28%) Videotex (8%) BGM (15%)
 Growing end market  Growing subscriber base
 Increasing adoption of LED
 Low penetration (~9%) demand ‐ mandatory with affordable prices
 Price moderation  Low rural penetration
 Increasing localisation digitalisation for STBs,  Government incentives ‐
 Export potential to Africa, (30%)
 Growing share of organised increased mobile usage import duties on CBU
Growth drivers other developing markets  Replacement demand
retail (3% of mix currently)  100% LED adoption by mobile (PCB likely in FY19)
with Philips  Price moderation
 Shift in lifestyle, price 2020 to boost domestic
 Milking mature product  Technology advancement
moderation  Low competition with production
cycles (CFLs)
limited large players  Technology advancements
EMS/ODM share in domestic
48% 15% 13% NA 40%
mfg (FY16)

16.5% for STBs, <1% for other
Dixon's EMS/ODM market 38.9% 50.4% 42.6% 8.4%
products
share (FY16)

Poised to leverage the growing CEA market

• The Indian Consumer Electronics and Appliances (CEA) market has Figure 14: Mobiles form largest part of Consumer Electrical market with high ticket sizes
sustained double-digit growth in the past few years, aided by
increasing product awareness, affordable pricing, innovative Consumer Electricals market mix ‐ FY16(Rs2,364bn)
products and high disposable incomes. TV
• Indian CEA market is expected to grow at ~17% Cagr over FY16-21 16%
as per CEAMA and F&S analysis (almost 2x growth rate as compared
to other global economies). Electronics market (mobiles, TV, STBs
washing Machine, STB, cameras etc.) is expected to grow at ~17% 7%
Cagr; while appliances market (AC, refrigerator, microwave oven Digital Cameras
etc.) is likely to grow at 12% Cagr. 6%
Mobiles
• A rapidly shrinking replacement cycle for consumer durables is Washing
driving demand in urban India. In rural areas, low penetration rates 67%
Machines
and increasing usage of consumer durables are leading to high 30% Orthers 3%
annual growth. 1%
• Mobiles form the largest category in consumer electronics market,
Source: Company, F&S analysis, CEAMA, IIFL Research
followed by TVs. Dixon’s diversified portfolio is well aligned to
benefit from growth in domestic consumption. It is the market
Figure 15: Drivers and restraints for Indian CEA market
leader in EMS manufacturing for flat panel display (FPD) TVs, semi
automatic washing machines and LEDs, CFL lights.
Driving factors Restraints
Figure 13:Indian CEA market growth likely to accelerate to 17% Cagr over FY17‐21
• Rising middle class population • Price hikes with rising material
(Rs bn) Indian CEA market size and low product penetration costs, INR depreciation
70 • Rising rural disposable incomes, • High GST rates on most
60
easy finance availability consumer durables (28%)
• Better availability of electricity • Challenge in distribution system
50 • Booming E‐commerce market • Inadequate after sales service
40 • Rapid technological • Slow pace of changes in
30
advancement, new product consumption habits and
offerings at various price points patterns
20
10
0
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21
Source: Company, CEAMA, F&S analysis, IIFL Research

Figure 16: Low penetration levels and increasing adoption in major segments is a key Figure 17: Indian EMS/ODM market is expected to receive significant impetus from
driver for growth in Consumer Electrical market GOI’s thrust on “Make in India” initiatives
(%) FY16 FY21 (Rs bn) EMS/ODM market size (LHS) As % of CEA market (RHS) (%)
60 600 10%
Category wise penetration levels in India
50 500 9%
8%
40 400
7%
30 300
6%
20 200
5%
10 100 4%
0 0 3%
LED TVs Washing Machines Mobiles FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21
Source: Company, F&S Analysis, IIFL Research Source: Company, F&S analysis, IIFL Research
Figure 18: Dixon enjoys market leadership in EMS production of FPD TVs, washing
Rapidly changing technologies, cost efficiencies driving higher
machines and LED, CFL lights
outsourcing by OEMs
• Consumer Electronics OEMs require continuous investment to (%) EMS share in domestic manufacturing Dixon's EMS market share
introduce new technologies and designs, even as competitive 60
pressures weigh down profitability. In the Indian market, price
50
sensitivity poses additional challenges, while currency volatility has
adversely affected imports for many products. 40
• EMS players offer OEMs flexibility in product design updates, faster 30
time to market, cost effectiveness, lower manufacturing challenges
besides value added aftermarket services, which is leading a shift 20
towards EMS players. OEMs like Sony, Panasonic etc. are
10
undertaking manufacturing through EMS.
• Indian EMS market has grown at 24% Cagr over FY12-16 and stood 0
Lighting products LED TVs Washing machines Mobiles
at Rs149bn in FY16. It is expected to grow at 31% Cagr over FY16-
Source: Company, F&S analysis, IIFL Research
21 to Rs569bn as per F&S analysis. Telecom forms 24% of the mix,
followed by Consumer Electronics (19%) and Industrials (14%).
Mobiles, LED lighting, semi-automatic washing machines,
• EMS companies in India have matured from mere contract
manufacturers to being end-to-end support partners today. The
refrigerators, window ACs, CCTVs etc. are expected to drive growth
competition concentration in Indian EMS market is moderate as the
in the EMS sector.
top three companies account for ~28.5% of the market.

Figure 19: India EMS market shares (FY16; Rs149bn) – Dixon occupies the No. 2 spot Figure 21: Current EMS capabilities in India and expected scale up in the medium term

Products Present Expected
Jabil
13% Medium. High level of High. Complete end to end
Consumer product assembly and manufacturing including
Dixon
Electronics development services, low product design and RL especially
9%
level of design services in WM, Refrigerators, TV etc.
SFO High. Product design, product
Medium. Only Assembly &
Others 7% Mobile Phones development, and assembly
Packaging
66% including RL
Elin
3% High. End to end manufacturing
Low‐Mid. Assembly and
LED Lighting including design services at
Rangsons Product development
product level will exist
2%
Medium. High EMS capability,
Others (PoS, Smart Cards, Low. Assembly, Product
outsourcing will slowly increase
RFID, CCTV, ATM etc.) development and Packaging
Source: Company, F&S analysis, IIFL Research with ODM also being developed
Figure 20: Key EMS competitors in India and their offerings
MNCs Domestic Companies Figure 22: Dixon has a well‐diversified and in‐depth presence in key segments than most
of its peers
Large Small Products/Services
SFO Technologies, SGS Tekniks, Coramandel, Lighting LED TV
Washing
Mobile
Reverse Other
Machine Logistics Appliances*
Solectron Centum, NTL Hical Technologies,
Sanmina‐SCI, Jabil, Dixon
Companies Electronics, Dixon, Sahasra, Amara Raja
Flextronics, Foxconn
Rangsons, Kaynes, Electronics, Smile NTL
Avalon, Elin, PG Group Electronics, Vinyas, Delta
SMT, PCBA, hardware Hardware design,
Elin
design, software software development, Plastic molding, sheet
Offerings
development, prototyping, logistics, metal fabrication, etc. Videotex
prototyping, logistics final assembly, testing MEPL

Technically complex & Low‐value products; Noble
Products made for the
Capability high‐value products; subparts, to be supplied
domestic market Vimal
export oriented to bigger participants
STB, White goods, Wire and harness, cables Optiemus
BTS, Mobiles, STBs; for
Mobiles, lighting and connectors, sheet Iqor
Products export market only:
products, syringes, metal parts, plastic molds,
Mobiles, Telecom
catheter transformers, coils Revenue/Scale of business High Medium Low
Source: Company, IIFL Research Source: Company, F&S analysis, IIFL Research * Other Appliances include smaller electrical
appliances/kitchen appliances

ODM products bear key significance for tier-II players

• EMS companies are primarily present in and around SEZs, with

subsidies and tax benefits accorded to these areas, and to cater • The Indian CEA market has been dominated by tier-I players like LG,
export markets. North India and Bangalore-Mysore are the key Samsung and Sony, but is seeing increasing share of Japanese peers
regions with presence of EMS companies. (Panasonic) and tier-II names such as Intex, Lloyds, and Micromax.
• Most consumer electrical players are concentrated in North India and • While the tier-I players rely on their product design and
now expanding presence in South. Bangalore is a hub for IT, development, tier-II players are emphasising on brand positioning,
electronics, and semiconductor design industry, and Chennai is an and do not rely much on in-house product capabilities. Advantages
automotive hub. such as nil/low design investment, standard designs, low cost of
product and quicker production turnaround makes ODM a compelling
Figure 23: EMS companies are primarily located in and around SEZs value proposition for tier–II players.
Noida-Jaipur SEZ • Certain products such as semi-automatic washing machine, direct
• NTL Electronics
• Dixon Technologies
cool refrigerator, window ACs, CFLs, etc. are highly commoditized
• Benchmark Circuits with less scope for design. As they move towards maturity phase,
• PG Electroplast
• SGS Tekniks more products are expected to become standard and fall under the
Kandla and Mumbai SEZ • Donex Industries ambit of ODMs. For example, feature phones will be procured
• Jabil Circuits • Raltronics India
• Kinetic Communications 1
• Sahasra Electronics through ODM model in the long term, as OEMs increase focus on
• Elin Electronics
• Foxconn smart phones.
Rising labour costs narrow India- China cost arbitrage

• A developed and stable supply chain and economies of scale have
enabled China to maintain low cost of manufacturing over the past
two decades. Hence, global EMS giants such as Jabil, Flex, Sanmina
Corporation, Compal Electronics, Foxconn, and Celestica have set up
large manufacturing facilities in China.
Andhra-Telangana belt
2
(Proximity to Chennai
SEZ) • Further, government support in form of capital subsidies and
Bangalore-Mysore
Region (Proximity to
• Apollo Microsystems relaxation of tax rates, availability of large qualified workforce at low
• Amara Raja Electronics
Chennai and Cochin SEZ)
• Kaynes Technology
• Foxconn wages has enabled China to become an export hub for electronics.
6 • Veratroniks
• Elcoteq
• Solectron Centum
• Resolute • However, currency devaluation and rising labour costs in recent
• Digital Circuits
• Hical technologies
years have affected China’s positioning as a low cost manufacturer.
• Vinyas 3 5 Chennai, Tirupati &
This is driving manufacturers to explore other geographies or
• SRV Telecom
• Smile Electronics Mahindra City SEZ increase automation levels.
• Incap Contract • Flextronics
• Sanmina SCI
• Avalon Technologies
• Cost efficiencies from rising volumes, a huge pool of affordable
Cochin SEZ
4 • Dixon Technologies labour and favourable manufacturing policies should strengthen
• SFO Technologies • Celkon
India’s positioning as a domestic-cum-export oriented manufacturing
Source: Company, F&S analysis (2016), IIFL Research destination.

Figure 24: With double digit wage increase over the recent years in China, Chinese Figure 25: An increasing scale should narrow cost differential in raw materials for Indian
labour costs are ~3x higher than Indian labour per man hour manufacturers; further, rising labor costs and overheads in China have improved India’s
competitiveness in local manufacturing of TVs vs. imports
Labour costs‐ USD/hour
4.0 (% of sales) Raw material Utilities Labour, Overheads Total Mfg costs
3.5 12%
FPD TVs ‐ cost differential ‐ India's advantage/ (disadvatage) vs China
10%
3.0
8%
2.5
6%
2.0
4%
1.5 2%
1.0 0%
0.5 ‐2%
0.0 ‐4%
India China ‐6%
Source: Company, F&S analysis, IIFL Research FY14 FY17 FY21
Domestic manufacturing push to improve capabilities and
develop supply chain Figure 26: Higher domestic value addition with should reduce material costs for mobiles
• An increasing import bill for electronics has increased GoI’s focus on in India over FY17‐21
domestic manufacturing of electronics. The “Make in India” initiative (% of sales) Raw material Utilities Labour, Overheads Total Mfg costs
and policies such as Modified Special Incentive Scheme (MSIPS), 10%
Electronic Development Fund (EDF), Electronic Manufacturing Mobiles ‐ cost differential ‐
Clusters (EMC), and Preferential Market Access scheme (PMA) are 5%
India's advantage/ (disadvatage) vs China
encouraging domestic investments in manufacturing capabilities.
• Many global EMS companies such as Foxconn, Flextronics, and Jabil 0%

Circuits are already operating in India. Multiple domestic companies
are also adding capacities to cater domestic demand for electronics. ‐5%
• Currently, EMS vendors in India undertake only box-level assembly ‐10%

apart from low value add activities such as sheet metal fabrication,
plastic moulding, etc. However, they are re-aligning their business
model to provide design and engineering services in coming years. ‐15%
FY14 FY17 FY21
• Growth in domestic consumption and increase in outsourcing Source: Company, F&S analysis, IIFL Research
volumes should drive development of a local component ecosystem
and enhance domestic sourcing capabilities.

Figure 27: Indian manufacturers enjoy pricing advantage over Chinese competitors in

semi‐automatic washing machines market
Consumer Electronics - Riding on LEDs
(% of sales) Raw material Utilities Labour, Overheads Total Mfg costs Industry dynamics
15%
Washing Machines ‐ cost differential ‐
• Indian FPD (flat panel display) TV market has transitioned from a
totally import-dependent to local-assembly market over recent
India's advantage/ (disadvatage) over China
10% years. It is expected to grow at ~16% Cagr over FY16-21 as per
F&S, led by increase in disposable incomes and growing middle
class, easy microfinance options and increase in LED TV penetration
5% (from 5% in FY16 to 20% in FY21).
• Exports have seen a gradual increase over the past few years to
0% Rs4.6bn in FY16 from Rs4.2bn in FY13. The Middle East, South
Africa, and Southeast Asia are the key export markets, and growth
in local production should further increase exports.
‐5%
FY14 FY17 FY21 • Indian FPD TV industry is highly competitive with LG, Samsung and
Sony holding ~61% market share, while other prominent players
include Panasonic, Videocon, Haier, Micromax, and Videocon. The
larger players focus on multiple ranges and options under each TV
Figure 28: India has gained competitive advantage in LEDs (in FY18) vs estimated by F&S technology whereas smaller players have limited and focused
led by GoI’s thrust on energy efficiency and EESL program which has aided strong models, mainly in LED TV and UHD TV.
volumes and faster adoption of the disruption in technology
• Tier-II players such as Micromax, Intex, VU Tech and Lloyd have
(% of sales) Raw material Utilities Labour, Overheads Total Mfg costs gained market share over past two years deriving growth from tier-2
10% towns and value for money offerings for the mass market.
LED lamps ‐ Icost differential ‐
5% India's advantage/ (disadvatage) over China Figure 29: FY16 FPD TV market share (volumes)
0% Others
Samsung
15%
24%
‐5% Panasonic
10%
‐10%
LG
‐15% Videocon
19%
FY14 FY17 FY21 14%
Sony
18%

• Principal raw materials in FPD TVs include open cell, electronic • Dixon enjoys market leadership status in EMS market for FPD TVs
components, mechanical and plastic parts. Displays, mechanicals, (50% share in FY16), supported by its ODM capabilities and reverse
main PCB, and power supplies form ~78% of the BoM; displays are logistics services.
entirely imported, while other components are partially imported.
Absence of a developed ecosystem has led to import dependence for Figure 31: Only 15% of FPV TVs manufactured domestically were outsourced to EMS in
critical components and restricted local value addition. FY16, indicating high growth potential in EMS market; Dixon had 50% share in EMS pie
• However, this scenario is changing with exemption of basic customs

duty on TV components and panels, aimed at boosting local
manufacturing. Twinstar Display is planning to set up a LCD panel
manufacturing plant in Nagpur with investment of US$10bn.
• Sony/ Skyworth/ Panasonic have partnered with Foxconn/ Resolute

Electronics/ Dixon for manufacturing of FPDs. Further, brands such
as Salora, Oscar, Zebronics, T-Series, Panorama, BPL, Haier are
increasingly opting for outsourcing. These trends indicate increasing
confidence in EMS and ODM companies. Thus, EMS share in
domestic production (volumes) increased from 7% in FY13 to 15%
in FY17, and it is expected to increase further to ~39% by FY21.
Figure 30: FPD TV market is expected to grow at 16% Cagr over FY16‐21; outsourcing to
EMS is expected to increase from 15% in FY16 to ~39% in FY21
Domestic FPD TV market (LHS) % of volumes outsourced to EMS (RHS) Source: Company, F&S analysis, IIFL Research

900 50%
800 Segment highlights
700 40% • Dixon commenced its operations in 1993 with manufacturing of
600 colour televisions. Over the years, it has launched several products
30% including LED TVs, VCRs, DVD players, STBs, LCD TVs, home
500
400 theatres etc. It has also back integrated into LED panel assembly,
20% back light unit and plastic moulding and assembly of PCBs for
300
inverter ACs (Daiken).
200 10%
100 • LED TVs are manufactured at Dehradun and Tirupati facility (since
0 0% Sep’17). The present installed capacity is ~1.3m units/year, and is
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 expected to increase to 1.9m units/year with ramp up of the Tirupati
Source: Company, Frost & Sullivan analysis, IIFL Research facility. Dixon has recently acquired in-house ODM capabilities for
LED TVs in 24-39 inch segments.

Figure 32: Dixon’s range of consumer electronics • Its ODM sales mix reduced from 12% in FY13 to 4% in FY15 with
LED TVs Home theatres PCBs the phasing out of DVD players; Dixon developed its first ODM TV
(32” LED) in FY15. ODM sales mix bounced back to 12% in FY17,
but it declined to 6.6% in 1HFY18 with significant growth in OEM
• 19” to 65” • 2.1 channel • For inverter air sales (Panasonic).
• 4K2K • 4.1 channel conditioners (for Daikin)
• Dixon has recently started supplying its ODM TVs to Flipkart (e-
commerce player) for its in-house brand ‘MarQ’; we expect ODM
• It caters to global and national customers such as Panasonic, Haier, sales mix to increase to 18% by FY20ii with increase in supplies to
Intex as well as regional players such as Mitashi, Abaj Electronics. It tier-II players.
also supplies to domestic retail private labels such for Reliance Retail
• Dixon is also the key supplier of PCBs for inverter ACs to Daiken
and Vijay Sales. Panasonic is its largest customer, accounting for
(OEM basis). Daikin is expanding its capacity in India, and has
65% of FY17 sales.
recently set up its second manufacturing plant in the country at
Neemrana (capacity of 1.5m ACs/year).
Figure 33: Consumer electronics sales mix ‐ despite high customer concentration, Dixon
has been able to offset loss of large customer (Skyworth acquiring Toshiba) • Ebitda margins have improved 140bps over FY14-17, led by
operating leverage benefits from increase in TV volumes.
Others (incl. AC PCBs) Toshiba Reliance Haier Intex Panasonic Improvement in FY17 was supported by a one-off gain in panel
100%
15% 14% 13% 11% sourcing from China, and hence margins are expected to taper off in
90% 22% FY18. We expect higher ODM mix and backward integration to drive
1%
6% 10% 8%
80% 2% 3% ~50bps improvement in Ebitda margins over FY18-20.
3%
70% 28% 9%
24%
60% Figure 34: Higher ODM mix and backward integration to aid improvement in Ebitda
50% 47%
16% margins over FY19‐20
40% 76%
65% (Rs bn) OEM sales (LHS) ODM sales (LHS) Ebitda margin (RHS)
30% 54%
42% 14 3.5%
20% Consumer Electronics
31%
10% 12
3.0%
0%
FY14 FY15 FY16 FY17 1HFY18 10
Source: Company, IIFL Research 8 2.5%
6 2.0%
• Dixon’s Consumer Electronics sales have grown at 17% Cagr over
FY13-17 to Rs8.4bn, with the similar growth rate in both OEM and 4
ODM sales. Over FY14-17, although TV volumes grew at 17% Cagr, 1.5%
2
revenues grew only 11% Cagr, due to a decline in TV prices with
technology advancement. We expect 17% revenue Cagr over FY17- 0 1.0%
20ii. FY13 FY14 FY15 FY16 FY17 FY18ii FY19ii FY20ii

Lighting - Holding the pole position Figure 36: FY16 LED market share (Value)
Industry dynamics
• Indian lighting market is expected to grow at 17% Cagr over FY16-
21 as per Elcoma and F&S analysis, led by increasing adoption in
LEDs (59% Cagr); CFLs are expected to decline by 20% Cagr over
FY16-21.
• The key growth drivers include government initiatives for LED

adoption such as Unnat Jyoti by Affordable LEDs for All (UJALA),
Domestic Efficient Lighting Programme (DELP), Street Lighting
National Program (SLNP), moderation in prices, energy savings
Preferential Market Access (PMA) policy that provides preference to
domestically manufactured electronic goods etc.
Source: Frost & Sullivan analysis
• As domestic CFL sales have reached a maturity stage, many
companies are shutting down in-house CFL capacities and
Segment highlights
outsourcing production to EMS players. Further, CFLs have
significant export potential to developing countries in Africa and
• Dixon entered lighting products in 2008 with manufacturing of CFL
lamps and drivers. It manufactures LED, CFL products and lamp
South East Asia, as it continues to enjoy a preferred status vs. other
drivers, and it is launching street lighting solutions in FY18. It has
lighting technologies in these countries.
undertaken backward integration into sheet metal, wound
Figure 35: Domestic lighting market is expected to grow at 17% Cagr over FY16‐21, led components and injection moulding plastic parts. Further, strong
by increasing adoption of LEDs (~59% Cagr) product know-how, understanding of the mechanicals and design
capabilities have facilitated Dixon to emerge as the most competitive
(Rs bn) LED CFL Others LED bulb manufacturer in India.
350
Figure 37: Dixon’s range of lighting products
300
250 LED Products CFL lamps Lamp drivers
200 • LED bulbs • CFL Lamps • Indoor LED drivers

150 (0.5W ‐ 20 W) (5W ‐ 27W) • (5W ‐ 20W)
• Down‐lighters • Outdoor LED drivers
100
(5W ‐ 15W) • (20W ‐ 150W)
50 • Battens • Electronics lamp driver
0 • T‐ LEDs (20W ‐ 24W) (10W ‐ 40W)
Source: Company, Elcoma, F&S analysis, IIFL Research

• Lighting products are manufactured in both Noida and Dehradun • It is also targeting to deepen relationship with Philips and supply
facility, and the current capacity is 260.4m units/year. It plans to LEDs for exports (currently only CFLs are procured from Dixon)
commence lighting production in Tirupati facility in FY19. given the cost advantages in India compared to China (labour costs
in India are ~1/3rd of China, Power cost ~50% lower at Rs6/unit). It
• Dixon received its first lighting products order from Philips, which also expects higher voltage LED products for Philips to shift to ODM
remains its largest customer (90% of FY17 mix); other customers segment, thus improving margins.
include Surya, Bajaj Electricals, Wipro, Panasonic Anchor etc. It has
also started supplies to Crompton from Oct’17. It currently exports Figure 39: Dixon had 39% EMS market share in Lighting products in FY16
CFL and LED lamps to Kenya, France, Poland, Netherlands, Dubai,
Malaysia, Thailand, and Sri Lanka through Philips.
• Many companies such as Orient, Eveready, Havells are now sourcing

CFLs through Philips, and hence Dixon has seen a significant bounce
back in its CFL volumes (~1.3m/month for Philips). Further, margins
are significantly better when mature product lines are in the decline
phase of their life cycle. CFL exports also remain strong at 1.8-2m
units/month.
Figure 38: Efforts to diversify and add new ODM clients should aid reduction in client
concentration; Philips remains Dixon’s largest customer in Lighting business
Others Anchor Panasonic Wipro Surya Bajaj Phillips

100% 4% 6% 5% 5% 4%
95%
5% 2%1%
2% 6%
90% 2%
85% Source: Company, F&S analysis, IIFL Research
80%
75% 96%
• Its lighting revenues grew at 20% Cagr over FY13-17, led by ODM
70% 93% 90% 90% products (introduced in FY14, form 45% of FY17 mix). Ebitda
87%
65% margins improved 300bps over FY13-16 led by operating leverage,
60% backward integration and increase in ODM mix.
55%
• We expect Lighting revenues to grow at 21% Cagr over FY17-20ii
50%
FY14 FY15 FY16 FY17 1HFY18 with similar growth in both ODM and OEM sales as new customer
acquisition and deeper relationships with existing customers
continue to drive growth. Although margins in FY17 were impacted
by initial fixed costs related to capacity expansion, they are
• With increase in capacities, Dixon targets to become a global expected to recover and sustain ~6-7% levels over FY18-20ii.
supplier for lighting products. It targets to cater European and US
markets, which are lesser price conscious and offer better margins.

Figure 40: Margin improvement over FY13‐16 was driven by operating leverage, back
integration and higher ODM mix; FY18‐20 again expected to show the growth trend
Home Appliances - Solid positioning
(Rs bn) ODM sales (LHS) OEM sales (LHS) Ebitda margin (RHS) Industry dynamics
12 8.0% • Indian washing machines (WM) industry has sustained double digit
Lighting products 7.0% growth in past few years and is expected to grow at 15% Cagr over
10
6.0% FY16-21 as per F&S analysis, led by increase in penetration levels
8 from 7% in FY16 to 11% in FY21, moderating prices and change in
5.0% lifestyles (no more considered as a luxury product).
6 4.0%
• Price sensitivity and washing habits of Indian customers is driving
3.0%
4 demand for Semi-Automatic (SA) WM for most first-time users,
2.0% where Indian manufacturers enjoy distinct advantage over China. SA
2 WM is a steadily growing market in India and has significant export
1.0%
0 0.0% potential to Middle East and African economies. The maturity of this
FY13 FY14 FY15 FY16 FY17 FY18ii FY19ii FY20ii product ensures standardization, and hence is an ideal product for
outsourced manufacturing and lower cost.
• Although price consciousness and first time buyers drive SA WM
Figure 41:Lighting sales mix‐ LED share had increased significantly in 1HFY18 sales, narrowing price difference between SA WM and low end Fully
Automatic Top Load (FA TL) WM is also driving the adoption of the
Ballast CFLs LED Lighting
FA WM. Hence, companies are steadily increasing focus on FA WM
100%
12% 9% and passing on SA WM opportunities to EMS players.
90%
80% 18% • The industry witnesses strong local manufacturing with a low-mid
29%
70% level dependence on imports. SA WM is majorly manufactured in
60% India with minimal incidence of electronics or imports.
50%
40% • Global factors such as political friction between Japan and China has
73% influenced Japanese brands like Panasonic to prefer Indian EMS
30% 60%
partners; US has also imposed high duties on imports of WM from
20%
China. To hedge against consumer demand volatilities and manage
10%
inventory efficiently, manufacturing in India is cost effective and
0%
advantageous solution.
FY17 1HFY18

Figure 42: With increasing standardization, EMS share in domestic WM manufacturing is Figure 44: SA WM mix by volumes in FY16 (2.8mn units)
expected to increase from 12% in FY16 to 34% in FY21
Others
Revenue (Rs bn) (LHS) % of volumes outsourced to EMS (RHS) 9%
Godrej LG
180 40%
7% 36%
160 35%
140 30%
120
25% Videocon
100
20% 14%
80
15%
60
40 10% Whirlpool Samsung
20 5% 15% 19%
0 0%
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 Source: Company, F&S analysis, IIFL Research
Figure 45: Dixon had 43% market share in WM units produced by EMS players in FY16
Figure 43: WM market mix by types – FY16 (5 mn units)
15.0%
56.0%
0.7
Semi‐automatic
Fully automatic Top Load
Fully automatic Front Load
1.4 2.8
29.0%

Segment highlights • WM revenues have growth at 38% Cagr over FY13-17, and are
• Dixon commenced manufacturing of SA WM in 2010. It currently expected to grow at 28% Cagr over FY17-20ii with growth in the
manufactures SA WM of capacities 6.2-8kg, solely under the ODM end markets and new customer additions.
model. It manufactures WM at its Dehradun facility, and has
capacity of 0.55m units/year. It is evaluating entry into FA TL WM. • Ebitda margins have improved by 10ppts over FY13-17 led by
increase in product portfolio and back integration. 1HFY18 witnessed
• It has back integrated into plastic moulding, panel, control table, disruption due to delay in ramp up of capacities and streamlining of
base, twin tub, and final assemblies. It is exploring entry into operations for Samsung, hence Ebitda margins are expected to be
electric motors over medium term for complete back integration. suppressed in FY18. Further, rising commodity prices are also
expected to weigh on margins in 2HFY18. We expect Ebitda margins
• It caters to customers such as Panasonic, Haier, and Intex. Based on to improve to ~17% levels by FY20ii with back integration and
its strong cost advantage and capabilities in eth category, it has economies of scale.
been able to convert tier-I player like Samsung as its customer and
has recently commenced supplies to Samsung (~15kunits/month). Figure 47: New customer additions, increase in penetration to drive 28% Cagr revenues
It has undertaken requisite modifications in manufacturing processes in Home Appliances over FY17‐20ii
to adhere to Samsung’s stringent requirements.
(Rs bn) Revenue (LHS) Ebitda margin
• Dixon is targeting to increase share of business from existing 5.0 18%
customers and acquire new customers from modern retail formats
Home appliances
such as Croma, and Vijay Sales. 4.0
16%
14%
Figure 46: Dixon enjoys a diversified customer base in WM 3.0 12%
Others Lloyd Videocon Intex Haier Godrej Panasonic 10%
2.0
100%
8%
90% 24% 26%
36% 29% 1.0
80% 44% 6%
70% 4% 2%
15% 7% 0.0 4%
60% 12% 16% 25% FY14 FY15 FY16 FY17 FY18ii FY19ii FY20ii
50% 10% 9% 14%
40% 10% 5% 16% 12%
12% 16%
30% 17% 12% 10%
20% 10%
18%
10% 19% 17% 21% 23%
0% 9%
FY14 FY15 FY16 FY17 1HFY18

Mobiles - Taking small step at a time • India’s huge domestic demand for low and mid end smart phones is
driving local investments by domestic and Chinese manufacturers.
Currently, there are 50+ facilities involved in manufacturing of
Industry dynamics
mobile phones in India; different players have announced
• Indian mobile market is expected to grow by ~13%/20% Cagr in investments worth Rs140bn across the value chain.
volume/value terms over FY16-21, driven by rise in disposable
incomes, declining prices and technology upgrade. Replacement of • The total combined manufacturing capacity across these facilities
handsets contributes 80% of all smart phone purchases, and is can be scaled up to ~21m units/month, while current average
expected to remain a strong growth driver. Penetration rate is output is ~6-7m units/month. Although majority of the capacity is
expected to increase from 38% in FY16 to 54% by FY21. still unused, indigenisation of supply chain and growing domestic
and export demand can increase capacity utilization.
• While global players dominate the high price segments, domestic
players are expected to dominate the low-to-mid price segments. • Supported by government policy of Phased Manufacturing
Samsung and Xiaomi now hold 23.5% share of India's smartphone Program (PMP) that offers tax benefits to manufacturers of
market, followed by Lenovo (Motorola), Vivo and Oppo at 9%/ mobile phone components in the country, progressive value
8.5%/ 7.9% respectively. addition is expected to increase from 6% at present to over 30% by
2020. PMP Phase-I covered products such as microphone and
• Feature phones form ~66%/13% of the volume/value mix in FY16, receiver, keypad, USB cable etc.
while smart phones formed 34%/87% of volume/value mix.
However, declining smart phone prices are reducing price gap • Under PMP Phase – II, 10% customs duty is expected to be imposed
between feature phones and smart phones, thus driving the on imports of printed circuit board (PCBs) for mobiles from FY19
adoption of smart phones. onwards. This is likely to be a significant boost for development of
domestic capabilities; Dixon is planning to set up printed circuit
Figure 48: Rising disposable incomes, declining prices and technology upgrading are board assembly (PCBA) manufacturing unit at its Noida facility.
expected to drive 20% Cagr growth in Indian mobile market over FY16‐21
Figure 49: Products covered in GoI’s Phased Manufacturing Program (PMP) for Mobiles
(Rs bn) Indian Mobiles market
4,500 Phase I ‐ FY18 Phase II – FY19 Phase III – FY20
4,000
3,500 Mechanics, die cut Populated printed Display assembly, touch
3,000 parts, microphone and circuit boards, camera panels, vibrator motor
receiver, key pad and modules and and ringer
2,500
USB cable connectors
2,000
1,500 Source: Company, IIFL Research
1,000
500
0

Figure 50: Investments across the value chain in mobile manufacturing Figure 52: ~40% of domestic mobile manufacturing is outsourced to EMS players; Dixon
Stage Company Capex (Rs bn) Period had ~8% market share in Apr‐Dec’17
Assembly and Packaging Gionee 3.3, 5.5 2015‐17, 2016‐18
Assembly and Packaging Xiaomi 6.5 2015‐20
Assembly and Packaging One plus 1 2016‐17
Assembly and Packaging Oppo 1 2016‐17
Assembly and Packaging Asus 1.5 2016‐17
Processing, Assembly & Packaging Lenovo 6.6 2015‐23
Assembly and Packaging Coolpad 19.43 2015‐23
Processing, Assembly & Packaging Celkon 6.6 2015‐23
Battery Maxx Mobiles 3.2 2015
R&D & Design Celkon 1 2015 onwards
Assembly and Packaging Videocon 1.5 + 5 2016‐18
Assembly and Packaging Micromax 20 2015‐17
Processing, Assembly & Packaging Lava 26.15 2016‐22 Source: Company, IIFL Research
Processing, Assembly & Packaging Karbonn 8 + 20 2015‐22
Segment highlights
Assembly & Packaging Vivo 1.25 2015‐18
• Dixon commenced mobile phone manufacturing in 2016 through a
Assembly & Packaging InFocus 0.5 2016‐18
50% JV Padget Electronics Private Ltd (PEPL), with Jaina Marketing
Assembly & Packaging Jivi Mobile 2 2016‐18 and Associates (Karbonn Mobiles). It manufactures feature phones
Source: Frost & Sullivan analysis, Company and smart phones (2G, 3G, 4G/LTE, VoLTE and CDMA) solely under
the OEM model, and its customers include Panasonic India, Gionee,
Figure 51: Clients served by EMS companies Jaina Marketing & Associates.
EMS Capacity Assembly for
(units/mth) • The mobiles are manufactured at its Noida facility, with installed
capacity of ~10m units/year. Key raw materials include touch panel,
Foxconn 1.4m Xiaomi, Motorola, Gionee, Sony, OnePlus, Oppo, Asus
LCD, PCBAs, FFCs and front and back housing. Currently operations
Flextronics 1.3m Huawei, Lenovo and Motorola are more of assembly and testing. PMP-II is expected to boost in-
Dixon 1.0m Gionee, Karbonn, InFocus, Intex and Panasonic house manufacturing and hence margins over FY18-20. Ebitda
Karbonn, Onida, Spice, Celkon Mobiles, HITECH Mobiles, HSL margins for the segment are expected to sustain at ~1-1.3% levels.
BGM 2.1m
Mobile, Intex, JIVI Mobiles and Lemon Mobiles
• While off-take by Gionee was impacted in 1HFY18, Dixon is in
PGEL NA Lava, Hitech and Salcomp
discussions with another large customer and expects conversion in
Million Club 0.8m Karbonn the next few months. Further, Karbonn has also tied up with Airtel
Source: Frost & Sullivan analysis, Company for supply of mobiles (A40 model), and Dixon expects to secure
orders for these handsets.

Figure 53: Mobile revenues are expected to grow at 17% Cagr over FY17‐20ii • E-Commerce has 15-20% return rates, and products of ~Rs1.2tn

(Rs bn) are returned annually. Hence, refurbished products (especially
Revenues (LHS) Ebitda margin (RHS) electronics) are emerging as a new category in e-commerce; this is
14 1.5%
Mobiles* beneficial for both OEMs and e-retailers.
12 1.0%
10 0.5% Segment highlights

0.0% • Dixon commenced reverse logistics in 2008 with repair services for
8 set top boxes. It offers repair and refurbishment services for STBs,
‐0.5%
6 repairs of mobile phones and LED TVs. It caters to players such as
‐1.0% Intex, Dish Infra, Airtel etc., and undertakes spare parts
4 ‐1.5% management for Gionee.
2 ‐2.0% • The reverse logistics is carried out through Noida facility and 17
0 ‐2.5% service centres pan India. Dixon’s reverse logistics capacity is 3.66m
FY16 FY17 FY18ii FY19ii FY20ii units/year. It currently focuses only on B2B segment and does not
Source: Company, IIFL Research *Indicates Dixon’s share of JV revenues have consumer facing service centres.
• Principal raw materials include open cell, backlight units, electronic

Reverse Logistics – High-margin business components including micro-processors, ICs, COFs, touch panels,
OCA glue, mechanical, plastic parts and other consumables like paint
Industry dynamics and thinner.
• Reverse Logistics is the process of efficient, cost effective flow of • STB repairs are facing headwinds in FY18 with consolidation in the
products from the consumers to the point of origin for repair/ industry and near-completion of the digialtization initiative, while
refurbishment/ disposal. Outsourcing suppliers have become refurbishment business is witnessing execution challenges with
specialists in managing the reverse flow of goods and can achieve issues in sourcing of spare parts. Mobile and LED TV repairs are also
scale. yet to pick up; Dixon has recently added Sony as a customer for LED
• Lack of control over reverse logistics process leads to multiple issues TV repairs. Reverse logistics hence is also a means to attract new
such as high cost, and inferior customer service, and it reduces customer with potential to cross-sell as the relationship matures.
asset recovery. Since reverse logistics is not the core competence of • It eyes significant opportunity from mobile refurbishment/repair
most OEMs, they usually outsource it completely to third party business in India. It has recently tied up with Ingram for
service providers. refurbishment of used Apple and Samsung smart phones.
• Average return rates of electronics items are: Mobile Phones (9%), • While revenue growth in FY18 is primarily being driven by spare
Set Top Box (16%), FPD TV (8%), WM (8%), and Computer parts management business, it carries lower margins due to cost
Peripherals (10%). The margin for repair/ refurbishment of a mobile pass through nature of the business. Hence, Ebitda margins are
phone is Rs200-300/unit on an average. depressed in FY18, and recover over FY19-20ii with improvement in
• Given the nascent state of reverse logistics business in India, it has mix (TV and mobile repairs).
significant opportunity and benefits for early movers.

Figure 54: Reverse logistics’ Ebitda margins impacted in FY18 due to mix issues expected

to bounce‐back in FY19‐20ii
Strong earnings strong and returns profile
(Rs m) Revenues (LHS) Ebitda margins (RHS) New category and clients to aid 21% sales Cagr (FY17-20ii)
1200 22% • Dixon’s recorded 34% revenue Cagr over FY13-17, led by 50%/30%
Reverse logistics Cagr growth in ODM/OEM sales. With key focus on ODM sales, its
1000 20% mix has increased from 14% in FY13 to 22% in FY17. We expect
800 18% 21% revenue Cagr over FY17-20ii, led by 27% Cagr in ODM sales
(to form 25% of mix by FY20ii); OEM sales should clock 19% Cagr
600 16% over FY17-20ii.
400 14% • With diversification into new segments, Consumer electronics and
lighting mix has reduced from 93% in FY13 to 56% in FY17. We
200 12% expect an increase in lighting mix in FY18 with new customer
0 10% acquisitions and portfolio expansion. Home appliances (washing
FY14 FY15 FY16 FY17 FY18ii FY19ii FY20ii machines) form 7-9% of the mix, and are expected to maintain
Source: Company, IIFL Research similar levels over FY18-20ii led by supplies Samsung from FY18.
• Dixon had entered mobiles in FY16, which forms 33% of FY17

New opportunity – entry in security systems revenues; security systems are expected to form 5% of the mix by
FY20ii. Reverse logistics form a minor portion of sales mix, but are
Dixon has entered into 50% JV with Aditya Infotech Ltd. (CP Plus) for influential to form new customer relationships and enable cross sell
manufacturing of security systems including CCTV cameras, DVRs etc. opportunities.
The products will be manufactured from its Tirupati facility, and
production is expected to commence in Dec’17. Figure 56: Diversification into new segments, expansion of customer base and focus on
ODM sales to drive 21% Cagr revenues over FY17‐20ii
Figure 55: Recent JV with CP Plus has significant growth potential
(Rs bn) ODM sales OEM sales
(Rs bn) Revenue (LHS) Ebitda margin (RHS) 50
2.0 2.5% 45
Security Systems* 40
2.3% 35
1.5
30
2.1% 25
1.0 20
1.9% 15
10
0.5 5
1.7%
0
0.0 1.5% FY13 FY14 FY15 FY16 FY17 FY18ii FY19ii FY20ii
FY18ii FY19ii FY20ii
Source: Company, IIFL Research *Indicates Dixon’s share of JV revenues

Figure 57: Segmental revenue mix Figure 59: Top customer contributes significant portion of each vertical revenue
Security systems Mobiles Reverse logistics Verticals Top customer Share of revenue(%)
Home Appliances Consumer Electronics Lighting FY17 1HFY18
2% 1% Panasonic India
100% 3% 3% 4% 5% Consumer electronics 65.2 76.3
7% 8% 9%
90% 9% Lighting products Philips Lighting 90.0 87.4
80% 33% 26% 29% 30%
Home appliances Panasonic India 21.0 23.2
70% 3% 2% 2% 3%
59% 7% 8% Mobile phones Panasonic India 43.7 39.6
60% 64% 65% 55% 8% 9%
50% Reverse logistics Gionee 60.2 65.5
40% 34% 35% 33% 31% Source: Company, IIFL Research
30%
20% 34%
10% 28% 25% 31% 22% 27% 24% 22% Growing ODM share and backward integration help expansion in
0% operating profitability
FY13 FY14 FY15 FY16 FY17 FY18ii FY19ii FY20ii • Led by increase in higher-margin ODM sales mix and backward
integration, Ebitda margins have improved from 0.9% in FY12 to
3.7% in FY17. Ebitda margins appear compressed, as OEM sales
include billing for input costs as well (primarily pass through in
• Dixon has significant client concentration, on similar lines to global nature), instead of the pure value addition (conversion charges)
EMS companies. Its top five customers contribute ~75-80% of
made by Dixon. It clocked 46% Ebitda Cagr over FY13-17, and we
revenues. With diversification in both segments and customer base,
expect 34% Ebitda Cagr over FY17-20ii.
it has been able to withstand loss of key customer and maintain
revenue growth over FY13-17. • Although home appliances form only 7-9% of sales, it forms 34% of
Ebitda mix in FY17 (higher margins of ~13-17% due to 100% ODM
Figure 58:Top five customers form ~75‐80% of Dixon’s sales mix mix). Consumer Electronics Ebitda margins are lower at ~2.5%,
Others Toshiba Reliance Retail while mobiles and security systems have ~1-1.5% Ebitda margins
Intex Technologies Gionee Philips Lighting due to the assembly-focussed nature of Dixon’s work in these
Panasonic India segments.
100%
20% 17% 14%
90% 23% 20% 3%
80% 0% 3% 2%
4% 4% 17%
70% 18% 17%
30% 15%
60% 11%
50% 20%
28% 20%
40% 24%
30% 27%
20% 38% 43%
28% 33%
10% 20%
0%
FY14 FY15 FY16 FY17 1HFY18

Figure 60: Ebitda margins are expected to sustain ~4‐5% over FY17‐20ii Earnings poised to clock 39% Cagr

(Rs m) Ebitda (LHS) Ebitda margin (RHS) • Dixon enjoys tax exemption for production from its Dehradun
facility, which will end in FY19. Further, it manufactures the new
2500 5.5%
products at Noida and Tirupati facility. Thus, its tax rate has
5.0%
increased from 26.8% in FY17 to 30.9% in 1HFY18; it is expected to
2000 4.5%
sustain at ~30%.
4.0%
1500 3.5% • Driven by healthy operating profits, net profit grew 78% Cagr over
3.0% FY13-17. Despite higher tax incidence and depreciation charges for
1000 2.5% capacity expansion (Tirupati and other facilities), we expect PAT to
2.0% grow by 39% Cagr over FY17-20ii.
500 1.5%
1.0%
• Interest costs have reduced from ~1-1.5% of sales over FY13-16 to
0.5% of sales in FY17, driven by conversion of debentures of
0 0.5%
FY12 FY13 FY14 FY15 FY16 FY17 FY18ii FY19ii FY20ii Rs375m (issued to India Business Excellence Fund) into equity
shares in Aug’16. With strong cash generation, interest costs are
expected to remain under 0.5% of sales over FY18-20ii
Figure 61: Segmental Ebitda mix Figure 62: Expect 33% PAT Cagr over FY17‐20ii
Security systems Mobiles Reverse logistics
Home Appliances Consumer Electronics Lighting (Rs m) Net profits (LHS) Net margin (RHS)
1% 2% 2% 1400 3.5%
100% 3% 2% 6% 6%
11% 12% 8% 8% 1200 3.0%
90% 13% 20% 14% 7% 10% 10% 2.5%
80% 19% 1000
24% 24% 2.0%
70% 29%
34% 30% 800 1.5%
60%
60% 44% 22%
50% 42% 27% 600 1.0%
40% 19% 18% 0.5%
28% 400
30% 0.0%
20% 40% 200
34% 38% 33% 31% ‐0.5%
10% 24% 28% 20% 0 ‐1.0%
0%
(200) ‐1.5%
FY13 FY14 FY15 FY16 FY17 FY18ii FY19ii FY20ii FY12 FY13 FY14 FY15 FY16 FY17 FY18ii FY19ii FY20ii

Figure 63: Interest costs as % of sales declined in FY17 with conversion of debentures Figure 64: Net working capital cycle
into equity shares; expected to sustain low levels with strong cash flows Days of sales FY13 FY14 FY15 FY16 FY17 FY18ii FY19ii FY20ii
Interest costs as % of sales Inventory 20 16 17 24 42 40 40 40
1.6% Trade receivables 16 13 9 10 9 6 6 6
1.4% Short‐term loans & advances 1 1 0 0 0 0 1 1
Other current assets 52 33 41 49 75 64 63 62
1.2%
Trade payables 3 4 2 3 3 3 3 3
1.0%
Other current liabilities 0 2 1 3 3 3 3 3
0.8%
Short term provisions 24 22 16 16 12 16 18 19
0.6% Net working capital 20 16 17 24 42 40 40 40
0.4% Source: Company, IIFL Research
0.2%
Asset-light model and high asset turns help sustain high returns
0.0%
FY13 FY14 FY15 FY16 FY17 FY18ii FY19ii FY20ii profile
• Dixon believes in the philosophy to be the lowest cost EMS player
and has selectively committed to capex for SMT process, injection
moulding machines and other PCBs which are fungible, making its
Maintains a lean NWC cycle, expect a gradual increase with
business asset light. Thus, its FA turnover has increased from 7x in
growing share of ODM sales
FY12 to ~20x in FY20 and is expected to sustain at current levels
• Dixon has a lean net working capital cycle at ~15-20 days of sales. over FY18-20ii.
It does not maintain high inventory levels, and follows a just-in-time
approach for procurement. • It is undertaking capex spends of ~Rs700m in FY18 for a greenfield
• WC intensity for OEM business is very lean (negative WC in some facility at SEZ in Tirupati, capacity ramp up in washing machines and
cases). In the OEM model, where the company gets a fixed expansion in other segments.
conversion charge, components are sourced based on the LC backed
by the customer and payment to suppliers are made with a lag of 8- Figure 65: Key highlights of Tirupati Facility
10 days from eth receipt of payment from the customers. Comments
• However, the ODM model has higher working capital than OEM. The Key objectives To penetrate South Indian market, enable easier access to export
company carries the inventory risk in ODM model and passes on the markets (140km from Chennai Port)
changes in commodity prices for polymers etc based on benchmark Area 12 acre facility, constructed area – 2 lakh sq ft.
prices with a 30-45 days interval. Further, with the implementation Other details Leased for 30 years from Government; Rent expense of
of GST, working capital has increased as Dixon has to pay upfront ~Rs2m/month; 100% SGST benefit
14% tax on imports of raw materials. Source: Company, IIFL Research
• With increase in ODM sales mix form 22% in FY17 to 25% in FY20,
we expect a gradual increase in the net working capital cycle. NWC
was lower in FY17 due to increase in the payables related to the
recently launched mobiles segment (OEM).

Figure 66:With strong cash flow generation, Dixon is expected to turn net‐cash in FY19 Figure 68: Du‐Pont Analysis
(Rs m) (x) FY13 FY14 FY15 FY16 FY17 FY18ii FY19ii FY20ii
Capex Free cash flow Net Debt
1,500 Ebitda margin (%) 2.6% 2.4% 2.7% 4.2% 3.7% 4.0% 4.6% 5.0%
Non‐operating effect (PBT/EBITDA) 0.3 0.5 0.5 0.7 0.8 0.8 0.8 0.9
1,000 Tax effect (PAT/PBT) 1.0 0.6 0.7 0.8 0.7 0.7 0.7 0.7
Asset Turnover (Sales/ Assets) 4.5 6.5 6.8 7.1 10.5 9.9 8.7 8.1
500
Equity multiplier (Assets/ Equity) 2.9 2.5 2.2 1.9 1.5 1.2 1.2 1.1
0 RoE (%) 8% 12% 15% 30% 31% 27% 27% 28%
(500)
Figure 69: Utilisation of IPO proceeds
(1,000) Rs m As per RHP Utilised till Sep'17 Balance
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 Repayment of debt 220 220 ‐
Source: Company, IIFL Research LED TV plant at Tirupati 76 ‐ 76
Back integration for Lighting at Dehradun 89 ‐ 89
• Led by higher FA turnover, ROE/ ROCE have increased from
8%/10% in FY13 to 31%/35% in FY17. With fresh issue of shares of IT infra upgradation 106 19 88
Rs600m in IPO (Sep’17) and capex of ~Rs700m in FY18, ROE is General corporate purposes 75 ‐ 75
expected to moderate to ~27-28% over FY18-20ii, while ROCE is 566 239 327
expected to sustain over 35% levels. IPO expenses 34
Figure 67: With an asset light model, ROE/ROCE are expected to sustain at ~27%/~36% Total 600
over FY17‐20ii Source: Company, IIFL Research
FA turnover (RHS) ROE (LHS) ROCE (LHS) (x)

45% 30
35% 25
25%
20
15%
15
5%
10
‐5%
‐15% 5
‐25% ‐
FY12 FY13 FY14 FY15 FY16 FY17 FY18ii FY19ii FY20ii

What makes Dixon attractive? growth opportunities. It entered mobiles vertical in FY16 (JV with
Jaina Electricals), and has recently entered security cameras and
surveillance systems (50% JV with CP Plus) in FY18.
Figure 70: Key investment arguments
• Strong customer relationships: Dixon has established strong
relationships with global brands such as Philips and Panasonic over
Diversified presence
the years. The stringent quality and IP requirements of marquee
across categories customers act as a key barrier to entry, and ensure revenue
Proxy play on Strong customer visibility. It has been able to cross sell new products to the existing
growing consumption relationships customers, and has leveraged this base to develop new categories.
sector The fact that Dixon is in B2B operations only and does not intend to
become a B2C player, offers significant comfort to its customers.
Why Dixon
• Market leader in key verticals with significant in-house
is in a sweet
capabilities: Dixon is a market leader in EMS industry for key
spot? verticals of Lighting products, LED TVs and semi-automatic washing
Market leader in key Strong volumes, machines. Growing mix of ODM sales increases customer stickiness
verticals, in‐house Increasing ODM and improves margins. Its in-house R&D team aids new product
share development. Reverse logistics capabilities helps Dixon to offer end-
capabilities
to-end solution to the customers and a means to attract new clients.
Cost competitive; • Cost competitive offerings and asset light model: Dixon
Asset light model believes in the philosophy of being the lowest-cost EMS player and it
has selectively committed to capex for SMT process, injection
Source: Company, IIFL Research moulding machines and other PCBs, which are fungible, making its
business asset light. Strong volumes backed by large customers
• Proxy play on the growing consumption sector: As an EMS and (like Philips and Panasonic) have enabled Dixon to achieve cost
contract manufacturer, Dixon is a proxy play on consumption with leadership in select categories like LEDs, FPD TVs and washing
rising disposable incomes and low penetration of consumer machines.
electricals in India. The Indian market has low penetration levels • Asset light model and lean NWC drive strong return ratios:
for LED TVs (5%), washing machines (9%) and mobile Dixon has reported strong 34% revenue Cagr, 46% Ebitda Cagr and
phones (38%), which are Dixon’s key verticals. Growing 78% net profit Cagr over FY13-17. This has been driven by 50%
disposable incomes and improving standard of living are driving Cagr in ODM (in-house designed) sales with higher margins, while
higher adoption of consumer durables. OEM sales grew at 30% Cagr. With an asset light model, its fixed
• Diversified presence across categories: Dixon has a well- asset turnover has improved from 7x in FY12 to c20x in FY17, and is
diversified sales mix across consumer electricals and appliances, to expected to sustain these levels. Further, higher ODM mix is
reduce dependency on any key segment and de-risk the business expected to improve Ebitda margins by c130bps to 5.0% over FY17-
model with from technology disruption in any key segment. Learning 20ii. Hence, Dixon is expected to sustain high ROE of ~27%/ ROCE
lessons from the past, it has been continuously exploring new of ~36%.

Key risks to growth attempting to mitigate the risk by developing new products to keep
pace with technological changes.
Figure 71: Key risks • Impact of warranty related liabilities: Dixon’s contracts typically

include warranties related to defects and performance. Although it
undertakes provision on an estimated basis, actual warranty costs
Client could be much higher. In certain cases, Dixon has back-to-back
concentration warranty clause with its suppliers, but it has to bear the impact in
other cases. Until now, Dixon has not faced any large quality issue
Raw material price
Warranty related nether on eth OEM nor the ODM sales.
fluctuation,
availability liabilities • Raw material price fluctuations and availability: Dixon
procures raw materials from both domestic and overseas suppliers
Key risks to with a just-in-time approach, and does not maintain high inventory.
growth Hence, delay in deliveries can affect manufacturing process and cost
of production, and expose it to exchange rate fluctuations for
imported products. Inventory risks are borne by customers in case
of OEM, however, Dixon bears the risk for ODM. It has tried to de-
Rapid Increasing risk for key cost elements like forex and polymers (plastic) by
technological competitive sharing the rate change on a monthly basis. However, inflationary
pressures in component sourcing like motors or timers for washing
advancement intensity
machines can result in margin pressures for short term.
Source: Company, IIFL Research • Increasing competitive intensity: Attracted by the rapid growth
in EMS industry and favourable policy incentives by the GoI, multiple
global and domestic manufacturers are entering the market. Key
• Dependence on key customers: Client concentration is not new to competitors such as Videotex International, Malhotra Electronics,
EMS companies, Foxconn, Compal and Pegatron also have high NTL Electronics, Elin Electronics, Sun Industries, Vimal Plast, MCM
concentration, despite their size. Dixon’s top five customers Telecom Equipment, iQor India etc have grown. However, most of
contribute c75-85% of its revenues. Loss of key customer is a these players cater primarily to a single segment, and Dixon enjoys
significant risk for the business, while preferential pricing for large competitive advantage of diversification and deeper presence into its
customers can also impact margins. However, Dixon is also large segments. At the same time large players like Foxconn, have come
vendor for key customers like Philips and Panasonic. Further, the with global accounts in the smart phone market, where the presence
company continuously works on adding new clients and diversify the of Dixon is very small. Dixon, however, offers more flexibility with
base to reduce client concentration. respect to volumes and SKUs for emerging smaller brands (including
• Rapid technological advancement, change in customer Foxconn’s in-house brand In-Focus).
preferences: CEA markets are characterized by rapidly changing
consumer preferences and advancement in technology, along with
lower manufacturing costs etc. Dixon’s business is dependent on the
end market demand for its customers’ (OEMs) products. It is

Initiate with BUY; Target Price Rs3,491 Figure 72: Global EMS players are valued at similar/higher multiples than the sector
OEMs; Dixon is currently valued at a discount to its sector OEMs despite higher growth
60
Dixon has significantly scaled up its presence and capabilities over the
past five years, led by growth in the consumer electricals market. With 50 IFB
FY17‐20ii EPS Cagr (%)
focus on strategic areas of achieving economies of scale, higher SONY DIXON JOHNSON
backward integration to increase value addition and cost efficiencies, 40
JABIL TCL CONTROLS
increase in higher margin ODM sales mix and new customer acquisition, SAMSUNG
it is well placed to achieve 21% revenue Cagr/ 34% Ebitda Cagr/ 39% 30 PHILIPS WHIRLPOOL
PAT Cagr over FY17-20ii. Better-than-expected performance of the new FLEX HAVELLS
security systems segment and sustaining growth in the lighting segment 20
CROMPTON
by leveraging Philips diverse portfolio and global reach can lead to SANMINA V‐GUARD
10 BENCHMARK
upsides on our estimates. COMPAL FOXCONN
0
Given Dixon’s asset light model (~20x FA turnover), lean NWC cycle 0 5 10 15 20 25 30 35 40
(15-20 days of sales) and significant free cash generation (Rs0.5-0.7bn FY20 PER (x)
during FY19-20ii), we do not rule out an entry into other new segments Source: Company, IIFL Research
by utilising cash to accelerate growth. We have not built in entry into
other adjacencies in our estimates, and a successful entry can further
boost Dixon’s growth prospects.
Although Dixon is an EMS player and generates mid-single digit Ebitda

margins, its ROE/ROCE are comparable to/ better than most other OEM
peers in the Consumer Electricals space. Further, Dixon has similar or
better growth potential than most peers, and it has delivered strong
performance with a well-experienced management team over the past
five years.
Global EMS players are trading at similar/ slightly higher valuations than
Consumer Electrical OEM companies. Most Consumer Electrical OEMs in
India are currently valued at ~21-23x Sep’19 EV/Ebitda; we assign a
10-15% discount and value Dixon at 20x Sep’19ii EV/Ebitda. We initiate
coverage on Dixon with a ‘BUY’ rating and target price of Rs3,491.

Figure 73: Valuation comparison against domestic OEM companies, global OEM companies and EMS players
EV/EBITDA PE Ratio EPS Cagr Price/BV ROE (%)
Name FY17 FY18 FY19 FY20 FY17 FY18 FY19 FY20 FY17‐20ii FY17 FY18 FY19 FY20 FY17 FY18
DIXON* 39.4 29.0 21.2 16.3 70.4 51.9 36.4 27.2 39 17.9 11.1 8.7 6.8 31.4 26.8
Consumer Electrical OEMs
HAVELLS INDIA 37.2 32.3 26.8 21.7 54.4 50.6 42.5 33.8 24 9.9 8.9 7.9 6.9 17.3 19.7
CROMPTON 35.2 31.3 24.3 19.5 58.1 51.6 39.8 31.5 21 31.5 22.6 16.5 12.3 75.7 50.5
V‐GUARD 46.4 41.3 33.6 29.0 48.3 58.0 45.6 38.5 20 11.6 12.9 10.6 8.6 27.4 24.6
JOHNSON CONTROLS 39.8 33.4 26.2 21.2 60.8 63.6 47.5 36.7 32 11.2 12.7 10.2 8.1 20.3 21.8
IFB INDS 47.6 32.9 24.4 17.3 51.4 65.7 44.1 29.1 52 5.6 9.8 8.1 6.7 11.5 14.6
WHIRLPOOL 37.7 30.7 25.5 20.0 49.9 49.7 40.8 32.0 25 10.5 10.4 8.5 7.0 23.4 23.1
International Peers
OEMs
PHILIPS LIGHTING 6.2 7.3 7.4 7.3 18.6 12.6 12.2 11.6 31 1.3 1.8 1.7 1.6 6.1 14.1
LG ELECTRONICS 7.3 5.2 4.8 4.5 122.3 9.3 9.5 8.7 194 0.7 1.2 1.1 1.0 0.6 13.9
SONY CORP 10.7 6.4 6.2 5.9 24.2 17.8 17.0 15.8 41 1.5 2.3 2.1 1.9 3.0 14.0
SAMSUNG 6.0 3.8 3.3 3.2 11.4 9.3 7.7 7.5 33 1.2 1.8 1.5 1.3 10.9 20.6
EMS players
FLEX LTD 10.7 9.2 8.0 7.3 13.9 16.8 13.3 11.2 28 2.6 3.3 2.9 2.6 12.3 20.4
JABIL INC 5.1 4.2 4.0 3.9 14.9 11.6 10.4 9.8 32 1.6 2.3 2.0 1.8 10.7 19.6
SANMINA CORP 7.7 6.3 5.9 13.2 11.6 10.5 10.4 10 1.3 1.4 1.2 12.0 13.5
PLEXUS CORP 12.7 9.9 9.2 8.5 18.6 18.4 16.6 14.9 23 1.7 1.9 1.7 1.4 8.7 10.8
BENCHMARK ELECTRONICS 7.8 7.4 7.1 23.5 20.7 18.9 15.8 14 1.1 1.1 1.0 4.8 5.3
PEGATRON 3.9 4.6 3.9 3.6 10.3 10.4 8.8 7.9 6 1.3 1.3 1.2 1.1 13.0 11.6
LITE‐ON TECHNOLOGY 3.4 4.9 3.7 3.7 12.0 25.5 9.9 9.6 0 1.5 1.2 1.2 1.1 12.4 3.5
COMPAL ELECTRONICS 6.1 6.3 5.4 5.2 9.8 12.9 9.3 8.7 8 0.8 0.9 0.8 0.8 7.8 6.7
TCL CORP‐A 21.7 12.4 11.1 10.2 25.2 19.4 16.0 13.7 34 1.8 2.0 1.9 1.6 6.8 8.6
FOXCONN (HON HAI PRECISION) 7.9 8.1 6.6 6.2 9.8 13.5 10.6 9.9 8 1.4 1.6 1.5 1.4 14.3 11.9
Other sector OEMs (Domestic)
ESSEL PROPACK 12.5 10.6 9.2 8.0 19.6 23.0 18.7 15.2 18 3.6 3.9 3.3 2.9 19.0 17.6
SH KELKAR 22.9 21.6 17.1 15.0 40.9 34.7 26.8 23.5 15 5.3 4.2 3.8 3.5 13.7 12.8
GULSHAN POLYCOLS 9.2 7.4 6.6 3.2 12.4 11.6 1.7 1.3 1.2 11.4 10.7
Auto Ancillaries
EXIDE INDUSTRIES 14.5 12.7 11.0 9.5 23.8 23.1 19.8 17.3 8 3.8 3.1 2.8 2.6 14.8 14.2
AMARA RAJA 15.5 14.6 12.2 10.7 31.8 26.9 22.3 19.4 13 5.9 4.5 3.9 3.3 20.3 17.7
MOTHERSON SUMI 19.3 14.4 11.3 9.4 32.7 32.8 24.2 19.7 32 6.3 7.3 6.0 5.0 24.5 25.0
BOSCH 28.4 25.6 21.7 17.8 48.9 36.4 30.7 25.8 9 7.9 5.8 5.2 4.5 19.0 16.2
WABCO INDIA 37.7 31.6 25.4 21.1 51.8 47.3 37.6 31.1 25 8.7 8.5 7.0 5.9 18.3 19.1
Source: Company, IIFL Research, Bloomberg consensus estimates

Global EMS companies also witness significant client concentration

Figure 74: Snapshot of Global EMS companies
Company Headquarter CY16 / FY17 Focus segments Key Customers Customer Manufacturing facilities
(US$ m) Revenue PAT concentration
Acer, Amazon, Apple, Blackberry, Cisco, Taiwan (Taipei), China (12), Brazil,
Hon Hai Mobile phones, PC components, Dell, Google, HP, Huawei, Intel, Top two ‐ 62%, largest ‐ India, Hungary Slovakia Turkey
Taiwan 135,155 4,610
(Foxconn) Connectors, Cables, etc. Microsoft, Motorola, Nintendo, Sony, 54% Czech Republic, Japan, Malaysia,
Toshiba, Xiaomi Mexico
PCs, LCD TVs and monitor,
Compal Top four ‐ 80%, largest ‐
Taiwan 23,777 252 Consumer Electronics, Medical Dell, HP, Compaq, Toshiba Taiwan, China
Electronics 40%
and Healthcare
Mobile phones, Consumer Top two ‐ 70%. largest ‐ Taiwan, Czech Republic, Mexico,
Pegatron Taiwan 35,898 600 ‐
Electronics and IT products 60% China
Abbott, Johnson & Johnson, Ford, Large industrial parks in Brazil,
Singapore Automotive, Computing,
Nexteer, Teradyne, Applied Materials, Top ten ‐ 43% of sales; China, Malaysia, Mexico and
Flex (American 23,863 320 Consumer Electronics, Industrial,
Xerox, Cisco, Nokia Solutions, Huawei,
none over 10% Poland. Regional facilities in
MNC) Medical and Mobile
Motorola, Lenovo, Nike, Bose multiple countries including India.
China, US, Mexico, Taiwan,
Apple, Cisco Systems, GoPro, HP,
Automotive, Industrial, Telecom, Malaysia, Hungary, Poland and
Jabil Florida, US 19,063 129 Ingenico , LM Ericsson , NetApp, Nokia Top five ‐ 47% of sales
PoS, Consumer durables multiple other nations. Chennai
Networks, Valeo and Zebra Tech
facility no longer used
In 23 countries. Large facilities in
A&D, Medical, Telecom,
Top ten ‐ 50% of sales, China, Mexico, United States,
Sanmina Corp California, US 6,869 139 Industrial, IT, Automotive, Oil & Nokia
Nokia >10% Hungary, Malaysia, Singapore.
Gas
Also present in India
Cisco Systems (19%), Juniper Networks
A&D, Communications,
(11%), Dell EMC, HP, Honeywell, IBM, Top ten ‐ 68% of sales Major facilities in Canada, China,
Celestica Inc Georgia, US 6,017 136 Industrial, Semiconductor
NEC, Oracle, Polycom, Western Digital, Malaysia, Thailand, Japan
Capital, Consumer Electronics
Applied Materials
Wisconsin, Healthcare, Industrial, General Electric (11%), Micron Malaysia, China, US, Mexico,
Plexus Corp 2,528 112 Top ten ‐ 58.8% of sales
US Networking and Defense markets Technology (10.4%), ARRIS Group (10%) Romania

Global peers have seen high growth for multiple years

Figure 75: Taiwanese peers have witnessed sustained growth of ~40% Cagr over FY03‐
08, while sales have been flat over FY13‐17 Figure 77: Ebitda margins across peers are broadly in the range of 2‐7%
Jabil Celestica Inc Skyworth Digital
Taiwanese EMS companies (YoY sales growth)
60% Compal Elec. TCL Corp Hon Hai (Foxconn)
9.0
50% Ebitda margins (%)
8.0
40% 7.0
30% 6.0
5.0
20%
4.0
10% 3.0
0% 2.0
1.0
‐10%
0.0
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
* Our sample universe includes Skyworth Digital, Advanced Semiconductor, Quanta Computers, Source: Company, IIFL Research
Pegatron, Lite On Technology, Compal Electronics, TCL Corp, AU Optronics, Hon Hai (Foxconn)
Figure 76: Competitive sourcing from East has consistently moved sourcing out from the Figure 78: Global peers have broadly sustained high double digit ROE for sustained
US; EMS sales grew moderately at 9% Cagr in FY03‐08 and grew 1% Cagr over FY13‐17 period over FY02‐11; demand weakness has led to compression in ROE during FY14‐17
US EMS companies (YoY sales growth) Lite On Technology Compal Electronics TCL Corp

20% Skyworth Digital AU Optronics Hon Hai (Foxconn)
35.0
15% Return on Equity (%)
30.0
10% 25.0
5% 20.0
0% 15.0
‐5% 10.0
‐10% 5.0
0.0
‐15% FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
* Our sample universe includes Jabil, Flex, Sanmina, Celestica, Plexus Corp, Benckmark Electronics

1HFY18 performance snapshot

Figure 79: Financial performance Figure 81: Segmental performance
Rs m ‐ Ind AS 1HFY17 1HFY18 % YoY Rs m 1HFY17 1HFY18 % YoY
Net Sales 11,689 15,634 34% Revenues
Raw materials (10,488) (13,908) 33% Consumer Electronics* 4,256 6,311 48%
Staff Cost (305) (333) 9% Lighting Products* 2,095 3,618 73%
Other expenses (435) (833) 92% Home Appliances* 1,008 975 ‐3%
Total expenses (11,228) (15,074) 34% Mobile Phones 4,037 4,342 8%
Ebitda 462 560 21% Reverse Logistics 294 388 32%
Ebitda margin (%) 3.9 3.6 ‐37 bps Total 11,689 15,634 34%
Other Income 10 30 215% (0) ‐
Interest (85) (66) ‐22% ODM sales mix
Depreciation (50) (67) 34% Consumer Electronics 12.7% 6.6% ‐610 bps
PBT 336 457 36% Lighting Products 29.8% 41.6% 1180 bps
Tax (86) (141) 64% Home Appliances 100.0% 100.0% ‐
Tax rate (%) 25.5 30.9 Ebitda margin
PAT 250 316 26% Consumer Electronics* 3.0% 2.5% ‐46 bps
EPS (Rs) 25.9 28.4 10% Lighting Products* 5.0% 5.5% 47 bps
As a % of sales Home Appliances* 12.5% 11.8% ‐77 bps
Gross margins 10.3 11.0 76 bps Mobile Phones 0.9% 0.9% ‐1 bps
Staff cost 2.6 2.1 ‐48 bps Reverse Logistics 23.1% 13.1% ‐1000 bps
Other expenses 3.7 5.3 161 bps Source: Company, IIFL Research
Figure 80: PAT reconciliation under Ind‐AS
Rs m 1QFY17 2QFY17 1HFY17
PAT under IGAAP 92 178 270
Re ‐ measurement of DBP 0 0 1
Amortisation of assets (0) (0) (0)
Finance cost for time value of convertible debentures (7) (21) (28)
Gain/ (Loss) on forward contract 9 (2) 8
Tax on defined benefit plan (0) (0) (0)
PAT under Ind AS 94 156 250

Institutional Equities
Company snapshot Dixon Technologies – BUY
Background: Dixon commenced manufacturing of consumer electronics such as colour TVs in 1994. Over time, it has diversified into manufacturing of
LCD and LED TVs, CFL and LED products and washing machines. It commenced manufacturing of mobiles through a JV in 2016. It operates through two
business models - "OEM", where product is made as per customer design and specifications and "ODM", where it supplies own design products to the
customers. Dixon had also started reverse logistics services in 2008, where it currently undertakes repair and refurbishment for set top boxes, mobile
phones, LCD and LED TVs, LED panels, home theatres, printers etc.
Management
Name Designation Sales mix (%) - FY17 Ebitda mix - FY17
Sunil Vachani Executive Chairman
Washing
Atul B. Lall Managing Director Lighting, Machine,
Mobiles,
33.0 22.4 33.8
Gopal Jagwan CFO
Consume Servicing
r , 13.5
Electroni
cs, 27.5
Servicing Mobiles,
Consume 5.5
, 2.6
Home r Lighting,
Competitors: Jabil , Foxconn, Flextronics, Noble, MEPL, NTL, Compact
applianc Electroni 19.7
Lamps
es, 7.7 cs, 34.4
PE Chart EV/Ebitda
Assumptions 12m fwd EV/EBITDA Avg +/‐ 1SD
Y/e 31 Mar, Consolidated FY16A FY17A FY18ii FY19ii FY20ii 12m fwd PE Avg +/‐ 1SD
Segment wise revenue growth 42.0 27.0
Lighting 42.9 28.2 55.0 6.0 8.0 (x) 26.0 (x)
40.0 25.0
Consumer Electronics (0.7) 9.7 32.0 10.0 10.0
Washing Machine 22.4 43.9 25.0 30.0 30.0 38.0 24.0
23.0
Servicing 112.3 60.2 20.0 22.0 20.0 36.0
- -
22.0
Mobiles 3.0 30.0 20.0
34.0 21.0
Camera - - - 65.0 40.0
20.0
ODM sales growth 111.2 43.9 39.1 20.4 22.4 32.0 19.0
OEM sales growth (0.8) 88.9 28.1 16.6 13.3 18.0
30.0
Source: Company data, IIFL Research Sep‐17 Sep‐17 Oct‐17 Oct‐17 Nov‐17 Nov‐17
Sep‐17 Sep‐17 Oct‐17 Oct‐17 Nov‐17 Nov‐17


Financial summary
Income statement summary (Rs m) Balance sheet summary (Rs m)
Y/e 31 Mar, Consolidated FY16A FY17A FY18ii FY19ii FY20ii Y/e 31 Mar, Consolidated FY16A FY17A FY18ii FY19ii FY20ii
Revenues 13,894 24,568 32,060 37,662 43,492 Cash & cash equivalents 75 153 324 599 1,177
Ebitda 587 907 1,267 1,714 2,193 Inventories 1,363 2,822 3,513 4,127 4,766
Depreciation and amortisation (84) (106) (157) (185) (206) Receivables 900 2,802 3,513 4,127 4,766
Ebit 502 801 1,110 1,530 1,987 Other current assets 399 598 536 671 775
Non‐operating income 18 15 45 30 58 Creditors 1,856 5,051 5,622 6,501 7,388
Financial expense (131) (128) (149) (124) (125) Other current liabilities 204 354 527 619 715
PBT 389 688 1,007 1,435 1,919 Net current assets 677 971 1,738 2,404 3,381
Exceptionals 117 0 0 0 0 Fixed assets 1,124 1,390 1,913 2,059 2,253
Reported PBT 506 688 1,007 1,435 1,919 Intangibles 112 1 1 1 1
Tax expense (80) (185) (302) (431) (576) Investments 1 0 0 0 0
PAT 426 504 705 1,005 1,344 Other long‐term assets 200 224 250 275 303
Minorities, Associates etc. 0 0 0 0 0 Total net assets 2,114 2,585 3,902 4,739 5,938
Attributable PAT 426 504 705 1,005 1,344 Borrowings 789 466 479 413 413
Other long‐term liabilities 96 142 142 142 142
Ratio analysis Shareholders’ equity 1,228 1,977 3,282 4,185 5,383
Y/e 31 Mar, Consolidated FY16A FY17A FY18ii FY19ii FY20ii Total liabilities 2,113 2,585 3,902 4,739 5,938
Per share data (Rs)
Pre‐exceptional EPS 32.9 45.9 62.2 88.7 118.6 Cash flow summary (Rs m)

DPS 0.0 0.0 0.0 0.0 0.0 Y/e 31 Mar, Consolidated FY16A FY17A FY18ii FY19ii FY20ii
BVPS 130.9 180.0 289.7 369.4 475.1 Ebit 502 801 1,110 1,530 1,987
Growth ratios (%) Tax paid (87) (155) (302) (431) (576)
Revenues 15.7 76.8 30.5 17.5 15.5 Depreciation and amortization 84 106 157 185 206
Ebitda 82.2 54.6 39.7 35.3 27.9 Net working capital change (107) (235) (597) (392) (399)
EPS 160.3 39.4 35.6 42.6 33.7 Other operating items 0 0 0 0 0
Profitability ratios (%) Operating cash flow before interest 393 518 369 892 1,218
Ebitda margin 4.2 3.7 4.0 4.6 5.0 Financial expense (131) (127) (149) (124) (125)
Ebit margin 3.6 3.3 3.5 4.1 4.6 Non‐operating income 18 15 45 30 58
Tax rate 15.9 26.8 30.0 30.0 30.0 Operating cash flow after interest 279 406 265 798 1,151
Net profit margin 3.1 2.1 2.2 2.7 3.1 Capital expenditure (270) (391) (700) (330) (400)
Return ratios (%) Long‐term investments 35 1 0 0 0
ROE 29.7 31.4 26.8 26.9 28.1 Others 30 40 26 (25) (28)
ROCE 26.8 34.7 35.6 36.1 38.3 Free cash flow 75 56 (409) 443 723
Solvency ratios (x) Equity raising 0 61 600 0 0
Net debt‐equity 0.6 0.2 0.0 0.0 (0.1) Borrowings (27) 46 (21) (66) 0
Net debt to Ebitda 1.2 0.3 0.1 (0.1) (0.3) Dividend (42) (84) 0 (102) (145)
Interest coverage 3.8 6.3 7.5 12.3 15.8 Net chg in cash and equivalents 6 79 170 275 578
Source: Company data, IIFL Research Source: Company data, IIFL Research

2017 11 - Dixon Ic - Iifl

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Dixon Technologies – BUY

27 November 2017 Institutional Equities

ROE/ROCE of 27/36%, FA turns of 18-20x, and Shareholding pattern (%) Stock performance

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Company snapshot Figure 2: Consumer electronics is the largest contributor to FY17 revenues; mobiles

Dixon is a leading Indian electronics manufacturing company (EMS) FY17 sales mix

Consumer Home Security Reverse

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Figure 4: Evolution from EMS to ODM model Figure 7: Washing machine contributes 34% to FY17 Ebitda despite 8% share in sales

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FY14 FY15 FY16 FY17

Associated with Dixon since its inception. Bengaluru Manufacturing facility

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Poised to leverage the growing CEA market

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Figure 19: India EMS market shares (FY16; Rs149bn) – Dixon occupies the No. 2 spot Figure 21: Current EMS capabilities in India and expected scale up in the medium term

prototyping, logistics final assembly, testing MEPL

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ODM products bear key significance for tier-II players

• EMS companies are primarily present in and around SEZs, with

Rising labour costs narrow India- China cost arbitrage

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• Many global EMS companies such as Foxconn, Flextronics, and Jabil 0%

• Currently, EMS vendors in India undertake only box-level assembly ‐10%

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Figure 27: Indian manufacturers enjoy pricing advantage over Chinese competitors in

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• However, this scenario is changing with exemption of basic customs

• Sony/ Skyworth/ Panasonic have partnered with Foxconn/ Resolute

Domestic FPD TV market (LHS) % of volumes outsourced to EMS (RHS) Source: Company, F&S analysis, IIFL Research

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Lighting - Holding the pole position Figure 36: FY16 LED market share (Value)

• The key growth drivers include government initiatives for LED

200 • LED bulbs • CFL Lamps • Indoor LED drivers

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• Many companies such as Orient, Eveready, Havells are now sourcing

Others Anchor Panasonic Wipro Surya Bajaj Phillips

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Figure 53: Mobile revenues are expected to grow at 17% Cagr over FY17‐20ii • E-Commerce has 15-20% return rates, and products of ~Rs1.2tn

10 0.5% Segment highlights

• Principal raw materials include open cell, backlight units, electronic

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Figure 54: Reverse logistics’ Ebitda margins impacted in FY18 due to mix issues expected

• Dixon had entered mobiles in FY16, which forms 33% of FY17

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Figure 60: Ebitda margins are expected to sustain ~4‐5% over FY17‐20ii Earnings poised to clock 39% Cagr

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FA turnover (RHS) ROE (LHS) ROCE (LHS) (x)

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Figure 71: Key risks • Impact of warranty related liabilities: Dixon’s contracts typically

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Although Dixon is an EMS player and generates mid-single digit Ebitda

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