Dixon – there is much more beyond the stellar listing

The sequential improvement in financials was impressive as the previous quarter was marred by GST-led disruptions that took the sheen off the first half performance.  We believe the second half of the fiscal to report a better performance.

Directionally the company appears to be in fine fettle:

In the consumer electronics business, the topline growth will be aided by the new LED facility that has commenced in Tirupati. In addition to catering to its usual clientele like Panasonic, Intex, Haier, Vijay sales etc., Dixon has signed a new client in Flipkart for designing, manufacturing and supplying its private label brand “Marq”.

The lighting business driven by its key client Philips is doing well. Dixon has also added Crompton Greaves, Wipro & Panasonic Anchor as clients in this segment and expects growth on account of further orders coming to Philips from EESL (Energy Efficiency Services Ltd).

The home appliances business of the company has recently signed up a marquee client in Samsung and the production is stabilising and would ramp up in the coming quarters. This should have a positive rub-off on the margins as well.

For mobile phones the rather poor show was on account of client-specific issues (Gionee). However, the outlook is better as the company is the supplier to Karbonn in its tie-up with Airtel. Dixon is also in advanced stages of discussion with a large customers that should close by the end of the fiscal.

Finally, while reverse logistics was a bit of a dampener in the quarter, the company’s offerings in this space  - repair and refurbishment services of set top boxes, mobile phones and LED TV panels-- is a key differentiator that helps in on-boarding clients for its core OEM (original equipment manufacturers) or ODM (original design manufacturing) businesses. Few EMS (electronic manufacturing service) companies provide end-to-end solution that encompasses repair and refurbishment services.

We feel Dixon has unique moats that will translate into secular earnings going forward

Dixon adopts an asset-light business model. On a total fixed asset base of Rs 139 crore, the company generated a turnover of Rs 2457 crore in FY17. In fact, the new facility that it is setting up in Tirupati has been leased to the company at a very nominal rate and enjoys SGST (state Goods & Service Tax) benefits.

Presently, OEM contributes close to 80 percent of revenue of Dixon and earns margins in low single-digit. ODM (original design manufacturing) contributes 20 percent of the revenue but earns margin which is a high single-digit. Going forward, the company wants to expand its presence as an ODM that should be a key driver of margin.

Dixon has backward integration in major manufacturing processes that improves cost efficiency, reduces dependency on third-party suppliers and gives better control on production time and quality.

It has long and well-established relationship with marquee clients. Most of the client-relationships are long-term and therefore sticky. Globally, big brands focus energy on brand building and distribution, leaving the manufacturing bit to trusted partners.

The government is encouraging indigenisation of electronics manufacturing. In the upcoming Budget imported PCBs of mobile phones are likely to be taxed and in the future a lot of manufacturing will take place out of India. Dixon is putting up a plant in Noida and by virtue of its end-to-end service offering, expects to be a formidable player in the growing market.

The company is continuously looking at expanding in contiguous product categories and we believe its smart execution strategy would result in decent earnings growth.

The stock trades at 27X FY19 projected earnings and deserves an inclusion in the core portfolio of investors for a secular, good quality earnings story.

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