Dixon Technologies (India) Ltd IPO Note

-Report by Apeksha Shetty

The principal business of the company is providing one-stop-shop solutions to companies in the consumer durables, lighting, mobile phones industry in India. It offers integrated design and manufacturing solutions for local and internationally recognized consumer durables, home appliances, lighting and mobile phones brands.

Lets understand the prospects of IPO and have an analysis:

Offer Details

The Offer consists of a Fresh Issue and an Offer for Sale by the Selling Shareholders.

  • Total Funds to be raised: Rs 600 Cr.
  • Fresh Issue: 4 lakh equity (around Rs 60 crore)
  • OFS: 5 lakh equity shares (around Rs 540 crore)
  • Price Band: Rs 1760 – Rs 1766 Per Equity Share
  • Issue Open- 6th Sept, 2017
  • Issue Close- 8th Sept, 2017

Shareholding pattern Post listing: 52% of Dixon will be held by promoters and friends, 8% by employees, 5% by Motilal Oswal and 35% will be with the public

Objects of the Fresh Issue

The Company proposes to utilize the Net Proceeds towards funding the following objects:

  1. Dixon plans to repay debt of Rs 22 crore;
  2. Invest Rs 7.57 crore for setting up a unit for manufacturing of LED TVs at the Tirupati Facility and Upgradation of the information technology infrastructure of the Company;
  3. The company will use Rs 8.85 crore for enhancement of the backward integration capabilities in the lighting products vertical at the Dehradun-I Facility;
  4. General corporate purposes

Business profile

Dixon Technology Ltd. Is the largest home-grown design-focused and solutions company engaged in manufacturing products in the consumer durables, lighting and mobile phones markets in India. The company is an electronic contract manufacturer for Panasonic India, Philips Lighting India, Intex technologies, Gionee and Surya Roshini, among others. Dixon Technologies also provides solutions in reverse logistics i.e. repair and refurbishment services of set top boxes, mobile phones and LED TV panels.

 

Positive Factors

  1. While OEM sales continue to be a major source of revenue (78.1% in FY17), the company plans to gradually expand its share of the ODM model (original design manufacturer) of manufacturing. The ODM model of business requires additional investment in R&D as well as working capital but provides higher margins as compared to the OEM model.
  1. Currently, the product offerings include consumer electronics, home appliances, lighting products and mobile phones, which accounted for 34.38%, 7.65%, 22.42% and 33%, respectively of its net revenue in FY17.
  2. The CE market revenues is expected to grow at a CAGR of 17.2% from FY16 to FY21 while the Appliances segment is expected to grow at a CAGR of 11.6% over the same period, resulting in a CAGR of 5% for the overall CEA market.
  3. Exponential rise in use of mobile phones, increasing penetration of smartphone in urban-rural markets, continuous up gradation and addition of features
  4. The company seeks to expand its geographical footprint by enhancing current manufacturing capacities and setting up of new manufacturing facilities, especially in South India (at Tirupati, AP). The company also seeks to further enhance its manufacturing capacity across its product verticals as well as set up Infrastructure for manufacturing of CCTVs and DVRs, through its JV, ADTPL, at the Tirupati facility.
  5. End to end solutions provider with dedicated research and development capabilities
  6. Over the last five fiscals ended March 31, 2017, company achieved a CAGR of 33.78% in revenue from operations (net) and 44.36% in EBITDA.

Negative Factors

 

  1. The top five customers accounted for 82.93%, 79.43%, 73.28%, 76.95% and 79.67% of our revenue from operations (net) for the years FY17, FY16, FY15, FY14 and FY13, respectively.
  2. Shortages in, or rises in the prices of, raw materials or components for products manufactured, which account for majority of the costs, may adversely affect the business.
  3. The Company’s production capacity may not correspond precisely to its production demand which may affect the results of operations.
  4. A significant portion of sales come from consumer electronics vertical. A decrease in the demand or average selling prices of these units, results could be adversely affected. Consumer electronics vertical accounted for 34.38%, 55.43% and 64.56% of revenue from operations (net) for the Fiscals 2017, 2016 and 2015
  5. The Company had negative cash flows in the past years. Sustained negative cash flow could impact our growth and business.
  6. There are outstanding litigations against the Company, Promoter, Directors and Subsidiary. An adverse outcome in any of these proceedings may affect our reputation and impact the business.

 Financial Analysis

  • Total Revenue(In Million) and YoY Growth(In %)

  • EBITDA and PAT Margin (In %)

Author’s Note:

  • The demand for electronic appliances is growing day-by-day due to changing modern lifestyle and high consumer spending, which would be beneficial for the company. We expect the company to grow and continue to show a robust financial performance.
  • The company might get the first mover’s advantage since there is no listed peer under this sector. On the valuation front, the company at higher price band is available at a P/E of 39.7x on a post issue basis, based on FY17 earnings.
  • The company enjoys healthy return ratios (ROCE: 34.21% in FY17) and is nearly debt-free with D/E of 0.17x (in FY17).
  • The company has been delivering superior return ratios of ROCE and 33.9% ROE due to higher margins as compared to the OEM model. We believe that investors may consider moderate investment for medium to long term.