Dixon Tech: Strong prospects, high valuations

Dixon Technologies is an electronic manufacturing services (EMS) company, which makes consumer durables, lighting products and mobile phones for brands like Phillips, Panasonic and Gionee.

About 78 per cent of its revenue comes from the original equipment manufacturers (OEM) business (supplies to big brands), while its original design manufacturing (ODM) business contributes the rest. In the ODM business, the company designs lighting products, light emitting diode televisions and semiautomatic washing machines.

The prospects for the company are strong, as the OEM/ODM sector, according to Frost and Sullivan, is expected to grow annually by 31 per cent over FY16-21. While OEM sales continue to be a major source of DTL revenue, the company has gradually increased the proportion of ODM manufacturing to 22 per cent in FY17, from 14 per cent in FY13. The company has market leadership in manufacturing of flat panel displays (FPD) TVs, washing machines, LED and CFL lights in India in FY16.

Given its leadership in various categories and higher volumes, the company has delivered annual sales growth of 33.8 per cent, operating profit of 44 per cent and net profit growth of 78 per cent over the past five years. The company has negligible debt. Positive cash flow helps it fund expansions. It is raising fresh funds to pay off some of its debt, set-up a manufacturing unit in Tirupati, enhance its backward integration capabilities in the lighting product vertical at the Dehradun facility and upgrade its IT infrastructure.

While Centrum Broking has an avoid recommendation given the low operating profit margins (3.7 per cent), high valuation, high offer for sale portion, analysts at Angel Broking have a ‘subscribe’ recommendation on expectations of higher revenue growth, improving margins, robust return ratios and negligible debt post IPO.