Why we did not recommend Dixon, India’s top LED TV maker?

Samsung & Xiaomi's best-selling LED TVs & mobile phones come from the factory of Dixon Technologies Ltd. If you had invested ₹1 lakh in the stocks of Dixon 5 years ago, you would have a good ₹24 lakh today!

However, it did not meet our analysts' expectations and we did not recommend it in Finology 30. Find out the reasons in this article.

What does Dixon Technologies (India) Ltd. do?

Dixon Technologies (India) Limited has been leading the Electronic Manufacturing Services (EMS) space in India. Founded in 1993 and commenced manufacturing of colour television in 1994, Dixon has now expanded its operations to various sub-segments of electronics.

Dixon's business is divided into two parts:

a. Original Equipment Manufacturer (OEM): In the OEM business, the company manufactures products based on the designs and specifications provided by other companies.

b. Original Design Manufacturer (ODM): In the ODM business, the company designs and manufactures products, which are then sold to other companies under their own brand name.

In addition to its existing ODM and OEM businesses, the company is beginning to focus on Joint Development Manufacturing (JDM). In this business model, the company collaborates with other companies to design, develop, and manufacture products.

In short, Dixon Technologies is a white-label electronics manufacturer. This means that the company designs and manufactures products for other companies, which are then sold under the other companies' brand names.

Dixon Technologies operates in 5 distinct divisions:

a. Consumer Electronics- Through this vertical, the company provides solutions to its customers, including Auto Insertion (process that inserts electronic components into printed circuit boards), SMT (used to make smaller, lighter, and more reliable electronic devices), LCM Module (display screen) Assembly, backward integration into LED panel assembly with clean room, PCB (boards that connect electronic components together) assembly, Backward Light Unit (produces high-quality images with good contrast and brightness) and Plastic Moulding. 

b. Home Appliances- In this division, the company offers semi-automatic and fully automatic washing machines. Revenue from this segment is completely based on the ODM model.

c. Lighting Solutions- With this unit, the company designs and manufactures LED bulbs, battens, LED drivers (devices that provide a constant current to LED lights), and downlighters (lights that are fixed into ceilings).

d. Mobile Phones- The company manufactures feature phones and smartphones through this vertical.

e. Security Surveillance System- This segment is a joint venture between Dixon and Aditya Infotech Limited to manufacture security devices like security cameras and digital video recorders (DVR).

The company is also expanding into new markets, such as telecom and networking products, set-top boxes, laptops, desktops, tablets, wearables & hearables and refrigerators.

What makes the Electronics Manufacturing industry special?

The global Electronic Manufacturing Services (EMS) market was estimated at US $880 billion in 2021 and is expected to grow at a CAGR of 5.4% to reach US $1,145 billion in CY 2026.

India's total addressable EMS market was valued at ₹3,372 Bn. ($45 Bn.) in FY22 and is expected to grow to ₹7,504 Bn. ($101 Bn.) in FY26 with a CAGR of 22%.

The Indian television market size was estimated to be 20.2 million units by sales in FY 22. The market is expected to grow at a CAGR of 11% and is expected to reach 30.4 million units by FY26. The Indian LED lighting market is expected to grow at a CAGR of 12%, from ₹ 21,708 crore in FY22 to reach ₹ 33,820 crore by FY26. The home appliance segment is one of the most rapidly expanding industries in the Indian market. India's Washing Machine Market was worth US$ 2.2 Bn. in 2022, and total revenue is expected to grow at a rate of 4.5% CAGR from 2023 to 2029, reaching almost US$ 3.0 Mn. in 2029. Indian smartphone segment is expected to grow at a CAGR of 14% between FY22 and FY26. On the other hand, the feature phone segment will remain stagnant during this period.

Entry Barriers

• Electronics manufacturing is capital-intensive, requiring large plant and equipment investments.
• Established electronics firms benefit from economies of scale and scope, which allow them to produce and distribute products at a lower cost than new entrants.
• The electronics sector is highly innovative, and firms must invest heavily in R&D to stay ahead of the competition.
• Consumers often have strong brand loyalty to established electronics firms. This makes it difficult for new entrants to gain market share.
• The electronics sector is subject to several government regulations, such as environmental and safety regulations.

Does Dixon have robust financials?

Strong revenue growth comes from high demand and new customer acquisitions, especially targeting high-value customers in the mobile segment.

Increased ODM% share in revenue contributed to Dixon Technologies' improved profit margin in 2023.

While the company always had large volumes and low margins, it has shifted its focus to high-margin product categories.

Segment	2021 Operating Margin	2022 Operating Margin	2023 Operating Margin
Consumer Electronics	2.7%	3.1%	2.4%
Lighting Products	8.8%	6.9%	8.6%
Home Appliances	9.2%	9.2%	7.6%
Mobile Phones & EMS Division	3.1%	3.2%	4.7%
Security Systems	2.8%	3.8%	3.0%

The ROE and ROCE improved due to improved earnings and working capital efficiency. Increasing share capital and reserves, along with high return ratios, is a good sign, as it means the company has more money to invest in its operations.

The debt-to-equity ratio stood at a healthy level of 0.14x. On the balance sheet front, total debt stood at 183 crore as of 31 March 2023, as against 458 crore as of 31 March 2022. There was a reduction in gross debt by ₹275 crore in FY23 through repayment.

The company can convert its profits into healthy cash flows. In the past 4 years, the company has generated more than 100% of its net profit in cash flow from operating activities. Moreover, it only takes the company about -0.03 days to convert its investment in inventory back into cash, which means inventory is sold before the company has to pay for it.

CAPEX Plan

• In the refrigerator segment, the company is constructing a new manufacturing facility in Greater Noida with a 1.2 million direct cool refrigerators capacity.
• In the security surveillance system segment, the company relocated its facility from Tirupati to a larger one in Kadapa, Kopparthi Electronic Manufacturing Cluster.
• It is setting up a new state-of-the-art facility in Dehradun in the semi-automatic washing machine segment.
• Dixon is also expanding its capacity by setting up its own Tool Room for in-house Mould Manufacturing.
• The company leased a new 3.2 lakh square feet facility in Noida. The new facility is expected to commence operations by mid-August 2023.

Expansions

• Dixon expanded its annual production capacity in consumer electronics and home appliance categories from 2021 to 2023.
• In the mobile phone category, there was a significant increase from 32 million units in 2021 to 45 million units in 2022. However, the capacity remained the same in 2023.
• In the LED bulb category, there was an increase from 240 million units to 300 million units in 2022. However, the capacity remained the same in 2023.
• The annual production capacity for CCTV and DVR remained constant during FY21-FY23.

Order Book

This company operates primarily in the B2B space, where a significant portion of its sales happens on credit. For FY24, trade receivables made up about 13% of sales, and trade payables were around 23%. This means the company extends and receives a lot of credit, which can impact cash flow.

One concern is the company’s approach to revenue recognition. Instead of following the standard practice of recognizing revenue when goods or services are delivered to the customer, this company is recording revenue as soon as it gets contract approval. Essentially, they are booking the income just because the contract is signed, even though they haven’t yet completed the work.

This early revenue recognition can be problematic. Normally, revenue should be recorded when control of the product or service is transferred to the customer. Recognizing it too soon can artificially boost the company’s earnings, which might indicate risky accounting practices and could be a warning sign for investors.

Clientele

• Consumer electronics- Xiaomi, Samsung, Hisense, VU, Nokia, Panasonic, TCL, Lloyd, Flipkart, etc.
• Lighting products- Signify, Panasonic, Wipro, Bajaj, Syska, Orient, Polycab, Luminous, Crompton, etc.
• Home appliances- Samsung, Godrej, Voltas- Beko, Panasonic, Bosch, Lloyd, Flipkart, Haier, Reliance, etc.
• Mobile phones- Samsung, Motorola, Nokia, ITEL, Jio, Karbonn, etc.
• Laptops & tablets- Acer
• Set-top box- Airtel
• Wearables & hearables- Boat

Scrutiny by Authorities

The company has frequently been under scrutiny by authorities, with several investigations over the years. One notable instance occurred in 2024, when the Directorate of Revenue Intelligence (DRI) searched for one of the company’s subsidiary manufacturing facilities in Noida. This investigation focused on the classification of raw materials that were being imported to manufacture one of the company’s products.

Such searches usually happen when authorities suspect a company may not correctly classify its imports. The classification of raw materials is important because it determines the duties and taxes that must be paid. If the wrong classification is used, it can lead to underpayment of responsibilities, which might trigger investigations like this one. While the outcome of the search hasn’t been publicly disclosed, being under the radar for such issues can raise concerns about compliance practices within the company.

SWOT

Strength

a. The company is the fourth largest LED lamp manufacturer in the world and India's largest ODM player in lighting solutions, with a 50% market share in LED lamps.

b. It is also India's largest washing machine manufacturer, with a 30% market share and the largest manufacturer in the Indian security surveillance space. 

c. Dixon has long-term relationships with Google, Xiaomi, Nokia, Samsung, etc. These relationships give it a competitive advantage, as it is more likely to win new business from these brands.

d. The company has a good track record of executing projects on time and within budget.

e. It manufactures various electronic products, including smartphones, tablets, televisions, and ACs. This diversification helps Dixon to reduce its risk and to weather economic downturns.

f. It has a large production capacity, which allows it to manufacture products at a lower cost than its competitors.

g. The backward integration strategy is a key part of Dixon's moat. By producing more of its own components, Dixon can reduce its costs and improve its margins.

Weakness

a. It depends on only a few customers, which comes with risks like fewer orders, contract renewals, favourable terms, and the possibility of losing these customers.

b. It creates accounts receivables when it provides manufacturing services to customers. If a customer can't pay for the products because they go bankrupt or face financial trouble, the company might not recover its costs of making those products.

c. Its customer agreements are not guaranteed, so they can change or be cancelled anytime. This makes it difficult for the company to predict its future revenues and production schedules.

d. Different requirements for different types of products require making changes to production schedules, increasing staffing, and engaging subcontractors. These changes can be costly.

e. Dixon faces fierce competition in the market, necessitating competitive pricing to secure business. With 75% of revenue coming from OEM operations, Dixon manufactures products based on client specifications, limiting its pricing flexibility. 

f. High costs, compounded by competition from low-cost manufacturers in countries like China, further challenge Dixon's profitability. It was also evident from FY22 that inflation, supply-side disruptions, freight costs, and consumer confidence made it difficult for the company to pass on the higher costs to its customers, affecting its margins.

g. Dixon is highly dependent on its suppliers for its core operations. Any disruption in the supply chain could significantly impact Dixon's ability to manufacture products and meet customer demand.

Opportunity

a. The GOI's PLI scheme is creating a favourable investment climate for the industry, allowing companies to grow and expand their operations.

b. The surging demand for electronic items presents a great opportunity for companies to capitalise on the growing market for connected devices and other IoT-enabled products.

c. The booming smartphone market in India, with its 5-7% Y-o-Y growth and increasing penetration, presents a lucrative opportunity for the company to thrive.

d. Dixon recognises the potential of the IT hardware sector in India, where $5 billion worth of equipment is imported annually. By partnering with some of the world's leading brands, Dixon is well-positioned to take advantage of these opportunities.

e. The Indian government has imposed restrictions on the import of laptops, tablets, all-in-one personal computers, ultra-small computers, and servers. This means that any company or entity that wants to import these products into India must now obtain a license from the government. The move is aimed at promoting domestic manufacturing of these products. 

f. Dixon is eligible for benefits under the Production-Linked Incentive (PLI) scheme in five sectors: mobile devices, telecom products, IT products, LED components, and wearables. The government has collectively offered incentives worth over $8 billion for these sectors.

Threat

a. The electronics industry of India faces tough competition with the electronic goods imported from China. Cheap imports from China will further pose a challenge for the electronics industry.

b. Dixon operates in an industry that is constantly evolving due to rapid technological advancements. The company has to adapt to these changes quickly and efficiently to remain competitive.

c. Its business could be harmed by any negative impact on its customers' reputation, as it relies on their success in marketing and selling the products.

d. The electronic manufacturing business is cyclical, meaning it goes through growth and decline periods. This is because it is sensitive to economic cycles. During economic downturns, consumer and business spending on electronic devices and equipment may decrease, reducing demand for manufacturing services. This is because electronic products are often considered to be discretionary items.

Dixon vs its peers & the future outlook

Company	Segments	3Y Sales Growth	3Y Profit Growth	OPM%	NPM%	ROE%
Dixon Technologies	LED lighting, TV, washing machine, mobile, laptops, tablets, wearables, security devices	40%	29%	4.31	2.11	22.52
Syrma SGS	DC motors, disk drives, fibre optic assemblies, magnetics, memory modules, power supplies and adapters, RFID tags	33%	10%	8.38	5.93	11.15
Kaynes Technology	Printed circuit boards (PCBA), box build	45%	103%	14.6	8.73	16.38
Amber Enterprises	AC, HVAC	20%	0%	6.62	2.4	8.75
PG Electroplast	Air Conditioners, Washing Machines, LED Televisions, Air Coolers	-	-	8.62	3.6	21.98

Future Outlook

• Dixon is investing heavily in its manufacturing capacity and capabilities. This will allow the company to meet the growing demand for consumer electronics products in India. Dixon is also expanding its export market.
• It is moving towards backward integration by setting up its own component manufacturing facilities. This will help the company to reduce its costs and improve its margins.
• It is entering new segments such as laptops, wearables, and hearables. This will help the company to diversify its revenue stream and reduce its reliance on any particular segment.
• ODM products have higher margins than contract manufacturing products. Dixon is currently a major contract manufacturer for leading brands such as Xiaomi, Samsung, and LG. However, the company is now focusing on increasing its share of the ODM market.
• The company has been awarded the PLI scheme for the manufacturing of smartphones, electronic components, and air conditioners. The PLI scheme will incentivise Dixon to manufacture these products in India.

Why we did not recommend Dixon Technologies Ltd.?

1. Sunil Vachani, the company's promoter and executive chairman, has significantly reduced his personal shareholding from around 33% in 2021 to just 6% in 2024. Normally, when a promoter sells such a large portion of their shares, it raises concerns in the market. Investors often interpret this as a sign that the promoter might have low confidence in the company’s future performance. 

2. Dixon faces high industry concentration risk as it is less diversified than its peers. Also, the majority of its revenues come from the Mobile and EMS divisions.
   Its operating profit margins are the lowest among its peers because  of 2 reasons : 

1. The Mobile and EMS business segment is a low-margin business segment. 

2. Its business model is primarily B2B. B2B-focused EMS players often operate on tight profit margins. 

3. The company has often been under the radar with constant search investigations. For instance, in 2024, the Directorate of Revenue Intelligence (DRI) searched with respect to the classification of the raw material imported for manufacturing of one of the products at the manufacturing facility of one of a subsidiary company at Noida.

Dixon got rejected in our thorough screening criteria for good long-term stocks. However, there are very few stocks that cleared it. Check them out here.