Dixon Technologies India Ltd - IPO Note - The trajectory of strong client base continues - Angel Broking

Views of Mr. Jaikishan J Parmar(Research Analyst - Mid-Caps, Angel Broking):

Dixon Technologies (India) Ltd (DTIL) is the largest home grown design-focused and solutions company engaged in manufacturing products in the consumer durables, lighting and mobile phone segments in India. The company manufactures electronics products for Panasonic, Philips Lighting India, Haier Appliances, Gionee, Surya Roshni, Reliance Retail, Intex Technologies, Mitashi.

Leading market position, strong customer relations to propel growth: DTIL is the leading player in most of the verticals in which it operates and it enjoys market leadership in manufacturing in India. DTIL is focused on expanding its product basket, strengthening existing customer relationships and increasing customer base. Strong relationship would help the company to expand market share, develop new products and enter newer market.

Original Design Manufacturer (ODM) & Reverse Logistics (RL) segments to improve blended margin: EBITDA margin of DTIL has improved by 130bps over the last 4 years, primarily due to the growing contribution from ODM business (improved by 800bps), which has better margins than original equipment manufacturing(OEM). Considering the management's ability and execution skills, we believe that margin improvement would continue further. Moreover, many bigger brands in home appliance segment are expected to collaborate with DTIL. Further, the company is also focusing on RL, which has higher margin and is growing fast over last 3 years.

Sufficient capacity and expansion into CCTV & DVR: DTIL manufactures and assembles high growth products and has enough operating leverage, as its utilization levels remain comfortable (40-60%). This, we believe, is a near term lever to improve the operating margins. Dixon is also setting up a new capacity of CCD televisions, which will commission in September 2017 and will add a new revenue stream in its business.

Healthy financials and return ratio: DTIL has reported healthy top-line of 33.8% CAGR and bottom-line of 78.3% CAGR over FY2013-17. Further, the company had negligible debt (D/E-0.22), low working capital requirement and reported ROE and ROCE of 25.5% and 33.3% for FY17.

Outlook & Valuation: DTIL would continue to report higher revenue and improvement in margins owing to its presence in high growth segments, experienced management and growing share of ODM segment. Despite the company operating on thin margins, it has registered return on capital of a whopping 33.3% in FY2017. Further, it has been generating positive cash flow from operations over the last 5 years and negligible debt post IPO. At the upper end of the price band, the pre issue P/E multiples works out be 38.5x of FY2017 EPS, on P/B, it is valued at 9.8x of FY2017 book value. We recommend 'SUBSCRIBE' on the issue for a mid-to-long term period.

Source : Equity Bulls

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