Dixon Technologies India Ltd (DIXON) Q2 FY23 Earnings Concall Transcript

Dixon Technologies India Ltd (NSE:DIXON) Q2 FY23 Earnings Concall dated Oct. 20, 2022

Corporate Participants:

Pulkit Chawla — Managing Director

Atul Lall — Vice Chairman and Managing Director

Saurabh Gupta — Chief Financial Officer

Analysts:

Aditya Bhartia — Investec — Analyst

Sonali Salgaonkar — Jefferies India — Analyst

Dhruv Jain — Ambit Capital — Analyst

Sujit Jain — ASK Investment Managers — Analyst

Sandip Sabharwal — ASK Investment Managers — Analyst

Unidentified Participant — — Analyst

Gopal Nawandhar — SBI Life Insurance Co. — Analyst

Bharat Shah — ASK Investment Managers Limited — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to the Dixon Technologies India Limited Q2 FY ’23 Earnings Conference Call, hosted by Emkay Global Financial Services. [Operator Instructions]

I would now like to hand the conference over to Mr. Pulkit Chawla of Emkay Global Financial Services. Thank you, and over to you, sir.

Pulkit Chawla — Managing Director

Thank you, Seema. Good evening, everyone, and welcome to the Dixon Technologies Q2 FY ’23 Earnings Call. I would like to welcome the management and thank them for this opportunity. We have with us today, Mr. Atul Lall, Vice Chairman and Managing Director; and Mr. Saurabh Gupta, Chief Financial Officer.

Without further delay, I shall now hand over the call to the management for their opening remarks. Over to you, gentlemen.

Atul Lall — Vice Chairman and Managing Director

Thanks very much, Pulkit. Good evening, ladies and gentlemen. This is Atul Lall, and we also have on the call today, our CFO, Saurabh Gupta.

Saurabh Gupta — Chief Financial Officer

Yeah, good evening, everyone.

Atul Lall — Vice Chairman and Managing Director

Thank you very much for joining this earnings call for the quarter ended June 23 — September 23. Coming to our overall performance for the second quarter, consolidated revenues for the quarter ended September 30, 2023 — ’22 was INR3,867 crores against INR2,804 crores in the same period last year, a growth of 38%. Consolidated EBITDA for the quarter was INR146 crores against INR111 crores in the same period last year, a growth of 31%. Consolidated PAT for the quarter was INR77 crores against INR63 crores in the same period last year, a growth of 23%.

Now, I’ll share with you the performance and strategy in each of the businesses going forward. Consumer Electronics: revenues for the quarter was INR1,501 crores with an EBITDA of INR43 crores and an operating margin of 2.9%. We have seen a margin expansion of 50 bps, namely because of large ODM/JDM business. In this business, there is a volume growth of 54%. However, the revenues look flat on account of the prices of open sale decreasing significantly in the international market. We have the largest capacity in India of 6 million sets including backward integration in LCM and SMT lines and catering to almost 35% to 38% of the NIM requirement.

Our JDM business with an anchor customer has shaped very, very well and we are in active discussions with other existing customers, who offer ODM/JDM solutions. A significant development in the last quarter was closing on the ODM sub-licensing rights with Google, relating to Android and Google TV which will open up a lot of opportunities for us, since almost 65% of Indian market is on this platform. We should be able to roll out the same by Q1 of the next fiscal.

We are also investing in setting up and injection molding plant in this particular category in line with our strategy of deepening the manufacturing and backward integration. This should be operational in Q4 of the current fiscal. That is we have got orders from Dell and the commercial production has already started. We expect the volumes to be around 0.2 million in this particular category.

Coming to Lighting: Lighting revenues in this quarter was INR290 crores with an operating profit of INR24 crores, with an operating margin of 8.3%. In margins, there is an expansion by 1% again in the Q1 numbers, which is in line with what we have been guiding. The demand in this business is normalizing, led by liquidation of inventory in the channel and reduction in input prices, which will result in increased revenues and profitability in coming quarters.

We are the India’s largest ODM player in Lighting and have the largest capacities in various SKUs. In LED bulb, we have capacity of 400 million, which is 45% of the Indian requirement. We already have expanded the annual capacity in battens to 50 million, and further in downlighters to almost 18 million. We’re getting into new product categories like starting strips and rope lighting, which will be launched by Q4 of the current fiscal. Our first supply is against exports to UAE is being executed in Q3 and we are working on some large RFQs for our anchor customer for U.S. market and we are confident of winning this business.

We are in the process of recognition [Phonetic] of a smart lighting company, which is cutting-edge blue-edge — cutting-edge Bluetooth mesh technology. That is in the process of development of WiFi-based technology solutions for Lighting products. This acquisition will be closing in the current quarter. New products leveraging this cutting-edge technology will be launched by Q1 of the next fiscal. We are in the process of hiring a very senior person in this division as Lighting R&D Head to further churn out more ODM solutions in different Lighting categories.

We have also started work on investing under the PLI scheme for LED lighting components in line with the backward integration strategy. We are confident that this capacity of LED lighting components will be set up by Q4 of the current fiscal. The capital employed in the business has been significantly reduced to almost INR85 crores year-on year on account of better current assets management.

Home Appliances, the revenues for the quarter was INR363 crores with an EBITDA of INR33 crores, is 9% operating profit. The margins have improved year-on year and quarter-on-quarter, led by passing on the impact of commodity cost to the customers, improved operating leverage and cost optimization measures. We have 160 odd models in semi-automatic category ranging from 6 kgs to 14 kgs, with an annual capacity of 2.4 million and we achieved the highest-ever production of almost 1.6 lakhs in the month of September.

In Fully Automatic category, we have got a capacity of 0.6 million with 96 variants across 6.5 kg to 11 kg with Bosch as our anchor customer. In addition to Bosch, we are also manufacturing for Lloyd and Croma and some other brands, they’ve already started touching a volume of almost 22,000 to 25,000 per month. We are also in final stages of getting a large contract with a large Japanese brand in FATL category for both domestic and global markets. We’ll be introducing more designs and new features in both Semi-Automatic and Fully Automatic category. The order book in this business looks very healthy and we’re looking to add more customers in this particular business.

Mobile Phones and EMS division: revenues for the quarter were INR1,594 crores, with an EBITDA of INR42 crores, 2.7% operating margin. For Motorola, we did 1 million volumes in Q2 and now we’re also setting up a line, for LED assembly in line with our strategy for backward integration and to deepen the manufacturing.

In [Indecipherable] rollout manufacturing smart and feature phones for Nokia and feature phones for itel. We are also hopeful of getting more business from Nokia in coming months for both the smart and feature phones for both domestic and global markets. As I’d communicated to you in the last call, we are almost close to closing large order with a couple of brands in mobile and [Indecipherable] both for domestic and exports market. I feel fairly confident that the production for these new brands is going to take off in Q4 of the current fiscal. We manufactured 3.3 million and 2.6 million of 2G and 4G phones respectively for Samsung in Q2. We’ve started the construction activity in our new [Indecipherable] integrated mobile facility in Noida. We have also embarked on an ODM journey in mobiles, we have recruited a very senior resource as our R&D Head for mobiles and a new team and a lab will be built in Hyderabad for that.

Security Surveillance: Dixon’s 50% share of revenues for the quarter was INR118 crores, with an EBITDA of INR3.6 crores at 3.1% operating margin. The order book in this segment looks healthy and we’re going into further capacity expansion from 10 million per annum to 14 million per annum and they are also relocating our existing footprint from Tirupati to Puttaparthi in Andhra. In this particular business also — we’ve also started working on backward integration for mainly molding and power supplies. Telecom and networking as a JV with Bharti for Airtel. The telecom piece is also looking very promising. And for Airtel, we’re also keep on shifting more from imports or domestic manufacturing. We have started commercial production for them — for O&D [Phonetic] category. We have also bagged a large order from Airtel for HD hybrid set-top boxes and the mass production should start from Q2 of next fiscal.

The PLI scheme has also been extended by one year along with addition of hybrid set-top box in other telecom products added to the scheme. We have taken up a new facility for this particular business and this facility should be operational by December of the current fiscal. We are in active discussion with some large global brands for existing and new product categories in this particular business. We are also building an R&D and we’ve recruited a senior resource as R&D Head for telecom devices.

Laptops, tablets and IT hardware products. In addition to manufacturing laptops for Acer, we are also in the process of starting manufacturing of tablets for Lenovo, whose volume is going to be almost 3,000 — 300,000 per year. We are expecting that the government is going to roll out revised more attractive PLI scheme for IT hardware products with higher incentive outlay, we are getting the same. Inverter controller board for air-conditioners of 40-60 JV with Rexxam to manufacture inverter controller board for air-conditioner is now operational in manufacturing facility in Noida. The venue potential in this is quite immense with the strong EBITDA margins both for domestic and export market. We are committing to make an investment of INR51 crores over five years in this and this Dixon share is going to be INR20-odd crores.

Wearables and Hearables: on the Wearables side, the Indian market is the third-largest market globally and it’s one of the fastest growing. In this, we have a partnership and JV with both and we have already achieved a milestone of manufacturing 1 million devices per month, that’s a number we touched in the last month, which is of TWS and very shortly, we’ll also start manufacturing neckbands and smartwatches, a new facility in Noida is being set up for that. We are hopeful and confident of in fact setting up this facility and making it operational by December this current year. In line with our strategy in this particular category also, we’ll be setting up the SMT lines and at some point of time looking at backward integration in the polymer processing space. In addition, we are about to start manufacturing of TWS in the smartwatches for Samsung also and the dedicated plant in Sector 90 of Noida.

Refrigerators, we have started the construction on 20 acres of land in Greater Noida, where we are creating a capacity of 1.2 million DC, and the categories of 190 to 235 acres with multiple features. We are in final stages of closing an agreement with large brand with commitments of almost 0.6 million which is 50% of the capacity. The trials of this particular product line are expected to take place by Q2 of ’23-’24.

So, thanks very much. And now, me and Saurabh look forward to responding to your questions, please. Thank you.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] Thank you. We take the first question from the line of Mr. Aditya Bhartia from Investec. Please go ahead.

Aditya Bhartia — Investec — Analyst

Hi good evening, sir. Sir my first question is on the Lighting business, wherein we have seen some challenges in the last couple of quarters. Just want to know how are you seeing things over there, should we be anticipating an improvement in that business? What exactly have been the issues and what are the steps that you have taken to tackle that?

Atul Lall — Vice Chairman and Managing Director

So, Aditya if you recall, in our last interaction, I had shared that there were certain internal challenges, we had an execution. And we have now new management team taking over. Business is coming back to normal, being reflected in the numbers. The margins have improved — they have come back to almost original level of 8% plus. Deals is improving. We have added new customers, the customer product portfolio is being expanded, given the sources for exports have been making — have been acquired and have been deployed. We have significantly improved the financials of this business.

As I shared with you in my opening remarks that we have been able to reduce the working capital intensity by almost INR85 crores. Exports to certain markets have taken off. So I think it’s going to take a quarter or more, it will come back exactly back to normal into a growth path but it’s definitely come back to — it’s on the correct but, that’s what I can share with conviction.

Aditya Bhartia — Investec — Analyst

Understood, sir. And you referred to some exports to the Middle East region, if you could just elaborate how large is the opportunity and are we seeing that ramping up over the next few quarters?

Atul Lall — Vice Chairman and Managing Director

So this is the first export order being executed of multiple home solution lighting products. The shipments are going to be made in the current month. I’m very sure that we’re going to have the weak [Phonetic] orders in this business. We are also pursuing as I shared with you some large RFQs for anchor customers were feeling like in the U.S. market. We feel and we feel confident that we can meet that target places. So, I think export business will definitely be the high point of lighting as a vertical. But this is going to take some time, it’s going to take couple of quarters or so to ramp up.

Aditya Bhartia — Investec — Analyst

Understood, sir. Sir, my second question is on the TV business. So this movement towards JDM and ODM per trial, does the Google license make it lucrative and easier for us to follow a JDM opportunity? That’s my first question. And second question, a related question that you mentioned that you’re looking to move some of the other customers to JDM contract as well. Are these existing customers who would get kind of upgraded towards JDM per trial or are we looking at new opportunities altogether as well?

Atul Lall — Vice Chairman and Managing Director

So responding to the first part of your question, almost 65% is on — of television market is on Android platform. And that — I think that’s the question, right? You had the first one.

Aditya Bhartia — Investec — Analyst

No. I wanted to understand sir that with the — with us having this Android license, does it become easier to follow the opportunity to offer an ODM kind of a solution on the TV side?

Atul Lall — Vice Chairman and Managing Director

So, what I wanted to share was, one, what is the opportunity like. So almost 65% of the Indian TV market is on Android Google. And some of the large existing brands who are also our existing customers on Android Google platform. And they have already started engaging with us for migrating from prescriptive mode to a JDM/ODM mode. That is one big plus. Further, there were many brands Tier 2 and Tier 3 brands, which were on USP. This would like to migrate to Google Android platforms because the performance of the set and also the cost competitiveness with an Indian [Indecipherable] Dixon enhances. So there is a large opportunity undoubtedly. And we have already signed up with some brands like Acer for that. The existing brands with whom we are in discussions for migrating from prescriptive to JDM/ODM, sorry, I’m not able to share the names, but please be rest assured the dialog is on and the response is positive.

Aditya Bhartia — Investec — Analyst

Great, sir. And that’s really encouraging to hear. Thank you so much and wish you a Happy Diwali.

Atul Lall — Vice Chairman and Managing Director

Thank you, Aditya.

Operator

Thank you very much. We take the next question from the line of Sonali Salgaonkar from Jefferies India. Please go ahead.

Sonali Salgaonkar — Jefferies India — Analyst

Good evening, Mr. Lall. Good evening, Saurabh and congratulations on a great set of numbers. So my first question is —

Atul Lall — Vice Chairman and Managing Director

Thank you, Sonali.

Sonali Salgaonkar — Jefferies India — Analyst

Sir, my first question is regarding the guidance for revenue and margins in FY ’23. From last quarter to this quarter, we have added a lot of customers, lot of initiatives including the Google TV Android. So would you like to probably give us the guidance again, do we maintain that?

Atul Lall — Vice Chairman and Managing Director

So, Sonali, I think just hold it for some time. To be very candid, we’re in the process of concluding certain large contracts. And you know where the large piece of our business is the mobile opportunity, which is in the process of concluding. So just wait for some time for Saurabh and me to come back on these numbers it’s — and the final —

Saurabh Gupta — Chief Financial Officer

Sonali, we’ll have a better visibility in another month or couple of months, yes, so then we’ll be able to better guide the market. So as of now, you should stick to our numbers which we have guided for.

Sonali Salgaonkar — Jefferies India — Analyst

Yes. That’s helpful, Saurabh. Could you wish, for the benefit of all, repeat the numbers of guidance as of last quarter?

Saurabh Gupta — Chief Financial Officer

Yes. So we stick to a guidance of around INR15,000 odd crores and we maintain that guidance.

Sonali Salgaonkar — Jefferies India — Analyst

Understood. And the margin at about 4%?

Atul Lall — Vice Chairman and Managing Director

3.8% to 4%.

Saurabh Gupta — Chief Financial Officer

Yes, 3.8% to 4%, yes.

Sonali Salgaonkar — Jefferies India — Analyst

Okay. Got it, got it. Sir, secondly how is the demand scenario shaping up? I mean, we completed the initial Navaratris and we are just about to begin the Diwali. What are your initial feelers of the festive demand or the demand for this quarter?

Atul Lall — Vice Chairman and Managing Director

So Sonali, we find that in certain categories. The demand has been very good. We find that in televisions, the inventories of the shares of the retail outlets also, both online, offline. We find the demand of washing machine, particularly with some large brands who are our anchor customers to be very, very helpful. We find the demand for hearables and wearables to be extremely good. However, I don’t find in certain other categories to be demand as strong as these particular product categories that I’m talking about.

So I feel that Diwali should be good for certain products, in fact very good for certain products and average for some other products. But, we need to wait and watch for Diwali to get over. Because undoubtedly the month of November is going to be muted, but I see the [Indecipherable] that are coming to us for the month of December, we start going back to normal, and the next quarter looks definitely much, much better than good, so is that is kind of response I would like to share with you.

Sonali Salgaonkar — Jefferies India — Analyst

Got it, sir. Very clear. Sir, thirdly, on the price hikes, have we taken all the price hikes required to fully pass on the raw material cost escalation that we saw up till a quarter back? Of course, the commodities have started softening from now, but are we in a position to take further price hikes that’s required?

Atul Lall — Vice Chairman and Managing Director

So, if you see in our main ODM businesses that are washing machine and lighting. And also the new business in which we are step by step marketing to ODM getting TV. The margin profile has improved. We have touched 9% in washing machines, which is almost back to normal. And in lighting also, we have touched 8%-odd. You will see that this is a 50 bps expansion also in the LED television as a category, which is primarily because of ODM business. So margins have almost normalized. That’s what I would say.

Sonali Salgaonkar — Jefferies India — Analyst

Got it, sir. Very clear. Sir, thank you. That’s it from my side and wishing both of you a Happy Diwali in advance.

Atul Lall — Vice Chairman and Managing Director

Same to you, Sonali. Thank you.

Saurabh Gupta — Chief Financial Officer

Same to you, Sonali. Thank you.

Operator

Thank you very much. We take the next question from the line of Mr. Dhruv Jain from Ambit Capital. Please go ahead, sir.

Dhruv Jain — Ambit Capital — Analyst

Hi, sir. Thanks for the opportunity and congratulations on a good set of numbers.

Atul Lall — Vice Chairman and Managing Director

Thank you, Dhruv.

Dhruv Jain — Ambit Capital — Analyst

Question on this — the ODM opportunity in television [Indecipherable] how should we look at the margins here? So there’s been a significant increase in ODM share on a [Technical Issues] margins we would have in more appliances or what’s going to be the margin profile here?

Atul Lall — Vice Chairman and Managing Director

So Dhruv, margins in ODM/JDM business and television is going to move up in steps. I feel that when we migrate in phase one, the margin expansion is going to be somewhere in the range of around 50 bps to 70 bps. But then as I shared with you in my opening remarks that we are setting up the backward integration footprint of injection molding and possibly later the metal processing, which will be operational in couple of quarters and once we are able to ship the toolings into India, the margin should expand by another 50 bps to 70 bps. So in two phases, I think the margins can expand by 125 bps to 150 bps.

Dhruv Jain — Ambit Capital — Analyst

Thanks. And sir, I had a question on the home appliances piece and we’ve seen a fairly good growth on a Y-o-Y and as well as on a quarterly basis. So — and we’ve had some decent contribution from the FATL piece. So if you could just quantify what’s been the contribution of the FATL and how do you see this panning out, say, in FY ’23 the mix between FATL and semi-automatics [Technical Issues].

Atul Lall — Vice Chairman and Managing Director

In the current fiscal, our growth, we are targeting somewhere between 1.7 million to 1.8 million washing machines. Out of that 1.5 million to 1.6 million is going to be in the semi-automatic category, 200,000 is going to be in the category of FATL. If you recall in the last fiscal, we had done 1.1 million, so from 1.1 million to 1.7 million, 1.8 million, that’s a significant growth. In the next year, I see, the major growth is going to come from FATL. I’m aspiring that this 200,000 number should reach around 450,000, 500,000 because now we’re going to complete product portfolio and customer acquisition is being worked upon.

In the semi-automatic category, that’s a category which is kind of normalizing. We are working on some new customer acquisition, but let’s see, in that category, I feel the growth is going to be muted from 1.5 million, 1.6 million going to be somewhere around 8% to 10%. So total what we can aspire from 1.7, 1.8 to reach around 2.2.

Dhruv Jain — Ambit Capital — Analyst

Thanks. And sir, just a bookkeeping one, if you can just give us the volumes of — volumes across categories. Thanks.

Atul Lall — Vice Chairman and Managing Director

Yes. So Dhruv, LED TV, the volume was 11.6 lakhs.

Saurabh Gupta — Chief Financial Officer

So that’s a growth of 54% from Q2 of last financial year.

Atul Lall — Vice Chairman and Managing Director

So as against 7.5 lakhs last year, is a growth of 54%, but clearly the revenues have not grown mainly because the selling prices of the portfolio come down from INR18,000 to INR11,500 rupees and the significant portion of that is on account of the display or the open sell which has corrected in the open market, in the international market, otherwise in volume numbers we have grown by 54%. Our bulb numbers are around 42 million, 43 million, batten was around again 4 million, downlighters was 1.4 million and then we had some small other categories. Semi-automatic washing machine we sold around 4.6 lakhs, fully automatic washing machine, we are now clocking or rendered of almost 22,000, 23,000 so it was around 60,000 to 65,000 in this quarter.

Smartphones outside Samsung was around 10 lakhs, feature phones outside Samsung was 13 lakhs. Smartphones for Samsung was around 26 lakhs, feature phone for Samsung was around 33 lakhs. CCTV was around 14 lakhs, DVR was 13 lakh — DVR was 3 lakhs, yes, so this is broadly the quantities that we sold. And for Boat, the wearables and hearables, we did around 2.3 million.

Saurabh Gupta — Chief Financial Officer

So in Boat, we ramp [Phonetic] production to almost 1 million devices a month. And in the case of telecom devices such as ONTs and modems for Airtel, we have touched a production level of 100,000 a month.

Dhruv Jain — Ambit Capital — Analyst

That’s great sir. Thank you so much. That’s all from my side.

Operator

Thank you very much, sir. [Operator Instructions] We take the next question from the line of Mr. Sujit Jain from ASK Investments. Please go ahead, sir.

Sujit Jain — ASK Investment Managers — Analyst

Yeah, thank you for the opportunity and compliments on a good set of numbers. Sir, when you speak about this export opportunity, first of all, congratulations, after a lot of hard work, that has opened up for us. But the categories that you speak about Home Solutions, strips, roof lighting, ceiling lights, etc, these look like smaller in terms of opportunity. So one, just wanted to see that and check, on a medium-term basis, how large this opportunity could be?

Atul Lall — Vice Chairman and Managing Director

So, Sujit, please appreciate, that Dixon’s main focus till now has been on bulb as a category. And also then we got into battens. Both bulbs and battens in India are reaching some kind of flattening sales. Because particularly in bulbs, because the government’s program under ESL, lot of coverage on the ground has been done. And the market undoubtedly is shifting more and more towards ceiling lights, that is downlighters. And also there is lot of potential on the strip lights perspective. So, both, I mean on the downlighters side, ceiling lights side, we are expanding our capacity with 30 million. And this 30 million should give us an additional revenue of almost INR300 crores.

And the strip lighting, wherein, we are making an investment of almost INR6 crores setting up a new line, should give us a revenue of almost, INR50 odd crores. This additional revenue of INR350 crores from these two categories should come in, a couple of years.

Sujit Jain — ASK Investment Managers — Analyst

This you’re talking about domestic opportunity INR350 crores?

Atul Lall — Vice Chairman and Managing Director

I’m not looking at export at all, because exports, I’m not able to put the number in the budget but if we are able to crack export and each RFQ, is around INR200 crores.

Sujit Jain — ASK Investment Managers — Analyst

And that will be mainly directional products or these two new lines, is what I’m trying to realize.

Atul Lall — Vice Chairman and Managing Director

Sujit, please appreciate in ceiling lights, in U.S. market, there is a tariff differential. When you go from China, the duty is 25%. When — the import from India, the duty now is 5%, so there’s a 20% arbitrage.

Sujit Jain — ASK Investment Managers — Analyst

Right. And in terms of the margins in lighting division, is the issues in terms of high-cost inventory etc., is finally completely behind and so therefore now we see sustainable margins in lighting division?

Atul Lall — Vice Chairman and Managing Director

As I shared in my response to Aditya’s question, we humbly accept that there were certain execution issues at our end. And those have been addressed and those have been corrected, we have got a solid management team now running this business. And, yeah, we feel that there can be some temporary shocks here and there because there are so many moving parts in business, but to a very large extent, this business is on a stable note now.

Saurabh Gupta — Chief Financial Officer

Yes. So Sujit, we feel confident this margins going forward should be sustainable.

Sujit Jain — ASK Investment Managers — Analyst

Right. But when I see, we used to — so we’ve done a margin of — in lighting product, at times a little higher than this on a full-year basis also including in, let’s say, FY ’21, 8.8% margin. So do we get back to those kind of margins?

Atul Lall — Vice Chairman and Managing Director

So getting into specific numbers might be a slight challenge, but we’ve already touched 8%. So, yeah, the teams are now working on a lot of value engineering, consolidating the industrial footprint, automation, productivity improvement, backward integration, give us some more time. I’m very sure that the margins are going to climb up. Once we start accruing the PLI benefits of which the investment of INR20 crores has been made in the current fiscal, once that factory becomes operational, the margin expansion will take place.

Sujit Jain — ASK Investment Managers — Analyst

Right. And in TV, this Google Android license opening up opportunity has opened up opportunities for us in terms of ODM solutions. But, our main client he has his own voice. So therefore to that extent, the rest of the business having this opportunity, is it a correct understanding?

Atul Lall — Vice Chairman and Managing Director

Yeah, you’re correct.

Saurabh Gupta — Chief Financial Officer

Yes, Sujit, that’s the right understanding.

Sujit Jain — ASK Investment Managers — Analyst

Perfect. Thank you. All the best.

Atul Lall — Vice Chairman and Managing Director

As I already mentioned 60%, 65% is a adjustable market for us, so which also if you look at in terms of volumes, we’re talking about a 14 million market and 60%, 65% would be 9 million — 8.5 million, so that becomes an adjustable market for us. That will be a combination of some of your existing brands and also some of the potential customers which are not with us today.

Sujit Jain — ASK Investment Managers — Analyst

Sure, thank you.

Operator

Thank you very much. We take the next question from the line of Mr. Sandip Sabharwal from ASK Investments. Please go ahead, sir.

Sandip Sabharwal — ASK Investment Managers — Analyst

I have two questions. The first question is, how does your pricing works with your large OEMs? So if the raw material prices are volatile, is it a quarterly reset, it’s an annual pricing, how does that vary?

Atul Lall — Vice Chairman and Managing Director

Yeah, so, in almost 80% of the business which is a prescriptive part of the business. There the understanding is that, Dixon will not take any currency or commodity days, so that’s immediately passed on and we were not impacted with any kind of a commodity or the input price increases. It’s only in the 20% of the business which is predominantly the lighting, washing machine business and now some portion of the TV business. Here, the commodity or the currency risk are passed on with a lag. Now, it’s different understanding with different customers, with some customers it is one month, with some customers it is three months. But — so that’s broadly the way we work with those customers.

Sandip Sabharwal — ASK Investment Managers — Analyst

For this quarter, what would be the kind of PLI benefits you received or accounted for?

Atul Lall — Vice Chairman and Managing Director

Yeah. So the first six months of this financial year, we have booked an income of almost INR4.5 crores on account of the mobile PLI. Because as you know, we’ve already — we are the first company in the mobile PLI which has already received the first check from the government pertaining to last year. And now the whole system is very much stabilized and clearly we see that the way it will work going forward is that whatever — in whichever period you’re able to achieve those revenue and capex thresholds, you apply and within couple of months we’ll now get the PLI from the government, so that system is absolutely stable. So we feel confident and this should be accounted for around INR4.5 crores in the first six months of this financial year.

Sandip Sabharwal — ASK Investment Managers — Analyst

So that’s what we have accounted for — so you account for, when you receive or you will see accounting products?

Atul Lall — Vice Chairman and Managing Director

So the way it works is we are accounted for our share of income and the way as far as the balance sheet is concerned, there’ll be a receivable from the government only that receivable gets knocked off and the cash comes into the system and on the liability side, there’ll be payable — whatever our understanding with various customers is, there will be payable on the liability side. So, as and when the cash keeps coming in, the receivable and payable gets adjusted with that cash amount.

Sandip Sabharwal — ASK Investment Managers — Analyst

So in the first six months, only INR4.5 crores has been accounted for [Indecipherable] across product categories?

Atul Lall — Vice Chairman and Managing Director

Last year, we had booked the income of INR9 crores, out of which, some portion has already come in as cash to us and this year, yeah, we have — in this first six months, we have booked INR4.5 crores.

Sandip Sabharwal — ASK Investment Managers — Analyst

Okay. Thank you.

Operator

Thank you, sir. We take the next question from the line of Mr. Onkar [Phonetic] from Shree Investments. Please go ahead, sir. Mr. Onkar, your line is unmuted sir, please go ahead with your question.

Unidentified Participant — — Analyst

Yeah, my question was regarding the recent launch of 5G, so how would it exactly benefit Dixon, as it would be the first one, two manufacturers [Indecipherable] able to be?

Atul Lall — Vice Chairman and Managing Director

You’re talking about the 5G rollout?

Unidentified Participant — — Analyst

Yes, yes.

Atul Lall — Vice Chairman and Managing Director

So 5G rollout, there are two potential opportunities for Dixon. One of course is on the mobile devices. So Dixon is one of the first few companies which has started manufacturing 5G, and our infrastructure is all geared up. This is both for the domestic market and export markets. That is one. Second on the telecom devices front, we are already registered under the telecom PLI scheme for the networking products, both for 4G and 5G. It is at a very basic level but we are definitely exploring the EMS opportunities and dialogs with certain potential partners has started for doing these 4G, 5G networking products in our new factory but it’s at a very basic level. But undoubtedly, we have started dialogs with the potential partners.

Unidentified Participant — — Analyst

But how big this opportunity can be as per the management?

Atul Lall — Vice Chairman and Managing Director

A [Indecipherable] qualification and this is going to be a complex process. So put a number to this potential, I think it’s too early at present. But we recognize this opportunity, it’s a large potential opportunity and the teams under our new CEO for this business. So vendor who was earlier with Tejas, the work has already started.

Unidentified Participant — — Analyst

So there might be a better clarity in the next six months?

Atul Lall — Vice Chairman and Managing Director

I feel that possibly something in this area we shouldn’t be able to conclude. Initial stages but should be able to conclude by Q4 of the current fiscal that is March quarter.

Unidentified Participant — — Analyst

Correct. Okay, all right. In terms of so free cash flow generation, you have done pretty well this quarter and because of that ROE and ROCE has expanded well. So how do you see the trend for this ROE and ROCE for the full-year as well and for the rest of the year as well as for the next upcoming two years?

Atul Lall — Vice Chairman and Managing Director

So we feel, if you remember last year, it was a bad year for us as far as the working capital was concerned because clearly you had the shortage of components, supply chain issues last year on account of COVID and we ended up deploying money in the working capital. So now clearly those headwinds are behind us and we are putting — internally we are putting a lot of effort to reduce our working capital intensity in lighting. So as you see the numbers INR85 crores of working capital is on par and that has been significantly account — on account of the inventory reduction, which has happened. Clearly we need to do a lot of work — further work on some of the working capital intensity that has been deployed in mobiles, which we are working on and we feel confident that that should also come down.

So my sense is that ROCE should only be on an upward trajectory side, you should see better numbers as far as 31st March financials are concerned because clearly we had that earnings visibility with us and clearly we see that more of working capital intensity should come down because there’s huge amount of focus internally on managing that. And as you see that if more customer additions and significant part of the growth area is in mobiles, which is predominantly — will be prescriptive business in the working capital intensity as per the nature of the business would be small. And if that business contributes 40%, 45% of the revenues. And even the other verticals, say, telecom and with the revised IT hardware scheme, all these businesses are businesses with a low capital intensity, high asset turns. So we see that the ROCE profile of the company should keep going up. Very difficult to give you a number, but, yeah, if what we are aspiring for in the next couple of years if we continue on our plans and achieve our plans, I think it should be a 40% plus ROCE business for us.

Unidentified Participant — — Analyst

40%, okay. The overall business as — the Dixon as a company you’re saying?

Atul Lall — Vice Chairman and Managing Director

Dixon as a company, right.

Unidentified Participant — — Analyst

So ROCE of around 40%?

Atul Lall — Vice Chairman and Managing Director

40%, yes.

Unidentified Participant — — Analyst

Okay. And as far as the cash and cash equivalent is concerned, you have around INR200 crores and what would be the capex for this year? Are there any planned capex for the next year?

Atul Lall — Vice Chairman and Managing Director

Yes, so in the first six months, we have done a capex of around INR185 odd crores and what we had budgeted for this year is somewhere around INR320 odd crores to INR330 odd crores so broadly we will add that number only. And one needs to finalize the plans for next year, but my sense is broadly it should be in the similar lines for next year as well.

Unidentified Participant — — Analyst

Okay. All right. Thanks a lot.

Operator

Thank you, sir. [Operator Instructions] We take the next question from the line of Mr. Gopal from SBI Life Insurance. Please go ahead, sir.

Gopal Nawandhar — SBI Life Insurance Co. — Analyst

Thank you for the opportunity. So the question is, in the last quarter, our revenue guidance were at INR17,000 crore and we were pretty confident on 4% margins. Are we revising our guidance down to 15,000 and even revising the margins down whereas if you’ve have seen decline in the commodity prices, ideally it should have helped in terms of improving margins. So can you just help us which are the segment would have kind of disappointed in terms of scale-up?

Saurabh Gupta — Chief Financial Officer

Yes. So Gopal, we had — of course, we had corrected the guidance last quarter only, so, yes, you’re absolutely right, it is started this financial year somewhere around April and all, we were at INR17,000 crores but within couple of months, we had brought it down to INR15,000 crores. And nearly today also, you’re absolutely right that of course, commodity prices have come down and that is — that you have seen that — that is reflected in EBITDA margins for lighting and washing machine business but at the same time then currency has also depreciated, Indian rupee has also depreciated, which has again kind of impact — have some kind of an impact on our ODM business where I mentioned that currency also gets passed on with a lag.

Now what has changed in our numbers, clearly we see that the mobile market was slow and the numbers that we will end up doing for our anchor customer there for the domestic market and it’s not only true for an anchor customer, overall, the mobile market was slow, especially in the first quarter. So clearly, one of the reasons for bringing down the guidance was low sales on the anchor customer mobiles. And also we realize that the prices of open sale, which is also very dynamic globally. They had corrected significantly and one is not an expert when started the price is corrected further during the year.

So the revenue — the volume growth in TV has been very good. And clearly we have a plan for ODM, we have a plan for backward integration, but clearly the price for open sale is corrected, which would lead to lower revenues or may not be to a revenue growth despite a volume growth this year. So these are two fundamental reasons. And third, I would say, some of the businesses that we thought would start up in the first or second quarter has taken slightly more time to — for us to ramp up and stabilize some of the new businesses. So I think it’s a combination of everything put together. I think so we reduced our guidance of INR15,000 crores. But yeah that number is also dynamic.

If he — as mentioned by Mr. Lall if we get to customers in place and the production for mobile start in Q4, the numbers can be potentially slightly higher, but, yes, we don’t want to commit on those numbers. Second the margin, yeah margin, I think so, we still feel that it should be somewhere in the range of 3.8% to 4%. On a conservative basis side, I think so, we are keeping a margin of 3.7%, 3.8% because there are lot of moving parts right now in the business.

Atul Lall — Vice Chairman and Managing Director

So, also as Saurabh just explained, let me illustrate the TV business. In the last quarter, the volume has grown from 7.2 million, 7.3 million — 7.3 lakhs to almost 11.5 lakhs, that’s 54% growth. But the value growth has only been 3%. Now there are certain — these are the moving parts in business which are beyond our control. So that’s the reason in any case as Saurabh was sharing, we had corrected our guidance to this number of INR15,000 crores in the first quarter itself, in the opening of the second quarter, yeah. And the margin is dollar depreciation, margin impact is because of the product mix, combination of various factors.

Gopal Nawandhar — SBI Life Insurance Co. — Analyst

Okay, sure sir. And so earlier in the call also, we said we’ll give more color in the coming months about revenue guidance and all. So there, is it like upside on the revenue or there can be further downside to INR15,000 crore?

Atul Lall — Vice Chairman and Managing Director

So just wait for two to three weeks, we are in the process of concluding certain contract.

Gopal Nawandhar — SBI Life Insurance Co. — Analyst

Okay.

Atul Lall — Vice Chairman and Managing Director

We are very optimistic when concluding, but there can always be a slip between the cup and the lip, so wait for some time.

Gopal Nawandhar — SBI Life Insurance Co. — Analyst

Sure sir. And the second question is on the margins for home appliances business. So these two make 11.5% to 12% margins, obviously it has been improving for last couple of quarters. But, by when should one expect a double-digit margin for this segment? Because even earlier we were giving some indication of margin improvement because of FATL coming and mix improving. So if you can just give you a —

Atul Lall — Vice Chairman and Managing Director

Huge ramp-up — commercial production has already started.

Gopal Nawandhar — SBI Life Insurance Co. — Analyst

Okay.

Atul Lall — Vice Chairman and Managing Director

As we stated in our remarks that we have already reached 20,000 to 23,000 per month kind of level. But still the capacity is being utilized only at 40%, 45%. It’s going to take some time to reach a capacity utilization of 70%, 8%, which might take three to four quarters more because new customer acquisition is a long-drawn process, there are technical approvals, technical audits, some new tooling. So I think further expansion, some minor expansion and operating margin in washing machine might take place in quarter or two. But to go back to a double-digit number, would take three to four quarters.

Gopal Nawandhar — SBI Life Insurance Co. — Analyst

And sir, how should one look at mobile division margins? Should it be in the similar range of 2.7% to 3% or there is a scope for further improvement?

Atul Lall — Vice Chairman and Managing Director

No, as of now they’re going to be in similar range.

Gopal Nawandhar — SBI Life Insurance Co. — Analyst

Sure, sir. Thanks a lot.

Operator

Thank you, sir. We take the next question from the line of Mr. Bharat Shah from ASK Investment Managers Limited. Please go ahead, sir.

Bharat Shah — ASK Investment Managers Limited — Analyst

Yeah, hi. Two questions. One, given the way there has been roll off moving parts and operating change in the environment. And given the kind of business that we manage with long supply chains and deferring products, multiple centers at which we need to do our manufacturing. Earlier, so far, not probably fully reflected our potential and I suppose in Q2 we’d agree with that. Can we say now finally in terms of the size of opportunity, the way of operating teams have been set up, the benefit of PLI, the contracts that we have with our clients. And despite what is still remaining a very difficult and volatile world that we know, overall, we — can we say this quarter is kind of a departure into the kind of Dixon that we wanted to be and the strength at which it is supposed to perform? In other words, would you say that, we are kind of out of the kind of a little [Indecipherable] we were stuck in for variety of reasons, some internal, many external, but probably despite some of those factors remaining, is the current quarter period of now departure into a far more robust slip [Phonetic] in Dixon?

Atul Lall — Vice Chairman and Managing Director

So Bharatji, undoubtedly, last few quarters, you’re very correctly stated that largely due to the external factors, some more to the internal factors were challenging. However, I think internally the team has done well, executing some large projects, expanding our capacities, expanding our design capabilities, rolling out new factories, becoming an ODM player in televisions, getting into the verticals of telecom devices and doing it well, getting into the vertical of hearables and wearables and ramping up well, new talent acquisition, migrating to JDM/ODM in the business of televisions. So I think these are very significant positives. Correcting the stress that we have had in the washing machine margins, good rollout of FATL as a vertical, similarly, lighting in which we had lot of challenges is on a correction path. So I think those have been very significant positives.

Now have we covered the complete ground? I would say that we have covered 70%, 75% ground. There are certain large opportunities for which one has to, close some more large contracts particularly in this phase of mobile, which one is fairly confident of correcting. So one — once we have that then undoubtedly we are at mix level of stability, of which I’m confident that we’ll be able to [Indecipherable]. On a medium-to-long term basis, undoubtedly, the opportunities among with — the kind of opportunities that are in front of us. And also we feel that we have the bandwidth and we are at an inflection point for that kind of growth. So that I’m very candidly sharing my viewpoint and thoughts on this.

Bharat Shah — ASK Investment Managers Limited — Analyst

Sure. I appreciate Atulji. The second question, Saurabh mentioned that in couple of years’ time, we should be touching return on capital employed of 40% if not higher. Structurally over the years, I have — in many introductions, I have consistently heard that 40% or higher is something which is within the connected infrastructure of progressiveness in the way we done the business model. Of course due to very difficult volatile period of last couple of years, things have been different, we understand that. But these attainment of 40% now in couple of years you see is reasonable degree of certainty or it is still subject to kind of imponderables?

Atul Lall — Vice Chairman and Managing Director

So Bharatji, see, lot of capex has been front-ended, for example, mobile, FATL brand, refrigerator, telecom devices, backward integration piece of lighting. A lot of capex has already been made. And in the current fiscal also, almost, INR330 odd crores, INR340 odd crores of capex is going to be made out of which INR185 crores has been made. And in spite of this capex particularly in the current fiscal, the borrowing both at gross and net level has come down. And ROCE has improved by almost 250 bps. We feel that now we have to sweat those assets. And as Saurabh shared in his response, that these are all high asset turn businesses by nature and the DNA of what Dixon is all about, we are extremely focused on our working capital intensity, on our operating cycle and current assets.

So one feels confident that in the existing canvas [Phonetic] business, our aim of touching a 40% ROIC, is very much achievable, possible and we are committed to it. However, I’m not talking about the moving parts or challenges that any business environment can have, that is something separate. This particular industry of our electronics manufacturing is on a high growth path. So if a large opportunity comes and it requires another round of capex, then we’ll not shy away from it. Then again the ROIC can be impacted for triggering the next round of growth. However, with the same canvas in which we are playing the game at present, we are fairly confident.

Bharat Shah — ASK Investment Managers Limited — Analyst

Sure. And basically, our size and scale will improve and therefore operating leverage will kick in that in turn should improve our margins plus the kind of mix of the business, with our own design or pure manufacturing also further should improve our margins. And therefore, will the principal source of improvement in return on capital employed will be the margins led by operating leverage or in addition margins which will generally improve due to the less hostile raw material in other situation, plus improvement in the working capital efficiency. So will all the levers are expected to work in this assumption or what is the principal assumption we are making is a source of improvement in return on capital employed?

Atul Lall — Vice Chairman and Managing Director

So it will be a combination of everything, you have absolutely put it right. So on the numerator side or the earning side, yes, it will be a combination of operating leverage kicking in. Also absolute ODM revenues going up so the margin increase happening on account of the ODM migration to our own design solution, because it is strategy to migrate more and more to our own design solutions in every category. Third, we are committed to do more and more backward integration in each of the verticals so that should lead to margin expansion.

On the denominator side, yes, the verticals that we’ve added, so just to give an example, mobile we have already done a capex of INR200 crores, so a lot of capex has been front loaded and there is a significant focus on managing the working capital. So on the denominator side, it will be a combination of better working capital management. Yeah. And also since a significant portion of capex has already been done on the opportunities that exist today.

Bharat Shah — ASK Investment Managers Limited — Analyst

Sure. Thank you, Atulji. Thank you, Saurabh.

Atul Lall — Vice Chairman and Managing Director

Thank you, sir.

Saurabh Gupta — Chief Financial Officer

Thank you, sir.

Operator

Thank you very much, sir. We take the next question from the line of [Indecipherable] from Metaverse Equity Fund. Please go ahead sir.

Unidentified Participant — — Analyst

Yeah. Good afternoon. Thanks for the opportunity. So, sir, my question is what demand trajectory in different verticals you’re expecting in next financial year? And do you feel it will be hampered due to global uncertainty?

Atul Lall — Vice Chairman and Managing Director

So, what we feel is, there is definitely a positive outlook in the vertical of television because of Google opportunity. I have already shared in response to my — to the earlier question on home appliances that it’s going to be a normal growth of around 10% to 12%. And which is going to come mainly from FATL as a category. In mobiles, we are working on new customer acquisition which I have just shared that we are fairly confident of concluding soon, so that will be a significant trigger. Existing businesses of CCTV is again going to see normal growth, we’re expanding a capacity there. Lighting, let’s just wait and watch because at present, largely our businesses in the domestic side which is having a normal growth. In that, we’re adding new product portfolios in ceiling lights and strip lighting which is going to give us growth in that business.

New verticals, undoubtedly are going to be high-growth area for us because the base is a small, namely the hearables, wearables, telecom devices. And we feel that by Q3 of next financial year, we are also going to have the commercial production started for the refrigerator project. So it’s difficult to put a number form, but this is the [Indecipherable] of growth one foresees.

Unidentified Participant — — Analyst

Okay, sir. Thank you and best of luck for the future endeavors and Happy Diwali.

Atul Lall — Vice Chairman and Managing Director

Happy Diwali.

Saurabh Gupta — Chief Financial Officer

Happy Diwali.

Operator

Thank you, sir. We take the next follow-up question from the line of Mr. Gopal from SBI Life Insurance. Please go ahead, sir.

Gopal Nawandhar — SBI Life Insurance Co. — Analyst

Hi, sir, thanks again. So if you can just give some color on this Xiaomi related issues on the Sigma [Phonetic] side and all. Does it have any impact on Dixon’s television business? And second is, on the competition side, we’ve seen lot of companies investing into television manufacturing in India, so does that have any risk to our customers?

Atul Lall — Vice Chairman and Managing Director

So on Xiaomi side, there are large, large customers. And 95%, 98% of the requirement is done by Dixon. The developments happening on their regulatory front undoubtedly we were also concerned. I personally had deep dialog with the India leadership team and also Beijing leadership team. They’ve repeatedly assured me that there is no impact on their India business. The budget forecasting and the business that we have done till now there has been no impact, there has been no impact on the payment or lifting of the stocks. In fact, they’re revising upwards their forecast for coming quarters. So that’s the insight I have. However, it’s a large disruptive development for any conglomerate. So I don’t have any insight but this is the status of our current business.

Responding to your next question of competitive intensity, yeah, undoubtedly the competitive intensity is increasing. And Dixon has to and is gearing up for meeting their competition. So one is the capacity which generates an operating leverage for us. Second is the deepening of manufacturing and backward integration. So we will be and we already are the most backwardly integrated plant. Third is, owning the design. So in this year itself, almost 25% to 30% of our manufacturing in television it’s going to be Dixon Design Solutions. This enhances the stickiness with our customers. Fourth is, owning the Google Android license. This gives us a much larger leverage because no other ODM player in India has that license.

Next is that as on date, we are much ahead of our competition. We’re at least 2.5 times to 3 times the number two player and. I think almost 6 times the number three player. So we have that advantage. But yeah of course, we are in a good position, but the hubris should not set in and we have to keep on working, to keep on satisfying and adding value to our customers, so that we enhance this stickiness. That’s it.

Gopal Nawandhar — SBI Life Insurance Co. — Analyst

Sure sir. Thanks a lot.

Operator

Thank you. Ladies and gentlemen, that was the last question for the day. I now hand the conference over to the management for closing comments.

Atul Lall — Vice Chairman and Managing Director

So thank you very much for participating in this call and wish you all a very, very Happy Diwali. Thanks once again.

Saurabh Gupta — Chief Financial Officer

Thank you very much. Happy Diwali to everyone.

Atul Lall — Vice Chairman and Managing Director

Thank you.

Operator

[Operator Closing Remarks]