Dixon Technologies India Ltd Q4 FY22 Earnings Conference Call Insights

Key highlights from Dixon Technologies India Ltd (DIXON) Q4 FY22 Earnings Concall

Q&A Highlights:

 Bhoomika Nair – DAM Capital – Analyst

• The mobile business is looking at a very sharp ramp up. Talk about the ramp up in Motorola specifically and is it scaling up right now?

Saurabh Gupta – Chief Financial Officer

• Motorola volumes are ramping up and touched closer to a level of 4 lakhs.
  • Expects monthly volume to go to around 5 lakhs.
• Has a Motorola order book of almost 1.5 million in the next quarter.
• Ramp-up is at a faster pace now.
• A significant portion of INR3,000 crore mobile and EMS division revenue has come from the mobile business, which should translate into almost INR7,000-7,500 crores revenue this fiscal year, significantly led by Motorola as anchor customer.
  • 60% of the proceeds from Motorola will be exported to North America markets.
• Added customers like Nokia and Itel.
  • Both have a decent market share on the 2G phone side.

Bhoomika Nair – DAM Capital – Analyst

• Is Samsung looking to scale down their feature phone business?

Saurabh Gupta – Chief Financial Officer

• Samsung should exit the feature phone business either by December or March this financial year.
• Samsung are reducing their feature phone volumes, but at the same time, they’re increasing their smartphone volumes with Dixon Technologies as revenue and profitability on a smartphone is much, much higher than what Dixon Technologies are making on a feature phone.

Atul B Lall – Managing Director and Vice Chairman

• On the smartphone side, Dixon Technologies are in an advanced stage of discussion with one of the largest global brands operating in India and successfully qualified the technical audits.
  • Awaiting commercial negotiation to be launched very shortly.
• Assures that Mobile vertical is going to be the largest growth trigger for Dixon Technologies in the coming years.

Bhoomika Nair – DAM Capital – Analyst

• Washing machine volume outlook in FY23?

Atul B Lall – Managing Director & Vice Chairman

• Budgeting 1.6 million in the current fiscal.
• Budgeting 289,000 from fully automatic top loading.
• Combined figure is almost 1.9 million, a significant increase from 1.1 million of last year.

Bhoomika Nair – DAM Capital – Analyst

• When will margins be back to double-digit profile or closer to 9% to 10% range?

Atul B Lall – Managing Director & Vice Chairman

• Worked on cost optimization and been able to partially pass on cost increases to customers.
• Since it is a challenging environment, not possible in the current fiscal to be back to double-digits, but there will be some improvement from the existing operating margin levels.

Bhoomika Nair – DAM Capital – Analyst

• Is demand still holding on or just purely driven by new client additions?

Atul B Lall – Managing Director & Vice Chairman

• It is a combination of getting larger share of existing customers’ wallet and new customer acquisitions.
• Order book looks healthy.

Aditya Bhartia – Investec – Analyst

• What’s the reason for disappointing Lighting business growth in the last couple of quarters?

Atul B Lall – Managing Director & Vice Chairman

• Saw significant headwinds in last two quarters.
  • Significant cost optimization exercises yielded minor improvement.
• Has good order book, but unable to pass on inflation cost to the customers.
• Somewhat been able to pass that in the last quarter and the current quarter.
• Will see some improvement in the current quarter, but going to take a couple of quarters to come back to the original levels of 8.5%, 9%.

Aditya Bhartia – Investec – Analyst

• Is the lackluster lighting business revenue growth due to the market itself slowing down significantly, especially for bulbs?

Atul B Lall – Managing Director & Vice Chairman

• Market indeed has slowed down and does not see very significant volume growth in this particular vertical.

Aditya Bhartia – Investec – Analyst

With expansion done on the downlighters and batten side, what is the traction?

Atul B Lall – Managing Director & Vice Chairman

• There will be improvement in battens and downlighters in the forthcoming months.
• LED bulbs would be constant.

Aditya Bhartia – Investec – Analyst

• What does the ODM part of the business entail in TVs given that lot of components still would need to be imported and what could that really mean for margins?

Atul B Lall – Managing Director & Vice Chairman

• Working on four SKUs.
  • First two are 55 inches Ultra high-definition and 43 inches Ultra high-definition where technology is from Samsung and other mechanicals are by Dixon.
    • This product has already been launched and commercial production has started just last week.
  • Next two solutions, 32 inches and 43 inches HD, everything is Dixon’s offering.
• Grew from 2.7 million to almost 3 million in the last fiscal.
  • Targeting almost 4.2 million in the current fiscal when the market is not exactly growing.

• Expects margins to expand a bit.
• Believes that a quarter or so is needed to ramp up and stabilize margins.

Renu Baid – IIFL – Analyst

• Any issues from DIXON’s largest customer in the segment after some actions were taken by the government against them?

Atul B Lall – Managing Director & Vice Chairman

• Large anchor customer was a setback, but sees no change in their forecast plan, which continues to be at 1.8 million, 1.9 million in the current fiscal year.
• No impact on current assets.
• Payments are coming in smoothly.

Renu Baid – IIFL – Analyst

• How are the margins and profitability on the washer portfolio?

Atul B Lall – Managing Director & Vice Chairman

• Operating margins are going to be in similar range as semi-automatic, slightly better than that.

Sonali Salgaonkar –  Jefferies – Analyst

• Guidance for revenue and margin at this point for the coming 1-2 years?

Saurabh Gupta – Chief Financial Officer

• High growth vertical will be mobile this year.
• For FY ’23, expects 55% to 60% growth from revenues delivered in FY ’21-’22, significantly led by mobile business and expects operating profit margin profile of somewhere between 4% to 4.25%.

Sonali Salgaonkar –  Jefferies – Analyst

• Growth outlook for mobile vertical in FY23?

Saurabh Gupta – Chief Financial Officer

• Has the potential to go to almost INR7,000 crores, INR7,500 crores for this year.

Sonali Salgaonkar –  Jefferies – Analyst

Any change in CapEx guidance?

Saurabh Gupta – Chief Financial Officer

• Expects FY ’22, ’23 CapEx of around INR340-odd crores.

Sonali Salgaonkar –  Jefferies – Analyst

• From April, what price hikes have been taken on average in ODM?

Saurabh Gupta – Chief Financial Officer

• For washing machines, been able to get a hike of almost 1.75% to 2%.
• On lighting side, been able to get a hike of 1% to 1.5%.

Onkar Ghugardare – Shree Consultancy – Analyst

• What is the comfortable level for the management in terms of debt-to-equity or debt-to-EBITDA?

Atul B Lall – Managing Director & Vice Chairman

• At a net debt-to-equity level of 0.1, believes these are good comfortable levels to be maintained.
• Expects that as the profitability and cash flow improves, debt levels should see a reduction this year.

Onkar Ghugardare – Shree Consultancy – Analyst

• Apart from mobile phones, where is the larger opportunity in terms of revenue, and translating into margin.

Saurabh Gupta – Chief Financial Officer

• Apart from mobile, it will be TV business.
• Lighting revenue should see major growth.
• Washing machine revenue should increase from INR700-odd crores to almost INR1200 crores this year.

Atul B Lall – Managing Director & Vice Chairman

• TWS production currently at 100,000 per month.
  • Within the next three months, targeting 1 million a month.
  • Within the next five to six months, targeting 2 million a month.
• Outlook for ONTs and set top box from Airtel is very, very huge and production has just started.
• Commercially launched DC refrigerators, which at peak is going to be almost INR1,000 crores or INR1,200 crores.

Onkar Ghugardare – Shree Consultancy – Analyst

• Is management thinking about at least roughly around 25%, 30% kind of growth?

Atul B Lall – Managing Director & Vice Chairman

• Yes, really confident about it.

Onkar Ghugardare – Shree Consultancy – Analyst

• Will DIXON be comfortable holding on to these margins or better the margins as time goes?

Atul B Lall – Managing Director & Vice Chairman

• It’s going to be a combination of fators:
  • Maximum growth is coming from prescriptive business in which operating margins are in 2.5% to 3%, 3.5% range.
  • New vertical of refrigerators and the expanded volume of washing machine is the ODM business where margins are going to be higher.

Dhruv Jain – Ambit Capital – Analyst

• In the mobile business, other than Motorola, what is the revenue contribution from other customers?

Saurabh Gupta – Chief Financial Officer

• Out of this INR7,000 crores, INR7,500 crores, INR1,000-odd crores are from other customers.

Dhruv Jain – Ambit Capital – Analyst

• Cause of the sequential decline in the consumer electronics TV business?

Saurabh Gupta – Chief Financial Officer

• It’s majorly led by the drop in the average selling prices across DIXON’s portfolio.

Onkar Ghugardare – Shree Consultancy – Analyst

• With the kind of debt levels Dixon is sitting on, is it looking to raise any equity?

Atul B Lall – Managing Director & Vice Chairman

• No plans to raise any equity.

Onkar Ghugardare – Shree Consultancy – Analyst

• Is Dixon looking to get into the AC business?

Saurabh Gupta – Chief Financial Officer

• No plans to get into the AC business.
• Idea is to focus and consolidate existing and new verticals.

Onkar Ghugardare – Shree Consultancy – Analyst

• With 22% ROE and almost 25% ROC, what kind of expansion in all those verticals?

Saurabh Gupta – Chief Financial Officer

• Historically been maintaining 30% plus ROC and 24% plus ROE.
• Will take at least three, four quarters to go back to those levels, maybe slightly earlier.

Onkar Ghugardare – Shree Consultancy – Analyst

• What would be the comfortable level for cash conversion cycle?

Saurabh Gupta – Chief Financial Officer

• Around 90 days is a comfortable position.

Onkar Ghugardare – Shree Consultancy – Analyst

• Are all the problems regarding shipments and chip shortage behind us?

Saurabh Gupta – Chief Financial Officer

• Freight and logistics costs have come down from the peak level significantly and Dixon is passing on more and more price increases to its customers.
• As of now, the situation is in control.
• Not facing any chip issue right now.