Strong topline growth but margins affected the bottom line severely | Dixon Technologies Q3 FY22 Conference Call Highlights

• Revenue of Rs 3,073 Cr (40.8% YoY, 9.6% QoQ). Gross margin was down 120bps YoY at 8.4%. EBITDA came in at Rs 103 Cr (+2.5% YoY, -6.4% QoQ) with EBITDA margin of 3.4% (-120bps YoY). PAT at Rs 46.4 Cr (-24.7% YoY and -26% on QoQ).  
• The demand was robust but impact of inflation and omicron wave had an impact. The margins were affected due to lag in passing of increased commodity prices, freight costs, change in sales mix as mobile business has come into prescriptive business.
• LED TV volumes declined by 8%, LED bulbs were flat on y-o-y basis. Battens rose 73% to 78 lakhs, downlighters rose 69% to 23 lakhs. Home appliance volumes increased 27% y-o-y to 3.1 lakh. Smartphone volumes were 32 lakhs versus 3 lakhs. 2G feature phone volumes declined to 39 lakhs from 61 lakh. CCTV (17.5lakh) and DVR (3.8 lakh) volumes were up 90%. Set top boxes volume were 6.5 lakh.
• Consumer electronics: Revenues in this segment grew by 3% y-o-y to Rs. 1410 crores. TV volumes reduced to 8.3 lakh versus 9 lakh in Q3FY2021 but pricing led growth led to marginal 3% growth. Operating profit declined by 24% y-o-y to Rs. 30 crores. It has 5.5 million sets capacity catering to 35% of Indian capacity. The company is making investment in injection moulding equipment which is expected to be operational by Q1FY23 end. Company has a huge order book for LED TVs from global brand for which production is expected to start from May 2022. The LED monitor trials have concluded and commercial production is expected to start by April 2022. The volume in year 1 is expected to be 5 Lakhs which will be significantly scaled up in year 2.
• Lighting: Revenues were up 23% y-o-y to Rs. 430 Cr, while operating profit declined by 16% y-o-y to Rs. 28 Cr. The margins are expected to improve in Q4 and go back to normal in Q1FY23. It has an LED bulb capacity of 300mn which is 50% of Indian requirement. The capacity of battens is 5 million versus India’s requirement of 9 million. Downlighters’ capacity is 1.5 mn/month which is 50% of Indian requirement. The R&D department is working on decorative lighting and cost-effective solutions. It has received PLI approval for which Rs. 100 crores would be invested over 5 years.
• Home appliances: Revenues were up 56% y-o-y to Rs. 115 Cr while operating profit was up 3% to Rs. 11.7 crore. It has 2.4 million annual capacity of semi-automatic washing machines. Dehradun facility would commence from Q1FY23. The fully automated washing machine facility at Tirupati having capacity of 0.6 million has started production for Bosch.
• Mobile: Revenues grew to Rs. 940 Cr versus Rs. 299 Cr in Q3FY21. Under PLI, the revenues for mobile is expected to be Rs. 2500 crore which will be much higher than Rs. 4,000 Cr for FY2023. Set top box revenues were Rs. 70 crore and medical equipment Rs. 0.5 crore. In Q4, it would have 1.2 million order book which would be 1.6-1.7 million starting Q1FY23. It would start manufacturing feature phone 0.5mn/month for Nokia from Q1FY23. The company added a customer, Itell, in feature phones. It has taken 2 lakh square feet land in Noida for mobile manufacturing. The company manufactured 6.5 lakh set top boxes with revenues of Rs. 70 crore and OPM of 2.3%. Security equipment revenues grew to Rs. 113 Cr from Rs. 55 Cr in Q3FY2021. The operating profit grew to Rs. 4.7 crore from Rs. 1.9 crore. It is expanding capacity from 10 million to 14 million by Q1FY23.
• Laptops, IT & IT hardware: Manufacturing for ACER started in December 2021. The JV for telecom and network trial runs are underway and commercial production is expected to start from next quarter. The company’s share in Inverter controller board for investment in PLI is Rs. 20.4 crore.
• Capex: The company did capex of Rs. 280 Cr in 9MFY22 and would further do Rs 80-90 Cr in Q4. For FY22 the capex is expected to be Rs. 370-380 Cr in mobile, consumer electronics and acquiring land parcels. FY23 capex would be around Rs. 225-250 Cr. The net debt currently is at Rs. 100 Cr and is expected to be Rs. 100-125 Cr by March 31, 2022.
• Outlook: The company remains positive on demand. The margin should go back from FY2023. A shift in the sales mix towards the prescriptive business would lead to lower margins than 5% going ahead. However, return ratios and asset turnover will improve significantly. Over the next three years, RoCE would go to 40% from currently 30%.

Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell stocks or MF.

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