Dixon Technologies Explained: Revenue and Red Flags

In the past 5 years, Dixon Technologies Limited has been a popular stock. With an approximate compounded sales growth of 43% and profit growth of 42%, Dixon has shown great potential.

So, it's surprising that 20% of the 30 analysts covering the stock gave it a “sell” rating.

Dixon is an Electronic Manufacturing Services (EMS) company. Its product offerings range from home appliances to lighting and from consumer electronics to Closed-Circuit Television Cameras (CCTVs), with an added sprinkling of mobile phones.
 
Should you throw in your lot with the 60% of analysts who maintain their buy rating for Dixon?

This also raises the question of whether Dixon has fallen into the red flag category of stocks or not. Let’s find out.

What's Happening with Dixon Technologies?

Dixon’s finances have recently been giving some mixed signals. So, if you are wondering what's happening, you are not alone.

The analysts must have reasons for their divided stand, such as:

1. Due to a change in revenue structure, its Profit Before Tax (PBT) margin was reduced from 3.7% in Q4 FY23 to 2.8% in Q4 FY24.

The share of its mobile and EMS businesses increased to 66% in Q4FY24, a whopping rise from 46% in Q4FY23. 

2. Dixon's executive chairman and promoter, Sunil Vachani, has been selling off his stake in the company. He held 33% shares but now holds only 6%.

This feels like he might be losing faith in Dixon’s business model.

3. Dixon is booking its revenues earlier than its peers. In FY24, trade receivables and trade payables formed 13% and 23% of Dixon’s sales in 2023-24, respectively.

That’s a little suspicious as it indicates that a lot of its business is based on credit.

4. Dixon has a history of being the subject of frequent search investigations. The most recent one was in 2024, when the Directorate of Revenue Intelligence (DRI) searched a manufacturing facility owned by one of Dixon’s subsidiaries.

The DRI was checking if the imported raw materials were rightly categorized, which is important for customs and tax compliance.

Yes, some of these red flags have rational explanations. Sunil Vachani has actually just transferred his shares to his wife and his trust.

But what about the other red flags, like early revenue recognition?

To truly understand what’s going on with Dixon we need to step back and start at the beginning.

Dixon’s Foundation Story

Dixon is 31 years old. It was founded in 1993, and the company started manufacturing colour televisions in 1994. A lot has changed since then.

Dixon’s manufacturing expanded to include:

• CFL lighting and reverse logistics in 2008
• LCD televisions and washing machines in 2010
• Mobile phones in 2016
• Security surveillance systems in 2017
• Medical electronics and set-top boxes in 2020
• Refrigerators in 2023

Dixon operates under a "brand behind brand" philosophy. The company has become an important link connecting end-users and major electronic brands.

Let us get a basic understanding of Dixon’s business strategy:

a. Enter a category: From TVs to phones to washing machines, Dixon is a versatile manufacturer for sure.

b. Create Scale: Dixon scales up its operations with the help of state-of-the-art manufacturing facilities, allowing efficient production of a varied range of products.

c. Increase Backward Integration: The goal is to gain a competitive edge by reducing costs.

To realise this equation, Dixon sources components globally and manufactures key parts in-house. As an added benefit, it also helps maintain quality and control over production processes.

Dixon’s Business Model

When it comes to business models, Dixon is a bit of a multi-tasker. Let’s understand how:

a. Original Equipment Manufacturer (OEM): In this model, Dixon executes the manufacturing. The client decides the look and feel of the product. Dixon sources parts, components and materials to assemble the final product based on the client's specifications.

b. Original Design Manufacturer (ODM): In this model, Dixon handles A-Z of the process. The client simply wants a polished product. Dixon has the flexibility to design it from scratch, choose raw materials and technical specifications.

One company and two business models? The math ain't math-ing, but that's how Dixon rolls.

Dixon enjoys revenues from 5 different streams. ⬇️

As is clear from the infographic above, the majority of Dixon’s revenue comes from its mobile and EMS segments. It might be an indication of overdependence.

Furthermore, Dixon is a major supporter of the government’s Atmanirbhar Bharat initiative. It is a participant in five of the government’s Production-Linked Incentive (PLI) schemes, comprising 38% of the total approved financial outlay.

Electronics Manufacturing (Contract Manufacturing) Industry Overview

The electronics industry is a thriving one, especially in India. The Indian EMS industry is comparatively young. Although it forms only 2-3% of the global EMS market, it is still a key catalyst in the growth of the Indian economy.

Regardless of the growth, India's per capita electronic consumption is as low as a quarter of the global average. Currently, India imports 30% of its total electronics consumption.

The reason why the Indian electronics industry is so fruitful is because India is viewed as a human resource-rich country. There’s no shortage of cheap skilled and semi-skilled labour in India. The median age of the Indian population is 28.7 years, whereas in China/Vietnam, the median age is 37.4/31.9 years.

The government has placed great focus upon it in the past 6 to 7 years. The goal is to make India a top worldwide destination for electronics manufacturing.

In the next 5 years (FY 23-28) it is expected that the Indian electronics industry will experience a CAGR of 22%.

That's an impressive projection. This growth will be led by:

• Given the low penetration levels, local consumption is bound to rise with rising disposable income and changes in lifestyle.
• Technology has been evolving at a rapid speed. The life cycle for electronic products has been becoming shorter and shorter due to this.
• An increase in localisation of components leading to more cost-effective and affordable electronics.
• Changing geopolitical landscape. The “China+1” strategy has made sure that companies diversify their supply chains. The goal is to make India an appealing option for electronics manufacturing.
• The manufacturing process has been transformed by the adoption of Industry 4.0 and automation, resulting in improved productivity and efficiency in the electronics industry.
• The government has implemented many supportive measures to encourage local manufacturing. The Production-Linked Incentive (PLI) scheme is a prime example.

So, it looks like the electronics manufacturing industry has a lot going for it, in terms of growth opportunities and support.

Dixon’s Financials

Let's get to the heart of the matter:

As you can see, Dixon has been on a journey of growth. Even though the operating profit margin of the company has been stuck at 4% for the last three years, it has earned consistently high revenues and Profit After Tax (PAT) in the last five years.

Let us understand why Dixon’s performance has been impeccable in the past 5 years.

The company has added a few key clients and has increased its revenue from its existing client base.
Here are the big wigs Dixon works with:

At this point, there's one obvious question. If Dixon’s client list is filled with industry titans, if its financial performance has such a great track record and if it has such diversified revenue streams, then why did its profit percentage go down? 📉

The rising dependency on the mobile and EMS sector is the key reason. The mobile and EMS sector is associated with low profit margins impacting Dixon’s overall profitability.

Peer Comparison

With the government’s absolute support in the form of PLI and Make-In-India schemes, the EMS sector has been experiencing favourable winds, which have brought rising sales and profits for Dixon and its peers.

An interesting point to note is that Dixon’s operating profit margin is much lower compared to its competitors.

Being a Business-to-Business (B2B) focused EMS player means slim profit margins. As you can see, two of the companies with the lowest operating profit margins are Dixon and Syrma SGS. Both these companies are B2B focused. On the other hand, Kaynes and Amber focus on both B2B and B2C; hence, their operating profit margins are higher.

Dixon dominates over 15% of the feature phones and smartphones market.

It has already started manufacturing laptops for Acer. Dixon will soon start manufacturing laptops for Lenovo too. Acer and Lenovo enjoy a combined market share of 38%. Dixon’s target is to cater to 10-15% of their s requirements.

Dixon also rules over 30% market share in the semi-automatic washing machines segment and 10% market share in the refrigerator segment. It caters to brands like Samsung, Godrej, Voltas Beko, Panasonic, Bosch, Lloyd, Flipkart, Haier, TCL, Reliance, Onida, etc.

Peer Presence in the EMS Space

Comparing Dixon with its peers in terms of market presence.

Dixon’s diversity is lacking in comparison to its peers. As a result it faces high industry concentration risks.

The Bottom Line

Let's wrap it up. The electronics manufacturing (contract manufacturing) industry is growing with the supporting hand of the government.

One would assume that a company in the industry would also flourish. Dixon’s performance, on the other hand, has been less than ideal. There have also been some red flags.

Sunil Vachani’s sudden interest in “transferring”  his shares for succession planning purposes.

The suspicious and aggressive accounting practices of early revenue recognition. The earlier you recognise revenue, the more problematic it is. Early revenue recognition practices are a sign of a potential badmash company.

Not to mention the DRI scrutiny.

We won't tell you if you should invest in Dixon. Buy, hold or sell—that's up to you. But before you make any investment decisions, make sure to get your facts straight. Be on the lookout for red flags and take them seriously.

Disclaimer: The stocks, policies, and companies mentioned above are not recommendations from Finology Insider and should not be considered a substitute for professional advice. We strongly recommend consulting a financial professional or conducting thorough research before making any investment decisions.