Dixon Technologies (India) Ltd IPO - Should you subscribe?

Hello fellow investor...!!

Two mainstream IPOs have opened on the same day viz. SREI Infrastructure finance company promoted Bharat Road Network Limited and electronic items manufacturer Dixon Technologies. Both companies have attempted to take the advantage of current bull IPO market. BRNL is a loss making company and has no attractive figures in its balance sheet. From the date of its news of IPO, there were no positive vibes over its success among the trade Pandits and investors.

Read full review of Bharat Road Network Limited here: BRNL IPO Review

Here, we shall discuss about Dixon Technologies (India) Ltd

Overview of the company

Dixon Technologies is the largest home-grown design-focused and solutions company engaged in manufacturing products in the consumer durables, lighting and mobile phones markets in India. Its diversified portfolio includes;
1. Consumer electronics like LED TVs
2. Home appliances like washing machine
3. Lighting products like LED Bulbs and tube lights, down lighters and CFL Bulbs
4. Mobile phones
It also provides solution in reverse logistics i.e. repairs and refurbishment services of set top boxes, mobile phones and LED TV Panels.

It's a fully integrated end-to-end product and solution suit to Original Equipment Manufacturers ("OEMs") ranging from global sourcing, manufacturing, quality testing and packaging to logistics. It's also a leading Original Design Manufacturer ("ODM") of lighting products, LED TVs and semi - automatic washing machines in India. As an ODM, it develops and designs products in-house at its R & D Centre. It manufactures and supplies these products to well known companies in India who in turn distribute these products under their own brands.

Year 1993 - Dixon Technologies was incorporated

Year 1994 - Commencement of manufacturing of consumer electronics such as colour television

Year 2007 - Commencement of manufacturing of LCD TVs

Year 2008 - Entry in lighting business, manufacturing of CFL Products. And also started reverse logistics services 

Year 2010 - Commencement of manufacturing of LED TVs and semi - automatic washing machines

Year 2016 - Manufacturing LED lighting business

Issue details

Date of issue opening	06-Sep-17
Date of closing issue	08-Sep-17
Issue Price	INR  1760 - 1766
Market Lot	8
Tentative date of listing	18-Sep-17

30,56, 675 shares are being sold by existing shareholders. Proceeds from this will not be received by the company

Object of the fresh issue

The company proposes to utilise the net proceeds towards funding the following objects

1. Repayment/Pre-payment in full or part, of certain borrowings availed by our company
2. Setting up a unit for manufacturing of LED TVs at the Tirupati facility
3. Enhancement of its backward integration capabilities in the lighting products vertical at its Dehradun I facility
4. Upgradation of the information technology infrastructure of the company and
5. General corporate purposes

Should you subscribe? The answer is "NO"

This IPO should be avoided. I've listed the four main reasons why this IPO will not leave much on the investors plate.

Utilisation of net proceeds

The company has mentioned that it will utilise the proceeds for different objects. Out of 600 Crores will be garnered from the investors, 539.08 Crore will be taken by selling shareholders home(Offer for sale portion). Only 49.07 Crore will be utilised for other purposes. The following is the expected utilisation of proceeds from fresh issue

Objects	Rs (In Cr)
Repayment/pre-payment, in full or in part, of certain borrowings availed by our Company	22.00
Setting up a unit for manufacturing of LED TVs at the Tirupati Facility	7.58
Finance the enhancement of our backward integration capabilities in the lighting products vertical at our Dehradun I Facility	8.86
Upgradation of the information technology infrastructure of our Company	10.63
Total	49.07

The above objects are set to attract investors. What expansion can be done in 27.07 Crore which will help to boost the EPS?

Overpriced shares

Price range set is too high. This company is no such big brand or have goodwill to ask for such hefty premium. If we compare consolidated diluted EPS (Rs. 46.42)  with higher and lower band price (Rs. 1760 - Rs. 1766), PE Multiple comes to around 38.08 to 38.21. If we see the track records and its profit margin, such price is too high to justify 38.21 PE Multiple. Its consolidated PAT is hardly 2.05% of revenues. Its RoNW gone down from 34.66% in Fiscal 2016 to 25.48% in Fiscal 2017. Promotors and existing shareholders are exploiting the current bull sentiments of IPO market. The reasonable price of this share is around Rs 1050 - Rs. 1150.

One year ago, precisely on 27th August 2016, Dixon Technologies had issued shares to IBEF & IBEF I at Rs. 290.66 per share on compulsory conversion of convertible debentures. This Rs. 290.66 share is being sold at Rs. 1766. The following shares were issued at much lower rate than offer price.

Date	Particulars	No of shares	Per share (Rs)	Reason
27-Aug-16	IBEF I and IBEF	12,90,041	290.66	Conversion of compulsory convertible debentures
17-Sep-16	Various Employees	1,77,380	119	ESOP
17-Sep-16	Various Employees	1,37,426	290	ESOP
20-Sep-16	Existing shareholders	62,77,337		Bonus(Free of cost)

Under utilisation of capacities

The company has mentioned that it shall utilise its proceeds for setting up a manufacturing facility at Tirupati for LED TVs. However, its existing capacities are under utilised under all business verticals. What will happen if it expands at Tirupati, is it just because to avail tax benefit? The following is the actual vis-à-vis installed capacity at Noida & Dehradun units.

	Installed Capacity (Per Annum)	Sale for 16-17	% of capacity utilisation
Consumer Electronics
LED TVs	12,00,000	7,47,383	62%
Lighting products
LED bulbs	1260,00,000	503,03,492	40%
Downlighters	12,00,000	4,39,912	37%
Tubelights and battens	36,00,000	6,76,834	19%
LED drivers	60,00,000	25,44,909	42%
CFL lamps	480,00,000	264,94,167	55%
Electronic ballasts	156,00,000	112,87,347	72%
Others (CFL PCB, Deco lamp)	600,00,000	108,46,099	18%
	2604,00,000	1025,92,760	39%
Home Appliances
Washing machines	5,50,000	3,76,842	69%
Mobile phones	100,80,000	34,76,423	34%
Reverse logistics
Set top boxes	24,00,000	13,25,186	55%
Mobile phones	12,00,000	78,702	7%
LED TV panels	60,000	4,586	8%

The company has no orders in its books. Its capacity remains idle. Further, at Dehradun unit, tax benefits will expired in Fiscal 2020. After that, the company has to pay taxes on its profits from Dehradun unit.

Limited customer base

The company has very limited customer base. Major five customer covers 82.94% of revenue from operations. The company is incompetent to bring more customers on table to optimally utilise its idle capacities.

Main customers	% of revenue 31.03.17
Panasonic India Pvt Ltd	38.46
Philips Lighting India Ltd	20.2
Gionee	16.57
Reliance Retail Ltd	3.28
Intex Technologies (I) Ltd	4.43
Total	82.94

From the above statistics, prima facie, it seems that Dixon is not the mainstream vendor of its customers. More problematic thing is that company has no wide customer range. Any of top three customer is lost, company's performance may go down exponentially. The electronic items business is very much dependent on technology. If any of the customer gets upgraded technology at cheaper price from other vendor, there are chances of losing the business. And top of that, this company is much behind in technology upgradation.

Conclusion

No matter at what level the fundamentals are looked into. The market is driven by the supply and demand, and bull rally archology.

I would recommend to AVOID this IPO to save your hard earned money.


Thank you for reading...Jai Hind

CA Prashant Seta
Vadodara. Gujarat. India

(Note : The above opinion is based on my knowledge and understanding, you should do your own research before investing)