Dixon Eyes Rs 25,000-30,000-Crore Revenue From Electronics Incentive Scheme

Dixon Technologies Ltd. expects to earn a revenue of Rs 25,000-30,000 crore from the government’s incentive scheme for large-scale electronics manufacturing after India shortlisted the company for the subsidy programme.

“With the kind of discussions we are having with global brands, this kind of revenue is clearly achievable. And in the next five years, we can easily do Rs 25,000-30,000 crore in revenue,” Saurabh Gupta, chief financial officer at the contract manufacturer of lights, televisions, mobile phones and home appliances for Xiaomi Corp., Samsung Electronics Co. Ltd., Voltas Ltd., LG Electronics Inc. and Foxconn Technology Co. Ltd., told BloombergQuint in an interview.

The company, he said, will reveal its partnerships with global original equipment manufacturers in the next 30-35 days.

India shortlisted 16 domestic and global electronics makers under the performance-linked incentive scheme. Padget Technologies Inc., an arm of Dixon Technologies, is among the five domestic companies shortlisted. Incentives will be provided in each of the next five years for manufacturers opting for the scheme. The country expects production worth Rs 10.5 lakh crore and exports amounting to Rs 6.5 lakh crore over five years by domestic and global companies.

The scheme has a threshold revenue requirement of Rs 500 crore in the first year and incremental Rs 500 crore in subsequent years. The government has also raised the ceiling on revenue to Rs 2,000 crore in the first year and incremental Rs 2,000 crore in subsequent years, capping the maximum incentive that can be paid.

Production To Start In Q4

Dixon Technologies, Gupta said, plans to start production in the fourth quarter of the fiscal ending March 2021. “We have already identified the space in Noida for mobile manufacturing and will start hiring people,” he said.

This comes despite a washed-out first quarter on account of the disruptions caused by the Covid-19 pandemic. Yet, the company hopes to grow its revenue robustly for the full financial year. “The first quarter (ended June) has been a washout. Despite that, the order book has been quite strong in the second quarter and we see that continuing in the third quarter as well,” Gupta said. “We may end up seeing a 10-15% growth.”

The next year, according to him, will see a significant jump in revenue. That’s because “the mobile performance-linked incentive scheme will start accounting Rs 4,000-4,500 crore revenue for us, and the existing business will come back and we will have a normalised year”.

Gupta expects the company’s revenue for 2021-22 to be Rs 10,000-11,000 crore, and then continue to grow at 20-25%, led by the mobile incentive scheme.

Capacity Expansion

Dixon Technologies currently has a capacity to make 11 million mobile phones. It plans to increase this by 16 million in the next two years, taking the total capacity to 27 million.

The performance-linked incentive scheme requires the Indian company to invest Rs 50 crore each year for the next four years, making it a cumulative investment of Rs 200 crore to be eligible for it.

“We think our balance sheet is quite strong and our cash flow generation is healthy right now. There is enough cushion in the balance sheet to raise some debt,” Gupta said. “We won’t be requiring an equity raise for this. We will be funding most of the capex through internal accruals.”

Margin Trend

Contract manufacturing has thin margins.

“Initially we start with low margins and as volumes picks up each year, in line with the ceiling revenue defined by the government, our margin should expand,” Gupta said. “Our margin should also expand in line with operating leverage, and as we get into the backward integration of (manufacturing and assembly) batteries and chargers.”

Dixon Technologies is also looking at backward integration, or self-production, to expand its mobile printed circuit board (motherboard) capacity.

“Since it is a prescriptive business, Dixon will not be putting money on working capital and return-on-capital profile will be very good,” he said. “The asset turn will be very good, almost 40-45 times the asset turn ratio against 13 times we are doing at this time.”

The company’s return-on-capital at present is 32-33%, but will go up to 50-55%, led by mobile contributing 45-50% of the revenue over the next couple of years, Gupta said.

The contribution of mobile in Dixon Technologies’ operating profit, too, will increase from current 8% to 40%. The mobile margins, however, are 200 basis points lower than the company level. If the average margin is 5-5.5% at company level, then mobile margin will be 3-3.5%, he said.