Dixon Technologies Remains Optimistic Despite Dented Q1 Margin
A deadlier second wave of the Covid-19 pandemic and higher commodity costs hurt Dixon Technologies (India) Ltd.’s margin in the quarter ended June, according to its Chief Financial Officer Saurabh Gupta.
“We didn’t cut down on costs this time as opposed to what we did in the first wave. So there was a significant adverse operating leverage that kicked in because there was hardly any volume in some of the verticals,” Gupta told BloombergQuint’s Niraj Shah in an interview.
“Commodity costs continue to be high. The supercycle started last November and is still continuing,” Gupta said. “Though we have been able to pass most of it to our customers, it still impacts us, especially our original design manufacturing business.”
And almost 68% of the revenue came from prescriptive LEDs, or where design is provided by original equipment makers. Gross and Ebitda margins in the segment are lower than other lighting and washing machines designed by Dixon Technologies, he said.
Dixon, a maker of lighting, televisions, mobile phones and home appliances for Xiaomi, Samsung, Voltas, LG, Flipkart and Foxconn, saw its margin contract to 2.6% in the quarter ended June from 3.8% in the previous three months. Its revenue declined 11.5% sequentially to Rs 1,867 crore. Profit after tax slumped nearly 60% to Rs 18 crore.
According to Gupta, growth for the company slowed down mid-April because of the second Covid-19 wave. “It further decelerated in May and then we saw a gradual recovery in June. We’re almost back to normal levels in July and we have a strong order book.”
The order pipeline, however, is more in the prescriptive segment with margins at 2.5-3%, he said. “Growth in the segment is led by LED televisions, and mobiles will start reflecting in the coming quarters. Their contributions to the overall revenue and Ebitda have increased, but margins are lower.”
Still, Gupta hopes that the company will report a 3.5-3.7% margin this year because the company’s already had “one bad quarter”. Next year could see margins at 4-4.2%, driven by its original design manufacturing vertical.
He expects the second half of the ongoing fiscal to be significantly better. “Our month-on-month growth is getting better, and in July we’ll go back to 85-90% utilisation levels across all our factories. August is also looking very good. We should have a good Q2 ahead of the festive season and there will also be a bumper in Q3 from our mobile business, which is ramped up and stabilised under the mobile PLI scheme.”
Expansion On Cards
Gupta said clients want to outsource manufacturing and focus on branding and distribution.
Among the newer partnerships, Dixon is entering the direct cool refrigerator segment. “It should commence operations by Q3 of the next fiscal. We’re putting up a capacity of 0.6 million (6 lakh) units, ultimately ramping it up to 1 million (10 lakh),” Gupta said. “Margin will be 9-9.5%. We also plan to do a fully automatic washing machine starting September. Margins for that should be 9-10%.”
Besides, an extension of an existing partnership with audio equipment brand BoAt is on the cards, given that a production-linked incentive scheme for wearables and hearables is expected. “We’re also getting into components for air conditioners and lighting appliances segment to increase our competitiveness. We’ll file our application in September. A white goods PLI is expected in the sector.”
According to Gupta, Dixon already has a partner that makes air-conditioner printed circuit board for controllers. “We’re working for a joint venture so it can apply under PLI and shift its production to India. Our approval for the IT hardware PLI for laptops and tablets is also granted.”
In April, Dixon partnered Bharti Enterprises Ltd. to make telecom and networking equipment to take benefit of the government’s Rs 1.46-lakh-crore PLI scheme.
The company, Gupta said, should be able fund its capex given low debt on the balance sheet. “Having said that, we’ll be taking an enabling approval from the board so we can raise money on a short notice.”
Watch the full interview here: