How to Think About the Stock of Dixon Technologies

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A relative who came down from Canada during the year-end holidays kept gushing about the Made in India products available in the West.

I wasn't surprised initially. India has always been a big exporter of textiles and gems and jewellery.

But it turns out he was not referring to India's usual exports.

Rather, his pleasant experiences were about a low voltage motor, a pair of earphones, and some Apple products manufactured here.

The gradual shift from Made in China to Made in India is amply visible to consumers in the West.

Should we assume that foreign investors are oblivious to the trend?

Maybe not.

Electronics maker Dixon Technologies right now is a beehive of activity.

It is building a new facility in Noida to make 1.3 million laptops for Taiwanese PC maker Acer. The facility must be up and running in four months.

And the pace of activity will only increase.

Recently, Dixon won a contract from Chinese personal computer maker Lenovo. The latter is the third largest IT hardware brand in India.

Dixon's contracts allow it to assemble laptops and notebooks for Lenovo in India.

Do not get disappointed by the fact that Dixon's clientele in these two cases are Taiwanese and Chinese and not American.

For the wind beneath the company's tail is an Indian government's policy of providing production linked incentives (PLI).

Before the PLI scheme came on stream, Dixon used to assemble 100,000 phones a month.

With its new factory, the company will have a capacity to make 70 million phones annually. More than 50% of the capacity will cater to the demand for smartphones.

With an annual demand of 180 million phones in the country annually, Dixon would control more than 35% of the total capacity.

Dixon's global ambition will inevitably bring it at par with global giants, which are expanding their footprint in India.

Hence it is a matter of time before more American and Korean electronics brands use Dixon's outsourcing capacities.

Foxconn, the largest contract manufacturer of iPhones, already does US$ 10 billion in annual business in India, through 30 factories. This is 4% of its global revenues.

It has announced further investments of US$ 1.5 billion in the country to build more mobile making and component capacity.

Plus, it intends to get into wearables and hearables, assemble electric vehicles, and make semiconductor chips.

Therefore, India's indigenous electronics makers like Dixon continue to have stiff competition.

Over the past decade, Dixon has become a credible manufacturer of television sets and washing machines in India.

In fact, it manufactures every third TV and one out of every four washing machines sold in India. So, Dixon has demonstrated its value proposition in these consumer durable categories.

But IT hardware, semiconductor chips, smartphones are the product categories that can fetch the company bigger share of the high value electronics pie.

This is exactly why Dixon is focussed on these segments. In FY23, it earned 35% revenue from the consumer electronics segment while the share of the mobile phone category expanded by 14% year on year to 43%.

Now while Dixon may seem like the perfect stock to buy, its steep valuations could be the dampener for investors.

Currently trading at over 100 times earnings (P/E over 120x), Dixon is valued at more than double the multiple that HUL trades at (P/E of around 50x).

But Dixon deserve this premium?

The return ratios of Dixon and HUL are almost at par.

However, what makes Dixon more attractive is its growth rate. The company's new outsourcing deals and swelling order book make it a contender for long term tailwinds in manufacturing. The PLI benefits are added sweeteners.

HUL, on the other hand, has seen anaemic growth over past few quarters.

Growth in HUL's topline and bottomline numbers was dragged by poor volume growth, rising advertising and promotion spends and higher royalty payments to its parent company Unilever.

The FMCG giant has restructured the distribution margins with the fixed margin having been reduced by 0.6% to 3.3% in urban areas and the variable pay increased by 1.3% to 2%. This has irked distributors.

HUL has been pushing direct distribution aggressively over the last few years. It has tried to reach retail outlets directly through its Shikhar app, initiatives such as Smart Stores and by putting more feet on the ground.

Nearly a third (or 3 million outlets) of HUL's total retail reach of 9 million outlets is now serviced directly by the company.

The management indicated that it was looking to plough back money saved on account of lower commodity prices into higher advertising spends.

It also aims to get these back to pre-Covid levels. Lastly, higher royalty spends resulted in other expenses rising sharply.

Value Stocks: For People Who Never Like Overpaying for Anything

HUL's problems with distributors can create a low growth bottleneck. Also, growth in the rural areas could be gradual. But the company intends to keep advertising costs high due to regional competitive intensity.

So, it is safe to assume that, at least in the near-term, investors will find Dixon's growth, margins and return ratios more reliable and appetising than HUL's.

Question is how long Dixon will be able to sustain such growth to retain current valuation multiples.

When FIIs chase Indian stocks, especially bluechips, in 2024, both Dixon and HUL may be on the watchlist.

Warm regards,


Tanushree Banerjee
Editor, StockSelect
Equitymaster Agora Research Private Limited (Research Analyst)