IPO watch: Dixon Tech a pricey bet with limited margin of safety




Investors may give the IPO a miss on account of the steep valuation. ET Intelligence Group: Dixon Technologies, which manufactures electronic and mobile products for brands such as Panasonic India, Haier and Gionee, plans to raise Rs 600 crore through an initial public offer (IPO).

Of this, Rs 540 crore will be utilised to give exit to a private equity fund and promoters, too, will be offloading some shares. The remaining proceeds will be used to repay a part of borrowings, add capacity and upgrade technological infrastructure. Investors may give the IPO a miss on account of the steep valuation.

Business
Dixon Technologies manufactures LED TVs, washing machines, lighting and mobile phones for other brands. It started its mobile phone segment in FY16, which contributed 33 per cent to its total revenues that year, but just over 5 per cent to operating profit (Ebitda).

Its LED TVs and washing machine segments contribute 34 per cent and 8 per cent respectively to total revenues. The company plans to focus more on washing machines and TV due to higher profitability.

Financials
In FY17, Dixon reported revenue of Rs 2,457 crore and net profit of Rs 50.4 crore. Ebitda margin for the year was 3.8 per cent. Despite the low margin, it generates strong return ratios due to as the business is not capital intensive.

It sources parts from vendors selected by clients and pays the vendors only once the payment is received from clients. As a result, in FY17, its working capital cycle was only of eight days. Its return on equity (RoE) was 24.5 per cent and return on capital employed (RoCE) was 36.5 per cent.

Its debt to equity was 0.2. In the past three years, the company’s revenue grew at 31 per cent CAGR, largely due to 77 per cent growth in its mobile segment in FY17. The future growth will depend on strong client acquisition and growth of clients.

Valuation
At the upper price band, the company is demanding a market capitalisation of around Rs 2,000 crore and valuation of 39 times FY17 earnings. Though the company is present in high growth consumer sectors, it operates on low margins with high volatility in earnings growth, reason for the valuation to look unattractive. The company’s business model, with dependence on a handful of clients offers limited margin of safety to investors.




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