Dixon is becoming India’s Foxconn

One of the standout successes of the Indian government's Production-Linked Incentive (PLI) scheme is the boom in cellphone manufacturing. India now ranks smartphones as its fourth-largest export item, generating an impressive $15.6 billion in FY24.

Leading the export markets are the US, the United Arab Emirates, the Netherlands, and the UK, with exports valued at $5.6 billion, $2.6 billion, $1.2 billion, and $1.1 billion respectively. Additionally, India maintains a robust domestic market, with the combined domestic and export value of mobile devices reaching approximately ₹4.1 trillion ($49.16 billion) in FY24, marking a 17% increase year-on-year (YoY).

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Amid this surge, Dixon Technologies Ltd, an Indian contract manufacture, stands as the biggest success story, producing handsets for six of the top seven global brands. In this business since 2015-16, Dixon has scaled its production to 45 million smartphones and 40 million feature phones annually. The company has broadened its portfolio to include large displays for digital signage and flat TVs, as well as handset displays. Additionally, it has entered the fixed wireless access market for 5G devices, manufacturing products for companies such as Nokia and Bharti Airtel.

Dixon makes other electronic items and components, and household lighting as well, including being the anchor supplier for lighting brands. But telecom remains its key market segment, contributing about two-thirds of its total income. The company is progressively moving up the value chain, with Original Design Manufacturing (ODM) growing as a percentage of total revenues.

The company is investing heavily, as is normal in the industry. Capital expenditure (capex) was around ₹569 crore in FY24, while revenues at ₹17,691 crore. For FY25, it plans to spend ₹240 crore to develop the capacity to produce nearly 25 million display modules and has forged technology partnerships for these, and interactive flat displays. In total, Dixon anticipates a total capex of ₹550 crore in FY25.

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The market seems fairly happy, as revenues were up 45% YoY in FY24 and Ebitda (earnings before interest, taxes, depreciation, and amortization) at ₹698 crore, rose 36%. Net profit increased 47% to ₹373 crore. 

Many analysts, however, were expecting even faster growth.

Given the capacity expansions and the investments in value-addition and backward integration, some analysts, such as JM Financial, are estimating that FY25 revenues could more than double to ₹36,900 crore, driven by Dixon's proficiency in securing new clients and orders.

However, the demand for feature phones, as opposed to smartphones, is expected to decline, possibly leading to excess capacity that may need re-allocation.

More conservative analysts estimate that revenue and associated EPS growth would be around 65% YoY in FY25. Despite the high capex, the company is likely to generate healthy free cash flows.

Dixon's valuation, however, is expensive, at over 150 PE. The company has an Ebitda margin of just under 4% of revenues and the margin is likely to hover in the single-digits, though it may improve from here. Electronics manufacturing is inherently low-margin, high complexity and capital intensive. The valuation is astronomical. For context, the global market leader in contract manufacturing, Taiwan’s Foxconn (Hon Hai Precision Industry) has a PE of 18-5x.

The company continues to benefit from the global China-Plus-One strategy, under which large corporations have diversified away from China. Additionally, Dixon has developed its own original design capacities while partnering with major brands such as Google, Samsung, Motorola, Realme, Xiaomi, Longcheer, among others. 

However, a closer examination of the handset segment, and the consumer electronics industry at large, reveals that relentless scaling, technology adoption, and R&D are essential for sustained growth.

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