Ready to Roar - i.marketsmojo.com · Pankaj Chhaochharia • [email protected] • +91 22 6164 8503 Ready to Roar Room for more: domestic EMS industry CAGR of 30%

27 August 2018

Elara Securities (India) Private Limited

Pankaj Chhaochharia

[email protected]

+91 22 6164 8503 (Dir)

Electronics Manufacturing Services

Ready to Roar

Consumer Electronics

Electronic Manufacturing Services


Glo

ba

l M

ark

ets

Re

sea

rch


Pankaj Chhaochharia • [email protected] • +91 22 6164 8503

Ready to Roar

Room for more: domestic EMS industry CAGR of 30% in FY16-21E

India’s EMS industry (market size: ~INR 150bn in FY16) is expected to

post a ~30% CAGR over FY16-21E, due to development of the consumer

electronics and appliances ecosystem in India (CEA, market size of ~INR

2,350bn in FY16), due to favorable government policy (correction in

inverted duty structure, “Make in India” initiative and M-SIPS scheme),

the country’s low-cost advantage over China (leading to a rise in

domestic manufacturing and creation of large exports opportunity) and

the rise in outsourcing strategy adopted by consumer brands.

Ripe pickings: domestic CEA industry CAGR of 17% over FY16-21E

The CEA industry is expected to report a 17% CAGR over FY16-21E,

driven by low penetration level, rise in disposable income, increase in

middle class, reduction in replacement cycle & easier credit availability.

Limited range: Oligopolistic competition exists on segment basis

Competitive intensity is low with Top 3 EMS companies command ~70%

market share in various product categories. Domestic EMS players are in

sweet spot, as there is limited competition from Global EMS firms (except

in mobile phone) - against whom it would be difficult to gain market

share due to their global relationship with consumer brands.

India EMS industry = auto ancillary industry

India’s auto ancillary stocks posted a PAT CAGR of 18.6% over FY03-18,

due to increased localization levels, share of outsourcing and exports

opportunity. Robust financial performance led to a 30% market cap

CAGR, up 60x, during the same period. We believe that similar industry

tailwind exists for India EMS industry and may evolve in a similar fashion

over medium to long term basis.

Our picks: Dixon Technologies and Amber Enterprise

We believe Dixon Technologies and Amber Enterprise will be the

biggest beneficiaries of strong growth in the EMS industry. Dixon is a

market leader in outsourced manufacturing in washing machines, TV

and the lighting segments. It would post an EPS CAGR of 35% over

FY18-21E, driven by 19% revenue CAGR and a ~55bp margin expansion

(ex mobile) on high operating leverage and backward integration. We

initiate on Dixon with a Buy rating and a TP of INR 3,475 on 32x June

FY20E EPS of INR 109 (at a 24% discount to Consumer Durable/electrical

average 1 year forward PE multiple of 42x). Amber Enterprise is a market

leader of outsourced manufacturing in room air conditioners. We expect

a 39% EPS CAGR over FY18-21E, led by an 18% revenue CAGR (25%

revenue CAGR including newly acquired companies) and a 65bp

margin expansion by FY21E in existing business and lower interest

expenses. We initiate on Amber with a Buy rating and a TP of INR 1,225

based on 25x June FY20E EPS of INR 49 (at a 30% discount to India AC

consumer average 1 year forward PE multiple of 36x).

India | Consumer Electronics 27 August 2018

Initiating Coverage


India accounts just 0.6% of USD 500bn Global EMS market

Source: Dixon Technologies RHP, Elara Securities Research

India EMS market CAGR of ~30% in

FY16-21


Oligopolistic competition in various product segments

Note: RAC market share is of market leader as on FY17 and

Washing Machine segment market share is of Top 2 player;

Source Dixon Technologies RHP, Amber Enterprise RHP, Elara Securities Research

0.3 0.3 0.4

0.5 0.6

0.7

0.9

1.1

1.3

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21

(%)

76 93 116149

192250

325

428

569

0

100

200

300

400

500

600

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21

(IN

R b

n)

India EMS/ODM

97

7166

72

55

0

20

40

60

80

100

Lighting WashingMachine

LED TV Mobilephone

RAC

Top 3 EMS player Market share

Valuation matrix

Company Ticker Rating MCAP

(INR bn)

TP CMP* ROE (%) EV/EBITDA (x) P/E (x) P/BV (x)

(INR) (INR) FY19E FY20E FY19E FY20E FY19E FY20E FY19E FY20E

Dixon Technologies Dixon IN Buy 29.2 3,475 2,510 22.0 25.5 20.5 15.1 36.7 25.1 7.3 5.7

Amber Enterprise AMBER IN Buy 29.5 1,225 931 10.6 13.8 14.4 10.6 29.6 20.7 3.0 2.7

Note: *pricing as on 23 August 2018; Source: Company, Elara Securities Estimate


2 Elara Securities (India) Private Limited

Table of Content

Electronic Manufacturing Services

Appetite for growth

Executive summary…………………………………………………………………………………………………. 3

Will EMS Industry evolve like Auto Ancillary? …………………………………………………….. 5

Room for more…………………………………………………………………………………………………………. 6

Regulatory support to spur investments………………………………………………………………. 9

Exports: play on labor arbitrage……………………………………………………………………………. 12

Imports substitution………………………………………………………………………………………………… 14

CEA industry: grow at 17% CAGR over FY16-21……………………………………………. 15

Flat panel display (FPD) TV……………………………………………………………………………. 17

Washing machine (WM) ……………………………………………………………………………….. 18

Lighting products…………………………………………………………………………………………… 20

Room air conditioner……………………………………………………………………………………… 22

Security system………………………………………………………………………………………………… 25

Mobile phone………………………………………………………………………………………………….. 26

Reverse logistics………………………………………………………………………………………………. 28

Rise in share of outsourcing…………………………………………………………………………………… 29

EMS competition in India………………………………………………………………………………………. 31

Risks………………………………………………………………………………………………………………………….. 37

Company Section

Dixon Technologies (DIXON IN; Buy; CMP INR 2,510; TP INR 3,475)………………. 39

End-to-end solutions provider ………………………………………………………………………………. 42

Is it a Motherson Sumi in the making? …………………………………………………………………. 47

Value creator……………………………………………………………………………………………………………. 48

Key risks…………………………………………………………………………………………………………………….. 51

Company snapshot………………………………………………………………………………………………… 52

Amber Enterprise (AMBER IN; Buy; CMP INR 931; TP INR 1,225) …………………… 71

One-stop shop…………………………………………………………………………………………………………. 74

Is it another Gree in the making? …………………………………………………………………………. 84

Value creator………………………………………………………………………………………………….……….. 85

APPENDIX………………………………………………………………………………………………………………… 93


Co

nsu

me

r E

lectr

on

ics


Executive summary

Well placed to capture growth in nascent sector

Dixon Technologies has a superior business model with

Return on Operating Asset of 13.2% in FY18, primarily

driven by high asset efficiency (gross fixed asset turnover

of 15.3x and negative net working capital), large

addressable market opportunity (aggregate market size

of LED TV, Washing Machine and LED lighting is INR

607bn as on FY16); it is >5x compared to Amber

Enterprise) and a history of successfully adding new

products to its portfolio. The company has been able to

manage its segment-wise earnings volatility by

diversifying into various product categories.

Amber Enterprise is a market leader in outsourced

manufacturing of a low penetration product (room air

conditioner penetration in India is ~4% vs 30% globally)

with significant entry barriers and strong relationships

with most large AC consumer brands (~85% of ODM

business model and deals with eight out of 10 RAC

brands).

We expect both companies to deliver superior earnings

growth (Dixon 35% EPS CAGR over FY18-21E and Amber

39% EPS CAGR over FY18-21E) on a long-term basis as

the EMS industry is in the nascent stage and expected to

grow at 30% CAGR over FY16-21 given development of

the consumer electronics and appliances ecosystem in

India due to favorable government policy, India’s low-

cost advantage over China and the rise in outsourcing

strategy adopted by consumer brands.

Exhibit 1: Brief snapshot

Parameters Amber Dixon

Overall

Business model ~85% ODM ~22% ODM

Product portfolio Room Air Conditioner FPD TV, washing machine, LED lighting, mobile

phone, security system and reverse logistics

Entry barriers High Low

Addressable product market size (FY16) INR 119bn (FY17)

LED TV: INR 374bn Washing machine: INR 79 bn

Lighting: INR 154 bn Total: INR 607 bn

Product penetration level 4% LED TV: 60%

Washing machine: 10% LED lighting: shift from CFL

EMS industry CAGR (FY16-21E) 25.1% LED TV: 55.2%

Washing machine: 41.2% LED lighting: 43.9%

Company market share in OEM/ODM 55% LED TV: 50%

Washing machine: 43% LED lighting: 39%

Financial parameters

Gross fixed asset turnover (FY18) 3.5 15.3

Net working capital days (FY18) 34.7 -0.5

EBITDA margin (FY18) 8.6% 3.9%

EBITDA margin variability (FY13-18) 1.4% 0.8%

(High segment-wise volatility but low on consolidated level)

ROOA (FY18) (based on average operating asset)

10.1% 13.2%

ROE (FY18) (based on average shareholder equity)

9.9% 23.8%

EPS CAGR (FY18-21E) 39.0 35.4

EBITDA CAGR (FY18-21E) 25.3 31.2

Valuation

MILTGV 49.1% 57.7%

Implied long-term growth rate in residual earning (beyond FY21E)

8.8% 6.9%

FY19 P/E (x) 29.6 36.7

Source: Elara Securities Estimate



Exhibit 2: Relative valuation

PAT growth (%)

EBITDA margin (%)

ROE (%)

PE (x) EV/EBITDA (x)

Name Ticker CMP

(INR)

Market cap

(INR mn) FY19 FY20 FY19 FY20 FY19 FY20 FY19 FY20 FY19 FY20

Amber AMBER IN 932 29,310 58.9 43.3 7.8 8.1 10.6 13.8 29.6 20.7 14.4 10.6

Dixon DIXON IN 2,510 28,431 27.0 46.0 4.7 5.0 22.0 25.5 36.7 25.1 20.5 15.1

India EMS average

42.9 44.6 6.2 6.5 16.3 19.6 33.2 22.9 17.5 12.9

Whirlpool WHIRL IN 1,750 222,000 27.8 22.4 12.2 12.8 22.7 22.7 49.6 40.5 30.2 24.3

IFB Industries IFBI IN 1,162 47,093 nm 40.7 8.6 9.5 21.0 24.0 37.4 26.6 19.9 14.8

Havells India HAVL IN 707 442,366 33.3 21.2 13.4 13.9 21.6 22.6 50.9 42.0 32.8 27.1

CG Consumer Electricals CROMPTON IN 265 166,073 26.9 21.0 13.8 14.1 42.4 39.6 40.4 33.4 25.9 21.8

India Consumer

Electrical/Durable average

29.3 26.3 12.0 12.6 26.9 27.2 44.6 35.6 27.2 22.0

Voltas VOLT IN 608 201,343 10.6 15.6 10.4 10.5 15.3 15.8 32.2 27.6 24.9 21.2

Johnson Controls Hitachi

Air JCHAC IN 2,010 54,651 19.2 39.6 9.2 10.2 20.2 23.1 45.6 32.7 23.7 17.7

Blue Star BLSTR IN 683 65,773 38.5 32.1 6.4 6.9 20.2 23.7 37.4 28.3 20.7 16.5

India AC Consumer

average

22.8 29.1 8.7 9.2 18.6 20.9 38.4 29.5 23.1 18.4

Motherson MSS IN 302 635,532 47.2 30.6 10.0 10.7 23.8 26.5 25.5 19.5 10.8 8.5

Bosch BOS IN 18,864 575,739 16.4 20.9 18.4 19.1 16.0 17.0 34.6 28.7 21.3 17.5

Endurance Technologies ENDU IN 1,552 218,323 21.5 24.9 14.5 14.8 20.6 21.8 47.6 35.3 19.9 16.3

WABCO India WIL IN 6,801 128,992 18.7 21.6 15.3 15.8 18.9 19.2 39.8 32.7 26.0 21.3

Minda MNDA IN 410 107,417 25.8 20.7 12.4 12.6 22.7 22.4 32.3 27.1 16.4 13.6

Asahi India Glass Limited AISG IN 326 79,247 25.2 16.8 18.7 19.1 16.7 16.3 35.6 30.5 17.5 15.7

India Auto Ancillary

average

25.8 22.6 14.9 15.4 19.8 20.5 35.9 29.0 18.7 15.5

USD USD mn

Flex FLEX US 14.1 7,496 11.7 21.0 4.9 5.3 19.0 21.1 11.4 9.3 6.8 5.8

Jabil JBL US 28.3 4,770 8.4 6.1 7.0 6.8 22.9 23.1 9.7 9.2 3.7 3.5

Hon Hai Precision

Industry 2317 TT 2.7 46,099 8.0 9.8 4.3 4.5 10.9 11.2 10.6 9.6 6.2 5.5

Wistron Neweb 6285 TT 2.2 832 15.2 15.0 6.3 6.8 13.8 15.1 11.7 10.2 4.8 4.0

Global EMS average

10.8 13.0 5.6 5.8 16.6 17.6 10.9 9.6 5.4 4.7

USD USD mn

Midea group 000333 CH 6.1 40,363 18.9 17.5 10.9 11.1 26.1 25.7 10.8 9.2 7.6 6.3

Gree Electric Appliances 000651 CH 5.7 34,506 11.5 12.0 17.2 16.4 31.2 30.0 7.8 6.9 3.5 2.8

China AC average 15.2 14.8 14.1 13.7 28.6 27.9 9.3 8.0 5.5 4.5

Source: Bloomberg Consensus estimates; Elara Securities Estimate


Co

nsu

me

r E

lectr

on

ics


Will EMS Industry evolve like Auto Ancillary?

Auto ancillary stocks have delivered revenue CAGR, an

EBITDA CAGR and a PAT CAGR of ~16-19% over FY03-

18, primarily due to increased localization levels, share of

outsourcing and exports opportunity, given India’s

relative low-cost advantage. Robust financial

performance was rewarded with a 30% market cap

CAGR, up 60x, during the same period.

Exhibit 3: Sustained financial performance…

Note: Auto ancillary universe includes 30 stocks; Source: CapitaLine, Elara

Securities Research

Exhibit 4: …leads to ~30% market cap CAGR in

the past 15 years

Source: CapitaLine, Elara Securities Research

There are a couple of similarities between the auto

ancillary and EMS industries: 1) outsourcing model,

and 2) rise in domestic manufacturing and fall in

imports. We believe the EMS industry is currently in

the initial stages of auto ancillary industry growth

in India.

We believe the EMS industry can deliver superior

financial performance over long term, leading to

superior stock returns, given industry tailwinds,

such as government incentives & policy measures,

import substitution, rise in share of outsourcing and

exports opportunity, given India’s low-cost

advantage.

17.2

16.4

18.6

15.0

15.5

16.0

16.5

17.0

17.5

18.0

18.5

19.0

Revenue EBITDA PAT

(%)

CAGR (FY03-18)0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

(Re

ba

sed

to

10

0)

Auto Ancillary Market Cap



EMS India footprint has ways to go

The global electronics market has a market size of USD

~1.7-2.0tn, with low cost geography accounting for

~70% of production. China alone accounts for ~40% of

global production. India currently stands at ~1%, with

room to grow.

Exhibit 5: ~70% of global manufacturing is from low-

cost geography

Source: ELE Times (The Spotlight on Indian Electronics 2017-18)

The global electronic manufacturing services (EMS)

market is sized at ~USD 480bn as on FY16, which is ~25-

30% of overall electronics market.

Exhibit 6: Around 25-30% of global electronics

production is outsourced

Source: ELE Times, Elara Securities Research

The global EMS market has posted a ~3% CAGR over

FY13-16 and is expected to grow at a 7% CAGR to reach

USD 670bn by FY21, according to Frost & Sullivan

Analysis.

Exhibit 7: Global EMS market CAGR of 7% during

FY16-21E


India still in its infancy

India’s EMS market is in the nascent stage, accounting for

just ~0.6% of the global EMS market at ~INR 149bn and

is expected to grow at ~30% CAGR over FY16-21E,

taking India’s share globally to be~1.3% in FY21E (India’s

cost structure would be cheaper than China’s by ~8% in

FY21E.

Exhibit 8: India share in global EMS market is

expected to reach 1.3% by FY21E


High Cost, 31

China, 38

Other low cost, 31

OEM72%

EMS28%

436 444 455478

502532

569

615

670

300

400

500

600

700

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21

(USD

bn

)Global EMS/ODM

0.3 0.3 0.4

0.5 0.6

0.7

0.9

1.1

1.3

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21

(%)

Room for more

EMS industry CAGR of 30% over FY16-21E

Tailwinds exist on export potential, fall in imports, India’s cost advantage over China

Regulatory support to spur investments

CEA industry to grow at 17% CAGR over FY16-21


Co

nsu

me

r E

lectr

on

ics


Exhibit 9: India EMS market CAGR of ~30% in

FY16-21


We expect strong growth for India’s EMS industry, given:

Favorable government policy initiatives;

Large exports opportunity with migration of global

manufacturing hub to low-cost India

Huge domestic demand

Fall in imports

Outsourcing strategy adopted by OEM, due to

EMS superior value proposition: cost

effectiveness, flexibility in product design

updates, faster time to market and reduction in

working capital cycle

OEM focuses on core competency of innovation,

product differentiation, marketing & distribution

and prefers in-house manufacturing for latest

products. India is a late adopter of latest

consumer electronics & durable products, given

low per capita income

Tier II and III consumer brands entering India

Exhibit 10: Market segmentation of consumer

durables EMS industry (FY17)

Source: Amber Enterprise RHP, Elara Securities Research

OEM vs ODM business model

Original equipment Manufacturer (OEM) model: Product

design, raw material specifications, supplier details etc are

provided by the customers. Any volatility in raw material

prices is a pass-through (but may be with 1-2 month lag).

Margin under this model is low (~2-3%) but no

requirement of making any working capital investment,

leading to high Return on Capital employed.

Original design manufacturer (ODM) model: Product

designing, R&D, working capital management,

manufacturing, delivery and packaging of products is

managed by ODM firm. Relationship with brands is

stronger as the partnership is more strategic in nature.

ODM firm commands high margin, but needs to bear risk

of raw material price volatility and makes investment on

working capital leading to lower Return on Capital

employed.

EMS companies aspire to evolve their business model

from OEM to ODM.

Exhibit 11: OEM vs ODM

OEM ODM

Relationship with customers Transactional Strategic in nature

EBITDA margin Low High

Working capital Investment Low (near zero) High

ROCE High Low

Source: Elara Securities Research

Exhibit 12: OEM constitutes ~61% of total India EMS

as on FY17


76.2 93 116.4148.8

192249.6

324.6

428.4

569.4

0

100

200

300

400

500

600

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21

(IN

R b

n)

India EMS/ODM

FPD TV32%

RAC23%

Refrigerator16%

Air cooler15%

Washing machine

14%

OEM61%

ODM39%



Exhibit 13: Key barriers for consumer durables EMS industry


High capital expenditure requirements and

prevailing high finance rate in the country

Since profit margin is small, economy of scale is

essential to maintain profitability

Infrastructure inadequacy and lack of domestic standards

Need to innovate to restrict movement of clients

to competition

Lack of a stable component ecosystem and debilitating FTA with ASEAN countries are making imports cheaper compared to local

manufacturing, further intensify the situation.

Exhibit 14: Porter’s Five Force Model – evaluation of the EMS industry


Bargaining power of suppliers: low

Most EMS firms operate on an OEM

model (no investment in working

capital)

Commoditized raw materials

Threat of new entrants: low to moderate

Strong customer relationships

Low industry margin profile

Industry rivalry: moderate

Significant industry growth

Low fixed cost structure

Different sized companies specializing in

different products

Bargaining power of buyers: moderate (for

Tier II & III brands) to high (Tier I brands)

Low switching cost

Buyers well educated about the product

Lack of product differentiation

Buyers purchase in bulk volume

Bargaining power

of suppliers Bargaining power

of Buyers

Threat of new

entrants

Threat of substitution

Industry rivalry

Threat of substitution: low

Brand usually prefers to outsource products which are in mature product lifecycle to EMS

firms and focus on core competency of innovation and marketing & distribution

Tier II & III consumer durable brands that do not have the size to manufacture in-house

Increased custom duty, high lead time of ~6 months and lower domestic cost of production

leading to shift from imports to domestic production


Co

nsu

me

r E

lectr

on

ics


Regulatory support to spur investments

Policy initiatives

The government wants to focus on providing

employment through manufacturing and reduce imports

in consumer electronics by CY20. It has announced

flagship program, “Make in India” to boost

manufacturing and electronics is one key focus area.

Exhibit 15: Central Government regulatory boost


Preferential market access (PMA): Preference to

locally manufacture electronics products in

government procurement.

Modified special incentive package scheme (M-SIPS):

Provide capital subsidy of 20% in SEZ (25% in non-

SEZ areas) for units engaged in electronics

manufacturing. Under the scheme, the government

will offer incentives of up to USD 1.7bn until July

2020.

Merchandise exports from India scheme (MEIS):

Provide incentives for exports (2-5% of FOB value)

and the aim is to make exporters cost-effective by off-

setting losses due to infrastructure inefficiency

Electronics development fund: Develop a special

fund of INR 100bn to generate an R&D ecosystem in

electronics by providing risk capital to companies

developing new technologies

Electronics manufacturing clusters (EMC): These

clusters were formed to provide support for creating

world-class infrastructure to attract investments in

the electronics systems design and manufacturing

(ESDM) sector. This measure will help to offset

challenges arising due to lack of reliable

infrastructure. The government will provide financial

assistance of up to 50% and 75% of project cost for

developing Greenfield and Brownfield EMC,

respectively (subject to ceiling of INR 500mn for

every 100 acres of land). To date, 20 Greenfield and

three Brownfield EMC have been approved.

GST implementation

Make in India

Policies that help in capex like M-

SIPS

Infras development support-EMC

Rationalization of inverted

duty structure

Demand-side

support,PMA

Exhibit 16: Electronic manufacturing clusters in India

Note: Map not to scale; Source: Elara Securities Research

Chittor

Greater Noida

Abhanpur

Mundra

Pernem North Goa

Kharsawan

Ernakulam

Badwai-BhopalJabalpur

Khurda

Bhiwadi

Hyderabad

Maheshwaram

Parganas,

Hebbal, Hottagalli, Mysore

Aurangabad

Pune

Grownfield EMCGreenfield EMC



Phased manufacturing program (PMP): The FY16

Union Budget introduced a differential excise duty

for domestic mobile manufacturers. Under this,

countervailing duty (CVD) on imports was imposed

at 12.5% and excise duty at 1% without input tax

credit (or 12.5% with input tax credit). To enable

domestic manufacturers produce products at lower

excise duty, all input have been exempted from basic

customs duty. This exemption will however be

withdrawn product-wise based on pre-decided

timelines.

The scheme will progressively increase domestic

value addition and build mobile handset

manufacturing ecosystem in India.

Exhibit 17: Withdrawal of exemption to be in a

phased manner

Financial Year

Sub-assembly Basic customs duty

FY17 Charger & adapter, battery pack, wired handset

15%

FY18 Mechanics, die cut parts, microphone & receiver, keypad and USB cable

15%

FY19 Printed circuit board assembly, camera module, connectors

10%

FY20 Display assembly, touch panel & cover glass assembly, vibrator motor & ringer

Not yet announced

Source: Ministry of Electronics and Information Technology Notification

The government plans to extend PMP to other electronic

products keeping in mind its intent to reduce net imports

of electronics by 2020, under the Digital India program.

Rationalization of inverted duty structure: Inverted

import duty existed on various electronics products

like mobile phones, which caused domestically

manufactured products dependent on imported raw

materials uncompetitive. Inverted duty structure

exists when import duty on finished goods is lower

(due to India being part of regional & bilateral Free

Trade Agreement [FTA]) than import duty on

intermediates or raw materials.

India has realized that the inverted duty structure

has been a key hindrance on increasing scale of

manufacturing in the country. The government

therefore has taken measures over the past few

years to resolve this issue (by increasing import duty

on finished products and reducing it on raw

materials). Import duty on fully built mobile phone

and FPD TV has been increased to 20%, and open

cells used in LED TV manufacturing have been

reduced to 5%. Mobile components import duty

varies based on the phased manufacturing program

of the government.

Implementation of goods & service tax (GST): Under

the GST regime, the cascading effect of taxes will be

eliminated and savings on expenses incurred in

warehousing & logistics which is ~5-8% of total cost

of manufacturing. These savings will help in

lowering India’s cost of production, thereby

bolstering locally manufactured electronics.

States also get in on the act

Various State governments have realized the potential of

the EMS sector in generating revenue and employment

and have announced schemes to aid in its growth:

Gujarat Electronics Policy: create a globally

recognized hub for ESDM industry with a turnover of

USD 16bn and investment of USD 6bn to create

employment opportunities for 500,000 people

during 2016-21. Gujarat plans to provide incentives

to electronics manufacturing clusters (EMC) in

addition to incentives provided by the Centre. Key

production subsidies include:

Capital assistance of upto 25% of project cost to

Greenfield EMCs subject to a ceiling

Power tariff subsidy of INR 1 per unit on the

billed amount for five years

A 100% reimbursement for electricity duty paid

by EMC for five years

A 100% reimbursement of stamp duty and

registration fee

Haryana IT & ESDM Policy: make Haryana a

destination of choice for investments in IT & ESDM

sectors and attract investments of INR 180bn and

provide employment to 120,000 people during

2015-20. Key production subsidies include:

25% subsidy on land rates

50% top-up of capex support provided by DEITY

subject to a ceiling

A 100% reimbursement of State GST subject to

maximum of 100% of fixed capital investment

(FCI) for 10 years

A 100% reimbursement of stamp duty paid

A 100% electricity duty exemption for seven

years from operations

Power to be provided at INR 5.49 per unit

50% exemption for setting up a unit in Block ‘A’

and 100% exemption for setting up a unit in

Block ‘B’, ‘C’ & ‘D’ towards cost of external

development charges


Co

nsu

me

r E

lectr

on

ics


Telangana ICT Policy Framework 2016: Make

Hyderabad a global hub for electronics and set up

two EMC at eCity and Maheshwaram Science Park

respectively. The State government is providing

tailor-made, incentives package for companies

willing to start and expand operations

Maharashtra Electronics Policy: establish Brownfield

EMC at Pune, Aurangabad and Navi Mumbai. Key

production subsidies include:

Up to 100% reimbursement of State GST

Up to 5% interest subsidy on term loans

Power tariff subsidy of INR 1 per unit for a period

of up to five years

Electricity duty exemption for 15 years

Stamp duty exemption during investment period

Madhya Pradesh IT, ITeS & ESDM Investment

Promotion Policy: Key production subsidy and

benefits to develop ESDM industry include:

Provide single-window clearance system

Provide land at concessional rates

Interest subsidy of up to 5% of term loan

Capital subsidy of up to 10% on gross fixed

capital investment (GFCI)

Reimbursement of 75% State GST for upto 10

years (limited to upto 300% of GFCI)

Jharkhand ESDM Policy: Key production subsidies to

promote manufacturing of ESDM products:

Total fiscal incentive will not exceed 25% of

capital cost, excluding cost of land, transfer fee

and registration charges

Allotment of government land on payment of

land and development cost

Reimbursement of electricity duty for 10 years

Reimbursement of income tax for all ESDM units

Reimbursement of 50% of interest paid

A 100% reimbursement of stamp duty, transfer

duty and registration fees

Chhattisgarh Electronics, IT and ITeS Investment

Policy: key production subsidies to promote

electronics industry include:

75% reimbursement of total interest paid for

eight years

50% fixed capital investment subsidy

80% reimbursement of land premium

Reimbursement of EPF amount paid to

employees for seven years

100% exemption from payment of electricity

duty for up to 12 years

100% exemption from stamp duty

Policy measures to spur investment in India

Favorable policy measures have attracted investments

worth INR 1,570bn in 2017 (>105 mobile and ancillary

manufacturing units have been set up in India, creating

400,000 direct and indirect employment since 2014).

Exhibit 18: Sector sees investment of INR 1,570bn in

2017

Source: Media reports

Few other major investments include:

Samsung has committed INR 50bn to double its

mobile phone production to 120mn handsets pa by

2020 at its Noida facility, near New Delhi, India, and

also start exporting from this facility

Foxconn has committed to invest ~USD 5bn, which

includes USD 3bn investment in setting up display

fab, USD 250mn towards mechanics like CNC,

lithium ion cell battery and facilities for printed circuit

boards) in Maharashtra, India. Post expansion

manufacturing capacity will increase to ~10mn units

per month

LG is looking to establish India as one of its global

manufacturing hubs to cater to markets of South

Asia, Africa, and the Middle East, as China is no more

cost competitive.

Voltas and Ardutch have agreed to establish INR

6.5bn joint venture to manufacture refrigerators,

washing machine and microwaves.

Midea plans to invest INR 8bn to set up a

manufacturing facility at Pune for refrigerators,

washing machines and water treatment products

Jabil plans to acquire Ericsson’s India manufacturing

unit, which involves printed circuit board assembly

and testing activities

110

1,430 1,570

0

400

800

1,200

1,600

2,000

2014 2016 2017

(IN

R b

n)



Exports: play on labor arbitrage

Lower cost leads to shift in manufacturing hubs

In the past 70 years, there have been three shifts in

manufacturing hubs: 1) from the US to Japan & Europe

post World War II, 2) from Japan and Europe to

Southeast Asian countries, such as South Korea and

Taiwan during the 1970s and 1980s, and 3) from

Southeast Asia to China during 1990s and 2000s. The

single-most important factor driving the shift has been

the pursuit of low-cost manufactured goods.

Now focus shifts to high value-added manufacturing

Over the past three years, India’s cost structure for

consumer electronics has declined steadily relative to

China’s, primarily because of rising labor cost in China.

By FY21, India will be cheaper than China by ~8%, due to

decline in raw materials and stable labor cost in India.

Exhibit 19: Total cost – India vs China

Note: Total cost is average cost of flat panel display, mobile phone, washing

machine, LED lamps; Source: Dixon Technologies RHP, Elara Securities

Research

Raw materials

Raw material cost differential between India and China

(~6% in FY17) is likely to get bridged by FY21, due to 1)

increased levels of product indigenization (printed circuit

board assembly, panel manufacturing and component

manufacturing, 2) increased scale of manufacturing, 3)

subsidies provided by India, and 4) withdrawal of

subsidies by China’s government,

Exhibit 21: Raw materials cost – India vs China

Note: Raw materials cost is average of flat panel display, mobile phone,

washing machine, LED Lamp Source: Dixon Technologies RHP, Elara

Securities Research

Labor cost

During the 1990s, labor cost in China was the lowest

(less than half than India), leading to a shift in global

manufacturing base from South Korea to China. Since

1995, China’s share in global electronics increased

significantly, up from ~3% in 1995 to the current levels of

~38%, according to ELE Times (The Spotlight on Indian

Electronics 2017-18 Edition).

90.3

84.6

75.5

85.5 83.3

83.8

65

70

75

80

85

90

95

FY14 FY17 FY21

(%)

India China

65.8

59.8

50.0

59.8

53.0

50.3

40

45

50

55

60

65

70

FY14 FY17 FY21(%

)

India China

Exhibit 20: Shift in global manufacturing hub

Source: Deloitte Touche Tohmatsu Limited and US Council on Competitiveness, 2016 Global Manufacturing Competitiveness Index

Wave 1: Shift of manufacturing from the

US to Japan, after WW II

1

Wave 3: Shift of manufacturing from

the SE Asia to China, in the late

1990s and 2000s

3

Wave 2: Shift of manufacturing from

the Japan and Europe to SE Asia, in

the 1970s and 1980s

2Wave 4: Shift of manufacturing from

the China to India, Vietnam,

Indonesia - NOW!!

4


Co

nsu

me

r E

lectr

on

ics


Exhibit 22: Low cost of labor in China during 1990s

results in the shift of manufacturing base

Source: Deloitte Touche Tohmatsu and US Council on Competitiveness, 2016

Global Manufacturing Competitiveness Index

However, China is now witnessing an increase in

manufacturing cost structure, primarily due to its One

Child policy (resulting in labor scarcity) and economic

prosperity. India may emerge as the next manufacturing

hub, given 1) low labor cost, 2) huge domestic demand,

and 3) favorable policy initiatives.

Exhibit 23: China’s labor cost ~4x compared to India


Exhibit 24: India’s manufacturing competitiveness to

improve significantly in the next few years

Country (rank) CY16 CY20 Change

US 2 1 1

China 1 2 (1)

Germany 3 3 0

Japan 4 4 0

India 11 5 6

South Korea 5 6 (1)

Mexico 8 7 1

Taiwan 7 9 (2)

Malaysia 17 13 4

Thailand 14 14 0

Indonesia 19 15 4



Exhibit 25: India lacks significantly in terms of infra

Parameters(rank) US Germany South Korea

China India

Talent 90 97 65 56 52

Innovation policy and infrastructure

99 94 65 47 33

Cost competitiveness

39 37 60 96 84

Energy policy 69 66 50 40 26

Physical infrastructure

91 100 69 56 10

Legal and regulatory environment

88 89 57 25 19



Exhibit 26: Improving ease of doing business in India

Source: Deloitte Touche

Imports substitution

India imported INR 1,356bn worth of mobile phones, flat

panel display TV and LED lighting in FY16, given:

Availability of cheap imports

Inverted duty structure

Lack of product ecosystem locally

Poor local infrastructure

Exhibit 27: Imports of consumer electronics

Note: Total imports includes Mobile phone, Flat panel display TV and washing

machine; Source: Dixon Technologies RHP, Elara Securities Research

0.7 0.3

7.3

0.9 0.7

15.1

0

2

4

6

8

10

12

14

16

India China South Korea

(USD

/hr)

1995 2005

0.9

3.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

India China

(USD

/hr)

130

100

0

20

40

60

80

100

120

140

2017 2018

(Ra

nk)

792

1,035

1,388 1,356

0

200

400

600

800

1,000

1,200

1,400

1,600

FY13 FY14 FY15 FY16

(IN

R b

n)



However, over the next few years, we believe there

could be a sustained shift towards local manufacturing,

due to:

Rise in basic customs duty on final products

Decline in India’s cost of production vs China

Government incentives and tax structure leading to

increase in localization

Steadily rising domestic demand

Shorter lead time between placing an order and

product delivery

Improved ease of doing business in India

Safeguard against exchange rate volatility

Exports potential to countries in South Asia, the

Middle East and the African continent

Exhibit 28: Share of net imports as a % of total

domestic demand


Exhibit 29: Increase in basic customs duty to promote

domestic manufacturing

Consumer electronics product (%)

Old Dec-17 Feb-18 Mar-18

Microwave ovens 10.0 20.0 20.0 20.0

Mobile phone 10.0 15.0 20.0 20.0

DVD player 10.0 15.0 15.0 15.0

Flat panel display TV 10.0 20.0 20.0 20.0

Digital/video camera 10.0 15.0 15.0 15.0

LED Lamp & lamp and light fitting

10.0 20.0 20.0 20.0

Set-top box 10.0 20.0 20.0 20.0

Source: Media reports, Elara Securities Research

Exhibit 30: Localization levels (FY17)


(20)

0

20

40

60

80

100

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21

(%)

Mobile phone FPD TV Lighting

3035

70

35

7065

30

65

0

10

20

30

40

50

60

70

80

Refrigerator WashingMachine

FPD TV ResidentialAC

(%)

Imported Local


Co

nsu

me

r E

lectr

on

ics


CEA industry: grow at 17% CAGR over FY16-21


Exhibit 31: Mobile phones account for 67% of

consumer electronics in FY16


Exhibit 32: Consumer electronics industry is likely to

be at INR 5,200bn by FY21E…

Note: Consumer Electronics includes mobiles, flat panel display tv, washing

machine, camera & set-top box; Source: Dixon Technologies RHP, Elara

Securities Research

Exhibit 33: …aided by low penetration levels across

categories

Note; FY15; Source: Dixon Technologies RHP, Elara Securities Research

Exhibit 34: Rising affordability

Note: Affordability Index is India per capita income divided by prices. Average

Affordability index is the average of mobile phone, FPD TV, washing machine

and room AC. Source: Bloomberg, Elara Securities Research

Exhibit 35: Rising middle class

Source: Krishnan & Hatekar, Elara Securities Research

Exhibit 36: Easier credit availability

Source: RBI, Elara Securities Research

Mobiles67%

TV16%

Washing Machine

3%

Others14%

1,6211,7912,1652,364

2,7183,055

3,615

4,326

5,236

0

1,000

2,000

3,000

4,000

5,000

6,000

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21

(IN

R b

n)

20

10

60

85

70

89

0

20

40

60

80

100

Refrigerator Washing Machine FPD TV

(%)

India Global

5.6

6.5

7.5 7.8

8.79.4

9.910.4

11.1

4

5

6

7

8

9

10

11

12

CY

12

CY

13

CY

14

CY

15

CY

16

CY

17

CY

18

CY

19

CY

20

Average Affordability Index of ConsumerElectronics & Appliances

777.3574.8

304.2604.3

7.522.9

0

200

400

600

800

1,000

1,200

1,400

FY05 FY12

(mn

)

Poor (< $2/d) Middle ($2 - $10 /d) Affluent (> $10/d)

(10)

0

10

20

30

40

50

FY14 FY15 FY16 FY17 FY18

(% Y

oY

gro

wth

)

Credit Card O/S Personal loan



Exhibit 37: Porter’s Five Force Model – evaluation of consumer durables


Bargaining power of suppliers: low

Low product differentiation

Threat of new entrants: moderate

High capital investment

Popular firms have developed strong

brand equity and control a large market

share

Industry rivalry: high

Continuous innovation

Low switching cost


Bargaining power of buyers: high (for tier II

& III brands) to moderate (for Tier I brands)


Buyers well educated about the product

Consumer are price-sensitive

Bargaining power

of Suppliers Bargaining power

of buyers

Threat of new

entrants

Threat of substitution

Industry

rivalry

Threat of substitution: moderate

Technology advancement

Customers propensity to substitute


Co

nsu

me

r E

lectr

on

ics


Flat panel display (FPD) TV

Exhibit 38: FPD market CAGR of 16% over FY16-21E


Exhibit 39: FPD TV volume demand to increase from

12mn to ~26mn in FY21E…


Exhibit 40: … aided by improved affordability

Note: Affordability Index is India per capita income divided by FPD TV prices.

Source: Bloomberg, Elara Securities Research

Exhibit 41: Domestic production CAGR of 28% due to

decrease in reliance on imports


Exhibit 42: Outsourcing accounts just ~15% of total

production as on FY16


Exhibit 43: EMS production CAGR of 55% over FY16-

21E, due to rising share of outsourcing


161254

315374

448520

601694

777

0

200

400

600

800

1000

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21

(IN

R b

n)

FPD TV market

5

810

1214.5

17

19.8

23.1

26.2

0

5

10

15

20

25

30

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21

(mn

)

2.42.7

3.0 3.2

3.74.1

4.6

5.1

5.8

2

3

4

5

6

7

CY

12

CY

13

CY

14

CY

15

CY

16

CY

17

CY

18

CY

19

CY

20

(x)

FPD TV

1.4

5.1 4.6

7.9

12.8

17

20.5

24.3

27.6

(20)

0

20

40

60

80

0

5

10

15

20

25

30

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21

(%)

(mn

un

its)

OEP - Domestic Production % OF Net Import (RHS)

OEP by EMS15%

OEP by OEM85%

0.1 0.5 0.6 1.2 2.3 4.2 5.9 8.2 10.80

10

20

30

40

50

0

2

4

6

8

10

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21

(%)

(mn

un

its)

EMS Production Share of outsourcing (RHS)



Washing machine (WM)

Exhibit 44: WM market CAGR of 16% over FY16-21E


Exhibit 45: WM market units likely to double by

FY21E


Exhibit 46: Affordability Index

Note: Affordability Index is India per capita income divided by Washing

Machine prices. Source: Bloomberg, Elara Securities Research

Exhibit 47: Low penetration levels as on FY15

Source: Ernst & Young, Amber Enterprise RHP, Elara Securities Research

Exhibit 48: Semi automatic WM accounts for 56% as

on FY16


Exhibit 49: LG dominates in the semi automatic

category (2016)


59.1 64.0 70.479.1

90.7103.9

119.8

139.2

163.7

0

50

100

150

200F

Y1

3

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21

(IN

R b

n)

3.8 4.1 4.55.0

5.76.5

7.4

8.5

9.9

0

2

4

6

8

10

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21

(mn

)

5.05.5

6.1 6.3

7.2

7.9

8.7

9.4

10.3

4

5

6

7

8

9

10

11

CY

12

CY

13

CY

14

CY

15

CY

16

CY

17

CY

18

CY

19

CY

20

Washing machine

10

70

0

20

40

60

80

India Global

(%)

WM

Semi-automatic

56%

Fully automatic top load

29%

Fully automatic front load

15%

LG37%

Samsung19%

Whirlpool15%

Godrej7%

Videocon15%

Others7%


Co

nsu

me

r E

lectr

on

ics


Exhibit 50: EMS industry CAGR of 40% over FY16-21E,

due to increased share of outsourcing…


Exhibit 51: …and rise in exports as India’s cost

structure falls below that of China’s by 12% in FY21

Source: Ministry of labor & Employment, Dixon Technologies RHP, Elara

Securities Research

Exhibit 52: … and increase in level of localization


0.1 0.3 0.4 0.6 0.8 1.2 1.7 2.4 3.40

10

20

30

40

0

1

2

3

4

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21

(%)(m

n)

EMS/ODM volume in WM Share of Outsourcing (RHS)

83

70

79

82

60

65

70

75

80

85

FY14 FY17 FY21

(%)

India China

Local65%

Imported35%

Washing machine volume {FY17}: 5.7mn



Lighting products

Exhibit 53: Total lighting CAGR of 16.6% in FY16-21


Exhibit 54: Key growth drivers


Exhibit 55: LED share likely to go up to 80% of total

lighting market by FY21


Exhibit 56: LED demand CAGR of 60% over FY16-21


Exhibit 57: Comparison between LED, CFL and

incandescent bulb

Lamp equivalent

LED CFL Incandescent

bulb

Life expectancy (hours)

50,000 8,000 1,200

Watt 7 13-15 60

kWh of electricity used in 50,000 hours

263 700 3,000

Hazardous materials

None 5mg

mercury/bulb None

Color rendition Wide range of

color Restricted

color option Restricted color

option

Dimmability Yes Restricted possibility

Yes

Robustness Breakable Sensitive Sensitive

Start time Instant Delay Almost instant

Light efficiency (lumens/Watt)

620/8 = 78 620/15 = 53 620/60 = 13

Source: EESL

Exhibit 58: Domestic production CAGR of 75% over

FY16-21, due to decline in imports


110129

149 154176

224

286 285

332

0

50

100

150

200

250

300

350F

Y1

3

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21

(IN

R b

n)

0

20

40

60

80

100

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21

(%)

LED share CFL share Others share

7 12 17 2753

119

192 201

274

0

50

100

150

200

250

300

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21

(IN

R b

n)

OEM - Total Domestic Demand

3 5 9 1430

74

134161

241

0

20

40

60

80

0

50

100

150

200

250

300

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21

(%)

(mn

)

OEP - Total Domestic Production Share of import (RHS)

Rise in rural penetration with increased

electrification at the village & household levels

Improved availability of power

Government initiatives to replace incandescent

lamps & CFL with LED lights via schemes like

UJALA and SLNP

Increasing awareness of benefits in using LED

lighting

Significant fall in retail LED prices


Co

nsu

me

r E

lectr

on

ics


Exhibit 59: Bulbs and tube lights comprise ~60% of

the LED market (in terms of value) as on FY16


Exhibit 60: Phillips, Bajaj and Havells comprise ~65%

of total market (FY16 market share)


Exhibit 61: INR 180bn EMS opportunity due to rise in

domestic production and share of outsourcing


Government initiatives on LED lighting

The old conventional lights are to be replaced by

770mn LED lights and 35mn LED street lights by

2019

27.3mn LED lights to be distributed to BPL

houses under Deen Dayal Upadhyaya Gram

Jyoti Yojana (DDUGJY)

Across the country, more than 2.1mn

conventional street lights have been replaced

with LED under Street Lighting National

Programme (SLNP)

National-level projects for LED lights installation

such as Unnat Jyoti by Affordable LED for All

(UJALA), Domestic Efficient Lighting Programme

(DELP) and Street lighting National Program

(SLNP)

To promote and raise awareness, subsidized 9W

LED bulb is available to consumers for an

amount of INR 10 per month, thereby becoming

an adoption driver

Bulbs40%

Tube lights19%

Downlights17%

Street light 11%

Others13%

Philips34%

Bajaj18%

Havells12%

Osram8%

Syska LED7%

Surya Roshini

6%

Wipro5%

Crompton Greaves

4%

NTL Lemnis 3%

Other3%

34.8

214.4

0

50

100

150

200

250

FY16 FY21

(IN

R b

n)

EMS Opportunity



Room air conditioner

Exhibit 62: RAC market size at ~5mn units (FY17)


Exhibit 63: RAC market CAGR of 16% over FY17-22…


Exhibit 64: Market growth drivers


Exhibit 65: …helped by low penetration levels…

Source: CEIC, BELDA Asia, Amber Enterprise RHP, Elara Securities Research

Exhibit 66: …high cooling degree days

Note: Cooling degree days is number of degrees that a day’s average

temperature is above 65 degrees Fahrenheit (18 degrees Celsius), which is

temperature above which cooling may be needed; Source: CDD from IEA

analysis derived using NCAR (2004), Community Climate System Model, Elara

Securities Research

Exhibit 67: Rising affordability

Note: Affordability Index is India per capita income divided by Room Air

Conditioner prices. Source: Bloomberg, Elara Securities Research

3 3 3.1 3.43.9

4.75.5

6.26.9

7.7

8.6

0

1

2

3

4

5

6

7

8

9

10

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21

FY

22

(mn

un

its)

76 77 81 91104

119138

159184

213

246

0

50

100

150

200

250

300

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21

FY

22

(IN

R b

n)

Affluent middle

class and changing lifestyle

Energy effecient air conditioner

Adequacy of power

Low market penetration

Increase in average

temperature

Reducing Replacement

cycle

100 91

54

30 30

4

0

20

40

60

80

100

120

China Japan Malaysia Global Thailand India

(%)

Penetration levels

3,3

90

3,0

84

2,3

37

1,9

05

1,8

46

1,0

51

90

9

86

8

76

4

76

2

71

4

29

2

0

1,000

2,000

3,000

4,000

Ind

on

esi

a

Ind

ia

Mid

dle

Ea

st

Wo

rld

Bra

zil

Ch

ina

Jap

an

Me

xic

o

Un

ite

d S

tate

s

Ko

rea

So

uth

Afr

ica

Eu

rop

ea

n U

nio

n

2016 Cooling Degree days

3.03.3

3.6 3.7

4.5

5.15.5

5.86.2

2

3

4

5

6

7

CY

12

CY

13

CY

14

CY

15

CY

16

CY

17

CY

18

CY

19

CY

20

(x)

RAC


Co

nsu

me

r E

lectr

on

ics


Exhibit 68: Power availability

Source: Central Electricity Authority, Elara Securities Research

Exhibit 69: …reduced recurring power cost

2015-17 From 2018 ISEER range

1 Star N.A 2.70 - 2.89

2 star N.A 2.90 - 3.09

3 star 1 Star 3.10 - 3.29

4 star 2 star 3.30 - 3.49

5 star 3 star 3.50 - 3.99

N.A 4 star 4.00 - 4.49

N.A 5 star >= 4.50


Exhibit70: Evolution of RAC in India


Exhibit 71: Split AC comprises ~70% of total RAC

market


Exhibit 72: New demand comprises ~70% of total

demand as on FY17


Exhibit 73: RAC Market structure


Exhibit 74: Voltas, LG, Daikin and Hitachi are market

leaders in the RAC market


11.1 10.1

8.5 8.5 8.7

4.2 3.6

2.1

0.7 0.7

0

2

4

6

8

10

12

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

(%)

Power deficit

Split72%

Window16%

Inverter12%

FY17: 4.7mn units

Replacement demand

30%

New demand

70%

Market segmentation (Volume 4.7 Mn)

Voltas16%

LG15%

Daikin12%Hitachi

11%

Lloyd Electric

10%

Blue Star9%

Panasonic9%

Samsung5%

Carrier4%

Godrej2% Others

7%

FY17 Revenue: INR 119bn

PREMIUM Carrier Daikin

Hitachi

POPULAR

Voltas Blue star

LG Whirlpool

Panasonic

Economy Videocon

Onida Godrej 1990-

2000

Window AC

2000-

2007 2007-

2014 From 2015

Split AC

Star rated AC

Inverter AC



Exhibit 75: North and South India are the most

important markets for RAC as on FY17


Exhibit 76: EMS & ODM (outsourcing) account for

34% of total demand


Exhibit 78: EMS & ODM CAGR of 25% over FY17-22

on strong industry growth & rise in outsourcing share


North33%

South30%

West22%

East15%

RAC market: 4.7mn units

RAC brands 51%

EMS & ODM34%

Imports15%

FY17 market: 4.7mn units

1720

23

29 3134 35

4046

5257

0

10

20

30

40

50

60

0

1

2

3

4

5

6

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21

FY

22

(%)(m

n)

EMS/ODM Share of outsourcing (RHS)

Exhibit 77: Porter’s Five Force Model: evaluation of RAC


Bargaining power of suppliers: moderate


Increasing scale of Indian ODM

Availability of critical components from

India ODM

Threat of new entrants: low


Popular players have developed strong

brand equity and control large market

share

Industry rivalry: high

Aggressive marketing and promotional

strategy by brands

New product innovation

Bargaining power of buyers: moderate

Buyers are well educated about the

product

Consumers are price sensitive

Bargaining power

of Suppliers Bargaining power

of Buyers

Threat of New

entrants

Threat of

substitution

Industry

rivalry

Threat of substitution: moderate

Inexpensive and easy substitutes available (fan or air coolers) but functionally not up to par

as substitutes do not provide similar levels of comfort


Co

nsu

me

r E

lectr

on

ics


Security system

Exhibit 79: Electronic security services market CAGR

of 25% over FY15-20

Source: SIS India RHP, Elara Securities Research

Exhibit 80: Market share by end-user segment (FY15)


Exhibit 81: Market share by city classification

Source: Dixon Technologies Annual Report, Elara Securities Research

Exhibit 82: Competitive landscape: Large OEM

dominate the market as on FY15


Exhibit 83: Key Demand Drivers


24.3

60.575.6

95.3

122

154.9

196.8

0

50

100

150

200

250

FY

11

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

(IN

R b

n)

Electronic Security Services Market

Commercial37%

Industrial30%

Government28%

Residential5%

Tier I & II cities80%

Tier III & IV cities20%

OEM55%

System Integrators

35%

Private Security

Cos10%

Growing crime rates leading to increased threat perception

Declining prices of electronic security systems

Increase in government investments by increasing the number

of cameras installed at public places

States like Tamil Nadu and Maharashtra have made it mandatory to install CCTV in all private institutions

Increase in organized real estate



Mobile phone

Exhibit 84: Mobile phone industry CAGR of 20% over

FY16-21E


Exhibit 85: …aided by rising affordability (improves

from ~19 in CY16 to ~22 in CY20E

Note: Affordability Index is India per capita income divided by Mobile phone

prices. Source: Bloomberg, Elara Securities Research

Exhibit 86: Domestic production may surpass INR

4,500bn by FY21E


Exhibit 87: Share of smart phones (in terms of value)

is likely to reach ~85% by FY21


Exhibit 88: Smartphone penetration

Source: Dixon Technologies Annual Report, Elara Securities Research

Exhibit 89: Outsourcing accounts for ~40% of total

production (Apr 17 – Dec 17)


1,252 1,254 1,490 1,584

1,801 2,101

2,558

3,152

3,947

0

1,000

2,000

3,000

4,000

5,000

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21

(IN

R b

n)

OEM Demand

12.0

14.4

17.117.8

19.420.3 20.8 21.3

22.0

10

15

20

25

CY

12

CY

13

CY

14

CY

15

CY

16

CY

17

CY

18

CY

19

CY

20

Mobile phones

(20)

0

20

40

60

80

100

0

1,000

2,000

3,000

4,000

5,000

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21

(%)

(IN

R b

n)

OEP % net import

38

62

13

87

0

20

40

60

80

100

Feature Phones Smart Phones

(%)

FY16 FY21

23

50

0

10

20

30

40

50

60

India World

(%)

OEP by EMS40%

OEP by OEM60%


Co

nsu

me

r E

lectr

on

ics


Exhibit 90: India’s cost of manufacturing is expected

to be lower than in China by ~6.5% in FY21E

Source: Ministry of Labor & Employment, Dixon Technologies RHP, Elara

Securities Research

Exhibit 91: Xiaomi emerges as market leader in the

smart phone category

Brands (%) Q1CY17 Q1CY18

Xiaomi 13 31

Samsung 26 26

Vivo 12 6

Oppo 10 6

Honor 1 3

Others 38 28

Total 100 100

Source: Counterpoint Research, Elara Securities Research

Exhibit 92: Reliance Jio emerges as market leader in

feature phone category

Brands Q1CY17 Q1CY18

Reliance Jio 0 36

Samsung 25 10

Itel 16 9

Nokia 0 7

Lava 9 6

Others 50 32

Total 100 100

Source: Counterpoint Research, Elara Securities Research

94.0

90.0

81.086.087.0

87.5

70

75

80

85

90

95

FY14 FY17 FY21

(%)

India China



Reverse logistics

Exhibit 93: Reverse logistics CAGR of 15% in FY16-21


Exhibit 94: Reverse logistics market size expected to

be ~INR 40bn by FY21


Exhibit 95: Mobile phone is the biggest segment in

reverse logistics


Exhibit 96: Average return rate of ~10%


Huge potential

E-Commerce: ~INR 1.2tn of all products in E-

Commerce are returned annually (overall return rate

is in the range of ~15-20%)

Repair and refurbishment of consumer electronics:

FY19 Union Budget has allowed imports of second-

hand electronics goods for the purpose of repair or

refurbishment

Major firms involved in reverse logistics

Greendust Reverse Logistics, Flextronics, R-Logic, iQor,

Aforeserve.com, InTarvo Technologies, Smartlink

Network, Brightpoint India, Hongkong Excellence and

Reboot Systems

Benefits of outsourcing

Usually not a core competence of the consumer

durables firm

Specialists outsourcing suppliers can achieve scale,

thereby providing services at low cost

Outsourcing suppliers provide support in Tier II and

III cities where consumer durables firms are not

operating or do not want to invest significantly

26.2 29.4

41.047.3

53.661

65.6

79.8

94.3

0

20

40

60

80

100

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21

(mn

)

Total reserve logistics volume

10.7 11.514.8 16.6

19.122.3

25.6

31.6

38.4

0

10

20

30

40

50

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21

(IN

R b

n)

Total reserve logistics

0

10

20

30

40

FY13 FY16 FY21

(iN

R b

n)

Computer peripherals WM

FPD TV Set Top Box

Mobile Phones

16

10 9 8 8

0

5

10

15

20

Se

t to

p B

ox

Co

mp

ute

rP

eri

ph

era

ls

Mo

bile

Ph

on

e

FP

D T

V

WM

(%)

Average return rate for consumer electronics


Co

nsu

me

r E

lectr

on

ics


Rise in share of outsourcing

Consumer durables brands have been continuously

increasing their dependence on EMS firms, appreciating

the benefits derived from outsourcing (cost-effectiveness,

flexibility in product design updates, faster time to market

and reduction in working capital cycle).

Exhibit 97: Increase in share of outsourcing by

consumer durable brands

Source: CapitaLine, Elara Securities Research

Late adoption to technology in consumer electronics

India is years behind in adoption of latest consumer

electronics and appliances, given its per capita on

purchasing power parity at ~USD 7,000 vs China’s &

World’s average of ~USD 17,000. (10-year behind China

and 20-year behind world average)

Exhibit 98: India per capita vs other countries


Late adoption, due to lack of affordability, has resulted in

the market being dominated by segments where Tier 1

global firms are absent or do not focus, such as like semi-

automatic washing machine (~56% of India’s washing

machine market), feature mobile phones (~66% of India’s

mobile phone market) and flat panel design LED TV less

than 43-inch size (~95% of India FPD TV market). These

categories usually do not exist in advanced economies,

thereby global brands may not manufacture them and

prefer to partner with EMS firms to complete product

portfolio in India. So, a large mass market exists for EMS

firms in India.

Exhibit 99: Semi automatic washing machine

accounts for ~60% of total market (FY16)


Exhibit 100: Feature mobile phone accounts for

~70% of total market (FY16)


Exhibit 101: ~32-inch size FPD TV accounts for ~75%

of total market


31.1

34.7 37.4 36.6

38.6 38.1 39.8 40.5

46.6

20

25

30

35

40

45

50

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

(%)

Purchase of trading goods as a % of raw material

2,195 3,016

7,050

3,699

7,285

11,675

7,056

16,807 16,961

0

5,000

10,000

15,000

20,000

India China World

(USD

/ca

pit

a in

PP

P)

1997 2007 2017

Semi-automatic

56%

Fully automatic top load

29%

Fully automatic front load

15%

Feature Phones

66%

Smart Phones

34%

< 32 inch10%

32 - 43 inch85%

>43 inch5%



Exhibit 102: Non-inverter AC account for ~90% of

total market


Rise in prominence of tier II, regional & private labels

Tier II, regional and private labels prefer outsourcing, as

they are unsure of their market share, given increased

competition, diverse consumer needs, change in

customer preference and lack of scale & capability.

Brands usually prefer to import or outsource production

until they gain a sizeable market share. Also, private

labels usually prefer outsourcing as manufacturing is not

their core competence.

Exhibit 103: New consumer durables clear preference

for outsourcing manufacturing partners

Categories Consumer brands or durables retailer

Mobile phone

Adcom, AK, Callbar, Gfive, Daps, Blackzone, Forme, Celkon, Gamma, I Kall, Peace, 1+1=2, Ssky, GLX, Poya Vogue, Kechaoda, Chilli, Infocus, MTR, Xccess, Mafe, iVoomi, Zen

FPD TV

Polaroid, Dektron, Marq, Smartronics, Weston, Sansui, Thomson, Skyworth, TCL, Xiaomi, Kodak, Marq, Intex, Noble, Beltek, Crown, Texla, Kortex, Akai, Sanyo, Mitashi, Kevin, Daiwa, Nacson, Infocus, Lloyd

Semi automatic washing machine

Marq, Midea, Onida, BPL, Daiwa, Intex, Hyundai, Lloyd

LED lighting

Billion, Alpha, KWW, Opple, Parax, Halonix, Limelight, Calex, Aryshaa, Everready, Luminous, Top Max, Mg Gold, VPL India, Remen, Yes Celebration, Reli Power, Mood of Wood, Sunbeam


Croma, Reliance Digital, Next, eZone, Avoir, MarQ, Billion, Midea, Micromax, Mitashi, Sansui, Onida, Lumx


EMS superior value proposition

Consumer brands prefer outsourcing due to cost

effectiveness, flexibility in product design updates, faster

time to market and reduction in working capital cycle

and achieving asset light business model.

Exhibit 104: Outsourcing helps consumer durables

brands to be asset light…

Source: Capital line, Elara Securities Research

Exhibit 105: …with lower working capital investment

Source: Capital line, Elara Securities Research

Split72%

Window16%

Inverter12%

FY17: 4.7mn units

4.7 4.7 4.7

6.76.8

4

5

6

7

8


(x)

Gross fixed asset turnover

39.8

34.3

20.3 20.9

15.6

10

15

20

25

30

35

40

45


WC Days


Co

nsu

me

r E

lectr

on

ics


EMS competition in India

Competition in India’s EMS & ODM industry is moderate,

in our view, considering the following factors:

Huge market growth potential (~30% CAGR FY16-21

Moderate industry concentration (Top four firms

account for 35% market share)

Higher variable cost structure

Low exit barriers.

Exhibit 106: Top four EMS & ODM firms account for

~35% of total market (2016)

Source: Dixon Technologies RHP, Amber Enterprise RHP, Elara Securities

Research

Oligopolistic competition on sub segment basis

However, on a sub-segment basis, oligopolistic

competition exists with top three firms controlling a

significant portion of the market.

Exhibit 107: Oligopoly India EMS market (FY16)

Note: RAC market share is of market leader as on FY17 and Washing Machine

segment market share is of Top 2 player; Source: Dixon Technologies RHP,

Amber Enterprise RHP, Elara Securities Research

Flat Panel Display TV (FPD TV)

EMS FPD TV business has less competition, with top firms

controlling more than 50% of the EMS market.

Exhibit 108: Key EMS firms in the FPD TV business

(FY16)

Source: Dixon Technology presentation

Noble Group (Not Listed)

The company started in 1982 by Sarbjit Singh and has

manufacturing units at Haryana, Noida, Haridwar and

near Chennai in Tamil Nadu. The company has been

making LCD & LED since 2007 and is an OEM & ODM

supplier to brands in India like Haier. According to media

report, 1) the company manufactured 0.2mn units in

2016 (32-inch TV accounts for ~77%; 42-43 inch TV

account for 17%; and 49-inch account for 6% of total

sales) at its Haridwar unit, 2) has an installed capacity of

~0.7mn units pa plan is to double capacity), 3) has a PCB

manufacturing setup with high CPH pick and place SMT

machines, and 4) FY17 total revenue was INR 3,500mn.

The company also manufactures LED & LCD TV under its

own brand, which creates conflict of interest with

customers.

Exhibit 109: Corporate Video

Source: You-tube

Jabil13%

Dixon9%

Amber7%

SFO7%

Elin3%PG

Electroplast2%

Others59%

97

7166

72

55

0

20

40

60

80

100

Lighting WashingMachine

LED TV Mobilephone

RAC

Top 3 EMS player Market share

Dixon50%

MEPL8%

SVL8%

Videotex8%

Noble7%

Others18%

https://www.youtube.com/watch?v=QTg9gYvp2cg&t=35s



Malhotra Electronics (Not Listed)

The company is a manufacturer, exporter and supplier of

TV, plastic moulded cabinets and other electronic

consumer products, such as multimedia speakers, home

theatre system, sound bar system, tower system, DTH

receivers and DVD players. Over 25% of products are

exported to Bangladesh, Nepal, Sri Lanka and the African

continent.

The company has capacity of making 600,000 TV

cabinets, 600,000 TV chassis and 600,000 TV sets pa and

300,000 LED TV & LED TV Parts.

Key clients include T-Series, Intex, Weston, Beltek, Crown,

Texla, Kortex and Akai.


own brand, Wybor, which has created a conflict of

interest with customers.

Videotex (Not Listed)

Established in 1984, it is a EMS & ODM manufacturers in

the LED & LCD segment,. with a market share of ~8% as

on FY16). Key customers include Intex, Zebronics,

Videocon and T-Series.


own brand, which has created a conflict of interest with

customers.


Source: You-tube

Super Plastronics (Not Listed)

The company was established in 1997 by Amarjeet Singh

Marwah with four units (Pune, Himachal Pradesh, Noida

and Jammu) in India in ~130,000 sq ft area with

combined capacity of 30,000 units per month. It

manufactures CRT, LED TV, manuals and semi-automatic

machine, multimedia speakers, home theatre systems

and LED lights. The company has an 8% EMS market

share as on FY16 in the LED & LCD segment. .

The company also manufactures LED & LCD TV, music

system products under its own brands, Beltek and SVL. It

has also recently taken a brand licensee for Kodak TV in

India and it wants to scale up the brand here (plans 80%

revenue contribution from Kodak TV).

Exhibit111: Plastic injection molding machine

Source: Super Plastronics website

Exhibit 112: Clean room

Source: Super Plastronics website

https://www.youtube.com/watch?v=XXfTrKOQrs4


Co

nsu

me

r E

lectr

on

ics


Lighting segment

The EMS lighting business also has less competition with

Top three players controlling the entire market.

Exhibit 113: Key EMS firms in the lighting business as

on FY16

Source: Dixon Technology presentation, Elara Securities Research

Compact lamps

The company was started by Kapil Gupta and is

headquartered at Noida. It has four manufacturing plants

in Uttrakhand with capacity of more than 7mn lamps per

month. The company has a 28% EMS & ODM market

share as on FY16 in the lighting segment.


Source: You-tube

The company has established two brands, Ultra and

Orkuswhich, which has created a conflict of interest with

customers.

NTL Electronics India (Not Listed)

The company is headquartered at Noida and among

leading manufacturers of lighting electronics in the world

outside China. It has four manufacturing facilities with

combined capacity of 5mn LED products per month.

Product portfolio comprises electronic control gears,

ballasts, luminaries, retrofit CFL and LED drivers &

lighting products. The company has a 28% EMS & ODM

market share as on FY16 in the lighting segment.

In April 2012, NTL and Lemnis Lighting of Netherlands

entered into a joint venture to manufacture and market

LED solutions by creating NTL Lemnis. The company has

launched lighting products under its own brand, Pharox,

and has a ~3% market share in India’s LED lighting by

value as on FY16, thereby creating a conflict of interest

with customers.

Exhibit 115: Pharox brand LED by NTL Lemnis

Source: You-tube

Washing machine segment

The EMS washing machine business also has less

competition with top two firms controlling ~70% of

overall market.

Exhibit 116: Key EMS firms in the washing machine

business as on FY16


Noble Group: The company is a large EMS firm in the

washing machine segment, with a ~28% market share as

on FY16.

Dixon39%

NTL30%

Compact Lamps28%

Others3%

Dixon43%

Noble28%

Others29%

http://www.ntlelectronics.com/ntl-lemnis.html

https://www.youtube.com/watch?v=FoRr9LBHCSw

https://www.youtube.com/watch?v=1fqjN191PRY




There is increased competition in the RAC EMS industry,

which has four major firms — Amber, LEEL, E-Durable

and Zamil, with a market share of ~55%.

Exhibit 117: Amber is a market leader in India’s RAC

EMS industry as on FY17


Brief snapshot of other EMS firms

LEEL: The company is the largest producer of coils and

heat exchangers (fin & tube types) in India, serving the

HVAC and R industry in the country as well as OEM in

North America, Europe, the Middle East and Australia. It

also manufactures air conditioners for Indian Railways,

Metro Rail and buses at its Bhiwadi factory in Rajasthan.

The company has a global presence with six state-of-the-

art manufacturing facilities at Bhiwadi, Tauru (Haryana),

Pantnagar (Uttarakhand), Kalaamb (Himachal Pradesh),

Ranipet (Tamil Nadu) & Haridwar (Uttarakhand) and two

overseas manufacturing facilities at Prague, Czech

Republic and one in New Zealand.

The products manufactured include a range of room air

conditioners, such as inverter AC, roof mounted AC, a

wide range of heat exchangers, air handling units, fans

and other components.

On a standalone basis, the company derived 27% of total

revenue from OEM and packaged air conditioning units

i.e. INR ~8,000mn in FY17.

Exhibit 118: Coil shop

Source: LEEL website

Exhibit 119: Sheet metal fabrication


Exhibit 120: System tubing


Exhibit 121: Window & split AC assembly line


E-Durable (Not Listed)

The company is one of the largest EMS firms with a

product portfolio in air conditioners, microwave ovens,

induction cook tops, irons, geysers, heat convectors and

hair dryers. It has a manufacturing facility at Dehradun,

Uttarakhand.

Product range: Window AC (1.0-1.5 tonne) and split

ODU (1.0, 1.5 & 2.0 tonne). The company does not have

a product range in indoor split AC. Also in terms of critical

components, it only has multiflow condensers (with a

strategic tie-up with Delphi).

Amber55%

Other45%


Co

nsu

me

r E

lectr

on

ics


Zamil (Not Listed)

Zamil Air Conditioners India (ZAC India) is a subsidiary of

Zamil Industrial Investment, Saudi Arabia (‘ZIIC’) and it

began its full-fledged foray in India’s air conditioner

industry in 2013. ZAC India provides complete HVAC,

MEP, and plumbing & firefighting solutions on turnkey

basis. Its plant is a vertically integrated setup with in-

house design and development facilities, including a

psychometric laboratory.

Exhibit 122: Assembly line

Source: Zamil website

Mobile phone segment

Global Electronic Manufacturing Services Company has

operations in India for more than a decade and has

relationships with large global OEM brands. However, its

focus in India is in the mobile phones segment.

Domestic EMS firms are struggling in this space, due to 1)

increased competition due to global EMS firms operating

in India which have global relationships with large

mobile phone brands, and 2) consumer brands

expanding their manufacturing capacity.

Exhibit 123: Global EMS firms dominate the segment

as on FY16


Foxconn

Largest contract electronics maker with ~40% share

Foxconn has been operational in India since 2006 and

has capacity to produce ~4.0mn devices per month. the

company plans to expand its manufacturing presence,

due to 1) government incentives (production subsidies

provided by both Central & State governments and tax

differential between domestic production and imports),

2) improving infrastructure, 3) large domestic market,

and 4) India’s cost structure is likely to be cheaper than

China’s by ~6.5% by FY21. The company has already

signed an Memorandum of Understanding with

Maharashtra to invest ~USD 5bn (includes USD 3bn

investment in setting up display fab; USD 250mn towards

mechanics like CNC; lithium ion cell battery and facilities

for printed circuit boards). Post investment

manufacturing, capacity will increase to ~10mn units per

month. The company has ~35% EMS market share in

India mobile phone segment.

Exhibit 124: Foxconn manufacturing plant in Sri City

(Andhra Pradesh)

Source: You-tube

Flex India

Flex is the third-largest global electronics manufacturing

services, original design manufacturer. The company has

manufacturing operations in 40 countries totally

~200,000 employees.

Flex entered into India in 2001 and has units at Chennai,

Pune, Bengaluru, Mumbai and Gurgaon. Its unit in

Chennai Industrial Park is one of its six industrial parks

globally. The company has a ~22% EMS market share as

on FY16 in the mobile phone segment.

Dixon8%

Foxconn35%

Flextronics22%

BGM15%

Others20%

https://www.youtube.com/watch?v=omPXWF5pJy0&t=68s



Exhibit 125: Flex India operations in Chennai

Source: You-tube

Reverse Logistics

Multiple reverse logistics companies operate in India,

along with a few of large global ones.

Some major reverse logistics companies are as follows:

iQor: iQoris one of the largest providers of business

process outsourcing services in the world and

provides customized solutions to industries. It is a

global company with 66 facilities across 18 countries.

The company has a workforce of ~45,000 employees

undertaking ~20mn repairs per year.

R-Logic: R-logic was founded in Singapore in 1999

and provides reliable & timely reverse logistics

services, including technical support center, repair

services and defective inventory management using

forefront technology. The company has in-depth

technical repair hub in Singapore, India, Malaysia

and Indonesia. In India, it is present at Cochin,

Bangalore, Mumbai, Delhi, Chennai and Hyderabad

and has ~1,400 employees. In India, the company

provides services for LCD & LED panel, line printers,

motherboard, desktop & notebook, memory, power

supplies, mobile phone, tablets, tough books, data

storage units, routers & switches, enterprise products

and UPS.

Exhibit 126: Corporate video

Source: You Tube

inTarvo:

For over two decades, inTarvo has been serving as a

leading provider of after-market services in India focused

on technology asset management of electronic products.

The company provides end-to-end solutions across the

product life cycle and has a pan-India presence, with a

network of service excellence centers in 200+ cities. Some

major clients include IBM, Lenevo, Airtel, Croma, Airtel,

Reliance, Sun Direct, HP and Acer.

https://www.youtube.com/watch?v=jpOCJeQ5l9Y

https://www.youtube.com/watch?time_continue=57&v=hYRlrWKo4yQ


Co

nsu

me

r E

lectr

on

ics


Risks

Rising preference for in-house manufacturing

Global consumer brands like LG and Samsung are

looking to set up India as one of its global manufacturing

hubs, as China is losing its cost competitiveness. Samsung

has already committed INR 50bn to double its mobile

phone production to 120mn handset pa by CY20 at its

Noida facility near New Delhi, India, and start exporting

from this facility. LG is looking to set up a plant in East

India and continue to invest & upgrade its existing

facilities at Pune and Noida.

Complex labor laws

India’s cost competitiveness relative to China is largely

driven by lower labor cost. However, India is unable to

take advantage of its competitive advantage because of

panoply of restrictive labor regulations (about 200 labor

laws with over a fourth being Central acts).

The Industrial Disputes Act (IDA) requires firms with

100 or more workers to seek government permission

to retrench or lay off any worker

The Industrial Employment (Standing Orders) Act,

1946 requires employers in firms with 100 or more

workers (50 or more in certain states) to seek

permission even for reassigning a worker from one

task to another

The Trade Unions Act allows any seven employees to

form a union, thereby using up a large proportion of

the firm’s managerial resources in dealing with

several unions within itself

The government recognizes this as a major hindrance

and has undertaken various reforms in the recent past.

Some notable reforms undertaken are:

Reduce the number of registers employers are

required to keep under nine different federal level

labor statutes from 56 to five

Employers are permitted to maintain these registers

in electronic form

The number of forms and returns employers are

required to file under three federal labor laws has

been reduced from 36 to 12 by eliminating

redundancy and duplications

Several administrative and eGovernance initiatives

have been undertaken by the Central and state

governments to generate employment and facilitate

ease of doing business

Volatility in raw material prices

EMS firms is able to pass on the rise in cost of raw

materials (price & exchange rate fluctuations) to

customers. But, margin and cash flow are adversely

affected because of the time gap between date of

procurement of primary raw materials and date of price

reset with the customer to account for the increase in

cost (especially in case of ODM-based revenue model).

Change in technology: In case technology supported by

customers becomes obsolete, they may face reduced

demand, thereby affecting profitability of EMS firms. For

example, the launch of fibre to the Home (FTTH) by

Reliance Jio may impact demand of set-top box by DTH

firms

Customer concentration: Customer concentration is

usually high for all EMS firms with Top 3 customer

accounts for a large portion of revenue. So, decline in

customer’s market share may adversely impact

profitability of EMS firms

Short-term contractual agreement with customers: EMS

firms’ agreement with consumer durables brands is

usually valid for less than three years, with no obligation

to place an order. Switching cost is low and brands may

change vendors, switch for imports or set-up their own

manufacturing units, and, thus there is no assurance of

generating revenue

Seasonal sales: Demand for products manufactured by

EMS firms is seasonal in nature. Any adverse macro

events during the peak season may adversely impact

profitability of EMS companies disproportionately. For

example, peak season for room air conditioner is in

Summer. Low heat or unseasonal rains can significantly

hamper demand for room air conditioners.



Notes

Glo

ba

l M

ark

ets

Re

sea

rch



The ‘Durable’ builder

Integrated solutions: 30%+ EMS industry CAGR over FY16-21

Dixon Technologies (DIXON IN) is the only listed domestic electronics

manufacturing services provider in India. The company is an

integrated end-to-end solutions provider to brand owners with R&D,

reverse logistics solutions, global sourcing, manufacturing, testing &

packaging. We believe it will be key beneficiary in terms of market

leadership, lowest cost producer due to scale, backward integration

and industry tailwinds. We expect EMS industry CAGR of 30%+ over

FY18-21E, due to rise in domestic production and share of outsourced

manufacturing by consumer durables, large exports opportunity on

India’s relative cost advantage with China, and strong domestic

demand for consumer electronics.

Large addressable market size with market leadership position

The company have a good track record of entering into a new product

category and reach market leadership position (39% in lighting, 50% in

FPD TV, 43% in washing machines) and expand its addressable market

size (– Aggregate market size in lighting, washing machine and FPD

TV is INR ~600bn in FY16). It recently forayed in security (CCTV)

systems & mobile phone through joint ventures which we believe is a

successful model as seen in auto ancillary industry.

Asset-light model: superior business and healthy profitability

The company have a healthy profitability matrix (FY18 ROE of ~24%)

largely due to its asset-light business model as evident by high fixed

asset turnover (15x), negative net working capital turnover and cost

efficiency due to scale and adoption of backward integration strategy

(Printed Circuit Board and open cell assembly).

PAT CAGR of 35% over FY18-21E

We expect EPS CAGR of 35% over FY18-21E, driven by 1) 19% revenue

CAGR, and 2) 55bp margin expansion (ex mobile) on higher operating

leverage, better revenue mix & backward integration.

Rating: Buy Target Price: INR 3,475

Upside: 38%

CMP: INR 2,510 (as on 23 August 2018)

Key data

Bloomberg /Reuters Code DIXON IN/DIXO.NS

Current /Dil Shares O/S (mn) 11/11

Mkt Cap (INR bn/USD mn) 28/405

Daily Volume (3M NSE Avg) 2,354

Face Value (INR) 10

1 US$= INR 70.1

Note: *as on 23 August 2018; Source: Bloomberg

Price & Volume

Source: Bloomberg

Shareholding (%) Q2FY18 Q3FY18 Q4FY18 Q1FY19

Promoter 38.9 38.9 38.9 38.9

Institutional Investor 33.3 30.8 32.2 33.0

Other Investor 19.0 20.4 18.0 18.1

General Public 8.8 9.9 10.9 10.0

Source: BSE

Price performance (%) 3M 6M 12M

Sensex 10.6 13.4 22.5

Dixon Technologies (26.1) (23.7) -

Amber Enterprise (14.6) (17.2) -

Source: Bloomberg

Valuation We initiate on Dixon Technologies with a Buy rating and a TP of INR

3,475, implying upside of 38%. Our TP is based on 32x June 2020E

EPS of INR 109. We conservatively value the company by giving a

24% discount to consumer electrical/durable companies (~42x one-

year forward P/E) due to its B2B business model and high customer

concentration. However, the company enjoys superior FY18 ROE of

24%, an EPS CAGR of 35% over FY18-21E and segment-wise market

leadership.

Source: Bloomberg

Key Financials YE March

Revenue (INR mn)

YoY (%)

EBITDA (INR mn)

EBITDA Margin (%)

Adj PAT (INR mn)

YoY (%)

Fully DEPS (INR)

RoE (%)

RoCE (%)

P/E (x)

EV/EBITDA (x)

FY18 28,534 28.8 1,127 3.9 609 28.0 54.5 23.8 25.6 46.0 26.3

FY19E 31,104 9.0 1,446 4.7 773 27.0 68.3 22.0 27.6 36.7 20.5

FY20E 39,444 26.8 1,972 5.0 1,129 46.0 99.7 25.5 35.0 25.1 15.1

FY21E 48,045 21.8 2,546 5.3 1,531 35.6 135.2 26.8 40.8 18.5 11.7

Note: pricing as on 23 August 2018; Source: Company, Elara Securities Estimate


Initiating Coverage

Dixon Technologies

0.0

2.0

4.0

6.0

8.0

200

2,200

4,200

6,200

Se

p-1

7

Oct-

17

No

v-1

7

De

c-1

7

Jan

-18

Fe

b-1

8

Ma

r-1

8

Ap

r-1

8

Ma

y-1

8

Jun

-18

Jul-1

8

Au

g-1

8

Vol. in mn (RHS) Dixon Technologies (LHS)

80

130

180

230

280

Se

p-1

7

Oct-

17

No

v-1

7

De

c-1

7

Jan

-18

Fe

b-1

8

Ma

r-1

8

Ap

r-1

8

Ma

y-1

8

Jun

-18

Jul-1

8

Au

g-1

8

Re

ba

sed

to

10

0

Dixon Technologies Sensex

Dixon Technologies


Valuation trigger

Source: Bloomberg, Elara Securities Estimate

Valuation overview

P/E (x) 32

EPS March June FY20E (INR) 109

Target price (TP) INR 3,474

Rounded off TP (INR) 3,475

Upside (%) 38.4


Valuation driver

Return on equity expected to improve from 24% to 27% in FY21

Expect PAT CAGR of 35% over FY18-21

Source: Company, Elara Securities Estimate

Investment summary

Revenue CAGR of 19% over FY18-21E,

driven by strong growth in consumer

electronics, home appliances, lighting

and security system divisions

55bp margin expansion (ex mobile)

over FY18-21E on higher operating

leverage, better revenue mix &

backward integration

Asset-light business model as evident

by high fixed asset turnover (15x) and

negative net working capital turnover

Cost efficiency due to scale and

adoption of backward integration

strategy (Printed Circuit Board and

open cell assembly).

Valuation trigger

Large customer addition especially

export orders

Product category expansion

Higher capacity utilization in mobile

phone segment

Margin expansion

Key risks

Lack of revival in mobile phones and

reverse logistics division

Loss of revenue from key anchor

customer

Impact on margin due to rupee

depreciation and rise in commodity

prices as price escalation with

customers happens with a lag of at

least a month

Our assumptions

EMS industry CAGR of 30%+ over FY18-

21E

PAT CAGR of 35% over FY18-21E, due

to strong revenue growth and margin

expansion

Brands continue to opt for outsourced

manufacturing

Global EMS companies to focus largely

in mobile phone category

12 3

4

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

Se

p-1

7

Oct-

17

No

v-1

7

De

c-1

7

Jan

-18

Fe

b-1

8

Ma

r-1

8

Ap

r-1

8

Ma

y-1

8

Jun

-18

Jul-1

8

Au

g-1

8

Se

p-1

8

Oct-

18

No

v-1

8

De

c-1

8

Jan

-19

Fe

b-1

9

Ma

r-1

9

Ap

r-1

9

Ma

y-1

9

Jun

-19

Jul-1

9

Au

g-1

9

Higher capacity utilization in mobile

phone segment

Margin expansion

Large customer addition

especially export orders

Product category

expansion

20.016.2

41.0

29.7

23.822.0

25.5 26.8

0

10

20

30

40

50

FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E

(%)

ROE

83.5

40.7

154.4

45.4

28.027.0

46.0

35.6

0

20

40

60

80


(%)

PAT growth

Dixon Technologies

Co

nsu

me

r E

lectr

on

ics


Financials Income Statement (INR mn) FY18 FY19E FY20E FY21E

Net Revenues 28,534 31,104 39,444 48,045

EBITDA 1,127 1,446 1,972 2,546

Less :- Depreciation & Amortization 152 196 237 282

EBIT 975 1,250 1,735 2,264

Less:- Interest Expenses 135 182 189 181

Add:- Non operating Income 42 53 90 135

PBT 882 1,121 1,636 2,219

Less :- Taxes 273 347 507 687

Adjusted PAT 609 773 1,129 1,531

Balance Sheet (INR mn) FY18 FY19E FY20E FY21E

Share Capital 113 113 113 113

Reserves 3,036 3,779 4,863 6,333

Borrowings 406 456 506 556

Deferred Tax (Net) 41 41 41 41

Trade Payable 5,147 9,459 11,887 14,348

Total Liabilities 9,859 13,923 17,485 21,466

Net Block 1,788 2,192 2,505 2,828

Debtors 2,963 4,857 6,160 7,503

Inventory 3,223 4,431 5,619 6,845

Cash & Investment 552 1,111 1,869 2,958

Total Assets 9,859 13,923 17,485 21,466

Cash Flow Statement (INR mn) FY18 FY19E FY20E FY21E

Cash or operating profit adjusted for non cash items (before WC changes)

1,151 1,499 2,062 2,681

Add/Less : Working Capital Changes (470) (178) (569) (795)

Operating Cash Flow 680 1,321 1,493 1,886

Less:- Capex (724) (600) (550) (605)

Free Cash Flow (44) 721 943 1,281

Financing Cash Flow 417 (163) (185) (192)

Investing Cash Flow (997) (600) (550) (605)

Net change in Cash 100 558 759 1,089

Ratio Analysis FY18 FY19E FY20E FY21E

Income Statement Ratios (%)

Revenue Growth 16.1 9.0 26.8 21.8

EBITDA Growth 23.5 28.3 36.4 29.1

PAT Growth 28.0 27.0 46.0 35.6

EBITDA Margin 3.9 4.7 5.0 5.3

Net Margin 2.1 2.5 2.9 3.2

Return & Liquidity Ratios

Net Debt/Equity (x) (0.0) (0.1) (0.3) (0.4)

ROE (%) 23.8 22.0 25.5 26.8

ROCE (%) 25.6 27.6 35.0 40.8

Per Share data & Valuation Ratios

Diluted EPS (INR/Share) 54.5 68.3 99.7 135.2

EPS Growth (%) 24.9 25.3 46.0 35.6

DPS (INR/Share) 2.0 0.0 0.0 0.0

P/E Ratio (x) 46.0 36.7 25.1 18.5

EV/EBITDA (x) 26.3 20.5 15.1 11.7

EV/Sales (x) 1.0 1.0 0.8 0.6

BVPS (INR) 282.0 343.7 439.4 569.2

Price/Book (x) 8.9 7.3 5.7 4.4

Dividend Yield (%) 0.1 0.0 0.0 0.0


Revenue & margin growth trend

Source: Company, Elara Securities Research

Adjusted profit growth trend


Return ratios


3.9

4.7 5.0 5.3

0

2

4

6

0

20,000

40,000

60,000

FY18 FY19E FY20E FY21E

(%)

(IN

R m

n)

Net Revenues (LHS)EBITDA Margin (RHS)

28.0 27.0

46.0

35.6

0

10

20

30

40

50

0

500

1,000

1,500

2,000


(%)

(IN

R m

n)

Adjusted PAT (LHS) PAT Growth (RHS)

23.8 22.0 25.5 26.8

25.6 27.6

35.0

40.8

0

10

20

30

40

50


ROE (%) ROCE (%)

Dixon Technologies


Integrated solutions

EMS industry CAGR of 30% in FY18-21E

We expect EMS industry CAGR of ~30%+ over FY18-21E,

driven by 1) rapid fall in imports, 2) rising share of

outsourcing, 3) India’s relative cost advantage over

China by FY21, and 4) a 17% CAGR over FY16-21E for

the consumer electronics industry.

Exhibit 1: EMS market opportunity of INR ~300bn

over FY18-FY21


Exhibit 2: Strong EMS industry growth driven by…

(mn unit) EMS volume

(FY16) EMS volume

(FY21E) CAGR (%)

FPD TV 1.2 10.8 55.5

Washing machine 0.6 3.4 41.2

LED + CFL lighting 333 1157.9 28.3

Mobile phone 34.4* 383.7 103.0

Note: *share of outsourcing for mobile is for 9MFY18; Source: Company

Exhibit 3: …sharp fall in imports & outsourcing share

by brand owners

(mn unit) Net imports Share of outsourcing FY16 FY21E FY16 FY21E

FPD TV 34.2 (5.3) 15.2 39.1

Washing machine 6.0 (7.0) 12.0 34.3

LED + CFL lighting 22.0 15.0 70.0 85.0

Mobile phone 75.0 (14.0) 39.9* 66.1

Note: *share of outsourcing for mobile is for 9MFY18; Source: Company

Exhibit 4: Consumer electronics industry CAGR of

17% over FY16-21E

Note: Consumer electronics includes mobiles, flat panel display TV, washing

machine, camera and set top boxes. Source: Dixon Technologies RHP, Elara

Securities Research

Exhibit 5: Potential addressable market size of INR

~1300bn in FY21

(INR bn) FY16 FY21E CAGR (%) FPD TV 374.4 777.1 15.7

Washing Machine 79.1 163.7 15.7

LED + CFL Lighting 153.8 331.6 16.6

Mobile phone 1,583.5 3,947.2 20.0

Total 2,190.8 5,219.6 19.0

Total (excl mobile) 607.3 1,272.4 15.9

Source: Company

Exhibit 6: Product-wise industry volume growth

(mn unit) FY16 FY21E CAGR (%)

FPD TV 12.0 26.2 16.9

Washing machine 5.0 9.9 14.6

LED + CFL lighting 1,713.5 2.066.4 3.8

Mobile phone 282.2 509.0 12.5

Source: Company

Market leadership

Dixon’s experience in manufacturing, significant

backward integration, design capability, superior

execution with low rejection levels (Average quality

rejection is ~1%) and strong relationships with suppliers

& customers has helped it achieve market leadership in

all product verticals, except mobile phones.

76.2 93116.4

148.8192

249.6

324.6

428.4

569.4

0

100

200

300

400

500

600

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21

(IN

R b

n)

India EMS/ODM

0

1,000

2,000

3,000

4,000

5,000

6,000

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21

(IN

R b

n)

End-to-end solutions provider

EMS industry CAGR of 30%+ over FY18-21E

High Profitability ratio (FY18 ROE of ~24%) due to asset-light business model

Key USP lies in being a complete solutions provider with cost & market leadership

Dixon Technologies

Co

nsu

me

r E

lectr

on

ics


Exhibit 7: Market leadership in most product verticals

(mn unit) Market share (FY16) FPD TV 50.4

Washing machine 42.9

LED + CFL lighting 38.9

Set-top box reverse logistics 16.5

Mobile phone 8.4

Note: mobile units sold in 9MFY18; Source: Company, Elara Securities

Research

Strong product portfolio

The company manufactures products like CFL, LED

lighting, LED TV, washing machine, mobile phone, CCTV

and DVR. Recent product category expansion (of mobile

phones, CCTV and DVR) has been along with JV

partners (Karbon for mobile phone and CP Plus for

security systems). We believe product expansion through

JV is a successful strategy similar to what we have seen

in the auto ancillary industry, which the company may

continue in future product expansion. It may enter into

the refrigerator segment as well, further broadening its

addressable market size.

Exhibit 8: Product evolution


Focus on cost leadership

Large manufacturing capacity, backward integration and

being a sizeable player in each vertical has helped the

company achieve higher operational efficiency.

Economies of scale coupled with lower overhead, low-

capital intensive manufacturing lines and ability to

manage working capital investment has helped it attain

cost leadership.

Dixon has successfully maintained flexibility in

manufacturing through multi-functional training and the

use of surface mounting technology lines which can be

used to manufacture diverse products, such as LED TV,

CFL and LED products. Flexible manufacturing lines have

brought about efficiency in terms of asset and labour.

Over the years, the company has gradually backward

integrated each of its verticals. It has set up 1) plastic

moulding and sheet metal for lighting products, LED TV

& washing machines, 2) mechanical components for

lighting products, 3) a clean room for back-light units

and open cell assembly for LED panel assembly, and 4)

PCB assembly for mobile phones. Backward integration

have helped in bringing cost efficiency, reduced

dependency on third-party suppliers, reduce production

time, lower inventory days and quality of critical

components used in manufacturing resulting in lower

rejection rate (average quality rejection rate of ~1%),

thereby resulting in higher customer stickiness.

Customer stickiness and customer

acquisition

The company has developed long standing relationships

with well-known global brands (Panasonic & Phillips)

across verticals. It has an average association of ~2.5

years with 51 clients. The company has been able to

successfully meet the strict supplier selection process.

Customer stickiness and strong revenue growth over the

years demonstrate its strong execution capability and

ability to manufacture quality products in the most cost-

effective rate. Strong relationships with brands have also

aided in expanding product portfolio that allowed it to

diversify its revenue stream.

For eg, the company first received an order from

Panasonic for LED TV. Over the years, leveraging its

relationship & strong execution has helped it to diversify

into manufacturing of washing machines and mobile

phones.

The company has been successful in adding new

customers (Samsung, Flipkart, Llyods, Crompton and CP

Plus, TCL, Wipro, Anchor, Bajaj Electrical, Tambo), which

is helping it expand market share in India’s EMS industry.

EMS firm with bouquet of services

The company is a focused electronic manufacturing

maker, which believes in partnering with clients to

produce quality products at the lowest cost. It recognizes

its core competence lies in manufacturing, and not in

branding & marketing, The company does not want to

create conflict of interest with clients by launching its

own consumer brand. A few peers like Super Plastronics

and NTL which have launched its own brands are

struggling in the market place. The company aims to be

an end-to-end services provider, and thereby maintain an

edge over its peers. Its key service offerings include:

Color TV

1994

CFL lighting, reverse logistics (2008)

Phones (2016)

LCD TV (2007)

LED TV, washing machine (2010)

CCTV, digital video

recorder (2017)

Dixon Technologies


Research and Development: The company has a

R&D team of ~31 people and the R&D centre has

been approved by the Department of Scientific and

Industrial Research. In-house R&D centre helps in

electronics hardware designing, system architecture,

mechanical design, component engineering and

optic design. In-house R&D also assists customers to

achieve cost reduction via product engineering,

introduce new & unique products in the market and

enhance existing products with new features (such

as added waterfall mechanism and magic filter in

washing machines). R&D capability has helped it

steadily increase its ODM revenue, which is a high

margin business.

Exhibit 9: FY18 ODM revenue contribution of ~22%


Global sourcing: More than two decades of

manufacturing experience coupled with scale of

operations have helped it build relationships with

domestic & international suppliers, thereby gaining

expertise in global procurement of quality products

at the lowest cost and adhering to the time

schedules.

Backward integration: Backward integration in each

product vertical has helped meet client needs in a

timely and cost-effective manner. Backward

integration has helped the company evolve as ‘one

stop shop’, thereby becoming indispensible to its

customers.

Reverse logistics: The company has a repair and

refurbishment services for set-top boxes, LED panels

and mobile phones, which gives the company an

edge over peers.

Asset-light model: superior business and healthy profitability

The company have a healthy profitability matrix (FY18

ROE of ~24%) largely due to its asset-light business

model as evident by high fixed asset turnover (15x) and

low net working capital turnover (-1 day) and cost

efficiency due to scale and adoption of backward

integration strategy (Printed Circuit Board and open cell

assembly).

Exhibit 10: Expect 135bps margin expansion over

FY18-21


Exhibit 11: Expect PAT CAGR of 35% over FY18-21


0

5

10

15

20

25

30

35

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

E

FY

20

E

FY

21

E

(%)

ODM Revenue

2.42.8

4.23.7 3.9

4.75.0

5.3

0

1

2

3

4

5

6

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

E

FY

20

E

FY

21

E

(%)

EBITDA margin

83.5

40.7

154.4

45.4

28.0 27.0

46.0

35.6

0

20

40

60

80

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

E

FY

20

E

FY

21

E

(%)

PAT growth

Dixon Technologies

Co

nsu

me

r E

lectr

on

ics


Exhibit 12: High gross fixed asset turnover of ~15x


Exhibit 13: Nil working capital investment


Exhibit 14: Return on equity expected to improve

from 24% to 27% in FY21


Exhibit 15: Return on operating asset…


Exhibit 16: Negative financial leverage


Exhibit 17: Significant improvement in free cash flow


10.0 10.4 10.6

16.0 15.3 15.2 14.9 15.0

0

4

8

12

16

20

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

E

FY

20

E

FY

21

E

(%)

Gross Fixed Asset Turnover

14

10 10 9

(1)(2)

(1)

0

(4)

0

4

8

12

16

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

E

FY

20

E

FY

21

E

(da

ys)

Net working capital

20.016.2

41.0

29.7

23.822.0

25.5 26.8

0

5

10

15

20

25

30

35

40

45

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

E

FY

20

E

FY

21

E

(%)

ROE

12.5 13.0

19.3

15.613.2 13.3 14.2 15.0

0

5

10

15

20

25

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

E

FY

20

E

FY

21

E

(%)

ROOA

1.1 0.9

0.6

0.1

(0.0)(0.1)

(0.3)(0.4)

(0.8)

(0.4)

0.0

0.4

0.8

1.2

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

E

FY

20

E

FY

21

E

(x)

ND/E

3.8

7.3

3.9

1.9

(0.5)

5.6 6.0

6.9

(2)

0

2

4

6

8

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

E

FY

20

E

FY

21

E

(%)

FCF/OA

Dixon Technologies


Exhibit 18: SWOT analysis – Dixon Technologies


Strengths Strong customer relationship (duration with Phillips for

nine years and Panasonic for five years)

Lower production cost due to economies of scale and

backward integration

Asset-light business model with flexible production lines

Experienced senior management team

Diversified product portfolio

Market leadership in all categories except the mobile

phone segment

Weakness Client concentration

Variability in product margin profile

Opportunities Strong growth in consumer durables market due to low

penetration and rising affordability

New international brands or large national and regional

retailers entering the consumer durables market are

opting for outsourced manufacturing

Backward integration, thereby increasing value addition

(PCB & LCM assembly)

Entry into new product categories (like security

surveillance) or expanding existing (like top load

automatic washing machine, street and commercial

lighting)

Large exports market given India is likely to be cost

effective globally in all categories in the next few years

Threats Consumer durables brands preference for in-house

production

Disruption in the form of change in technology

Loss of customer market share

Dixon Technologies

Co

nsu

me

r E

lectr

on

ics


Is it a Motherson Sumi in the making?

Motherson Sumi (MSS IN, Buy, CMP; INR 302, TP; INR

362) is a great example of a home-grown company in

the auto ancillary industry, which boomed due to strong

execution and industry tailwinds.

While Motherson Sumi is different from Dixon

Technology as it manufactures automobile mirrors,

wiring harnesses, plastic components and modules and

serve customers globally, Dixon Technology

manufactures consumer electronics & lighting products

and primarily serves the domestic markets.

However, similarities between the two companies are 1)

vendor-customer relationship, 2) multi-product portfolio,

3) market leadership in respective products, 4) expansion

in product category (after starting with wiring harness,

entered into automotive mirror, plastic components &

modules) and 5) Strong industry tailwinds, such as

localization, rise in share of outsourcing and exports

opportunity.

Motherson Sumi delivered superior financial

performance (30% PAT CAGR over FY03-18), due to

strong execution, increase in product localization, share

of outsourcing and product portfolio expansion (entry

into the mirror business).

Exhibit 19: Can Dixon replicate MSS success?


Exhibit 20: MSS delivers ~300x in 15 years


We believe Dixon can deliver similar superior financial

performance over longer term on, 1) first-mover

advantage, 2) market leadership with low-cost

production due to economies of scale and backward

integration, 3) strong customer relationships, and 4)

industry tailwinds, such as sharp fall in imports, and

rise in share of outsourcing and exports opportunity.

39

34

30

20

25

30

35

40

Revenue EBIT PAT

(%)

CAGR (FY03-18)

0

10,000

20,000

30,000

40,000

Ma

r-0

3

Ma

r-0

4

Ma

r-0

5

Ma

r-0

6

Ma

r-0

7

Ma

r-0

8

Ma

r-0

9

Ma

r-1

0

Ma

r-1

1

Ma

r-1

2

Ma

r-1

3

Ma

r-1

4

Ma

r-1

5

Ma

r-1

6

Ma

r-1

7

Ma

r-1

8

Dixon Technologies


Initiate Buy with a TP of INR 3,475

We initiate on Dixon Technologies with a Buy rating and

a TP of INR 3,475, implying upside of 38%. Our TP is

based on 32x June 2020E EPS of INR 109. We

conservatively value the company by arriving at the

multiple of 32x by giving a 24% discount to consumer

electrical companies (~42x one-year forward P/E) due to

the B2B business model and high customer

concentration.

Sales CAGR of 19%, EBITDA CAGR of 31%, PAT CAGR of 36% over FY18-21

The company enjoys superior ROE, stronger EPS CAGR

and segment-wise market leadership, with FY18 ROE of

~24% and FY18 ROOA of ~13%, driven by higher asset

efficiency. We expect a ~36% PAT CAGR over FY18-21E,

largely driven by a revenue CAGR of 19% and 135bps

margin expansion.

Exhibit 21: Expect 135bps margin expansion over

FY18-21


Exhibit 22: Expect PAT CAGR of 36% over FY18-21


Exhibit 23: P/E has a positive correlation with ROE…


Exhibit 24: … and PAT growth


2.42.8

4.23.7 3.9

4.75.0

5.3

0

1

2

3

4

5

6

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

E

FY

20

E

FY

21

E

(%)

EBITDA margin

83.5

40.7

154.4

45.4

28.0 27.0

46.035.6

0

40

80

120

160

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

E

FY

20

E

FY

21

E

(%)

PAT growth

0

10

20

30

40

50

60

0 20 40 60F

Y2

0E

RO

E (

%)

FY20E P/E (x)

0

10

20

30

40

50

60

0 20 40 60

FY

20

E P

AT

gro

wth

(%

)

FY20E P/E (x)

Value creator

Initiate with a Buy rating and TP of INR 3,475, implying upside of 38%

Revenue CAGR of 19% and EPS CAGR of 35% over FY18-21E

Proprietary framework: Healthy ROOA of 15.0% by FY21E

Dixon Technologies

Co

nsu

me

r E

lectr

on

ics


Exhibit 25: Comparative valuations

PAT Growth

EBITDA margin (%)

ROE (%)


Name Ticker CMP (INR)

Market cap (INR mn)

FY19 FY20 FY19 FY20 FY19 FY20 FY19 FY20 FY19 FY20

Amber AMBER IN 932 29,310 58.9 43.3 7.8 8.1 10.6 13.8 29.6 20.7 14.4 10.6

Dixon DIXON IN 2,510 28,431 27.0 46.0 4.7 5.0 22.0 25.5 36.7 25.1 20.5 15.1

India EMS average

42.9 44.6 6.2 6.5 16.3 19.6 33.2 22.9 17.5 12.9

Whirlpool WHIRL IN 1,750 222,000 27.8 22.4 12.2 12.8 22.7 22.7 49.6 40.5 30.2 24.3

IFB Industries IFBI IN 1,162 47,093 nm 40.7 8.6 9.5 21.0 24.0 37.4 26.6 19.9 14.8

Havells India HAVL IN 707 442,366 33.3 21.2 13.4 13.9 21.6 22.6 50.9 42.0 32.8 27.1

CG Consumer Electricals CROMPTON

IN 265 166,073 26.9 21.0 13.8 14.1 42.4 39.6 40.4 33.4 25.9 21.8

India Consumer

Electrical/Durable average

29.3 26.3 12.0 12.6 26.9 27.2 44.6 35.6 27.2 22.0

Motherson MSS IN 302 635,532 47.2 30.6 10.0 10.7 23.8 26.5 25.5 19.5 10.8 8.5

Bosch BOS IN 18,864 575,739 16.4 20.9 18.4 19.1 16.0 17.0 34.6 28.7 21.3 17.5



Minda MNDA IN 410 107,417 25.8 20.7 12.4 12.6 22.7 22.4 32.3 27.1 16.4 13.6



average

25.8 22.6 14.9 15.4 19.8 20.5 35.9 29.0 18.7 15.5

USD USD mn

Flex FLEX US 14.1 7,496 11.7 21.0 4.9 5.3 19.0 21.1 11.4 9.3 6.8 5.8

Jabil JBL US 28.3 4,770 8.4 6.1 7.0 6.8 22.9 23.1 9.7 9.2 3.7 3.5

Hon Hai Precision Industry 2317 TT 2.7 46,099 8.0 9.8 4.3 4.5 10.9 11.2 10.6 9.6 6.2 5.5

Wistron Neweb 6285 TT 2.2 832 15.2 15.0 6.3 6.8 13.8 15.1 11.7 10.2 4.8 4.0

Global EMS average

10.8 13.0 5.6 5.8 16.6 17.6 10.9 9.6 5.4 4.7

Note: *pricing as on 23 Augsut 2018; Source: Company, Elara Securities Estimate

Dixon Technologies


Our proprietary framework

ROE is often used as a measure of corporate profitability;

although it is a holistic measure of company profitability,

it does not provide a true picture of operating

performance. ROE includes return generated from

financial leverage (RFLEV) or use of debt and return from

operating liability leverage (ROLLEV) or use of supplier’s

credit; therefore, the true operating performance of a

business gets clouded.

Return from net operating asset (RNOA) or ROIC or

ROCE is an improvement over ROE to understand

operating performance as it excludes the use of debt but

falls short of being a true measure of operating

profitability as it includes suppliers credit.

Return on operating asset (ROOA) is an “apples to

apples” measure which does not differentiate between

companies with high gross working capital or fixed

assets (including CWIP). It captures operating profitability

by stripping the impact of RFLEV and ROLLEV. The key

adjustment to arrive at ROOA is opportunity cost of

operating liabilities is added to post-tax EBIT to arrive at

adjusted operating profit.

Key inferences

Improvement in ROOA is largely through margin

improvement (better purchasing power)

Deterioration in operating asset efficiency is more than

offset by operating liability leverage (suppliers credit)

Large part of high ROE (key driver for rich valuation)

is derived from high suppliers credit (return from

operating liability leverage)

Deployment of large cash into the business for

acquisition or high dividend payout or buyback (not

factored into our model) can lead to significant

boost to return on equity

The company is expected to generate significant

positive spread (ROOA – WACC of 9.4%)

Residual earnings model indicates that current

market price implies a 6.9% terminal growth

(beyond FY21) in residual earnings, which we

believe is quite achievable, due to market leadership

and significant industry tailwinds. Key risk lies in

revenue loss from key anchor customers

Exhibit 27: Implied terminal growth in residual

earnings of 6.9%

(INR mn) FY18 FY19E FY20E FY21E

Operating Assets 9,306 12,812 15,616 18,507

ROOA (%) 13.2 13.3 14.2 15.0

Spread (%) 3.8 3.9 4.8 5.7

Residual Adjusted Operating Income (RAOI)

427 682 966

Present Value of RAOI

391 570 738

Enterprise Value 35,214

60% 42%

Operating Liabilities (Beginning) 6,302

Net Financial Obligations (Beginning) (146)

Equity Value 29,058

Current Market Cap 29,239

Growth implied in Market Cap (%) 6.9%


Exhibit 26: Drivers of profitability


Operating revenues (OR) 10,937 12,023 13,894 24,570 28,534 31,104 39,444 48,045

Growth (%) 43 10 16 77 16 9 27 22

Adjusted Operating Profit 279 322 596 879 1,121 1,466 2,017 2,568

Growth

15 85 48 28 31 38 27

Adjusted operating profit margin (%) (2÷1) 2.6 2.7 4.3 3.6 3.9 4.7 5.1 5.3

Operating asset (OA) 2,275 2,673 3,503 7,733 9,306 12,812 15,616 18,507

Operating asset turnover (1÷4) 5.01 5.29 5.20 7.01 3.69 3.34 3.08 3.08

Return on Operating Assets (ROOA) 12.5 13.0 19.3 15.6 13.2 13.3 14.2 15.0

Operating liabilities (OL) 1,287 1,566 2,174 5,487 6,302 9,574 12,002 14,463

Post tax interest on interest bearing operating liabilities 113 120 173 302 448 603 819 1,005

Operating Liability Leverage (OLLEV) 1.30 1.42 1.63 2.44 2.10 2.96 3.32 3.58

Cost of operating liabilities (COOL) (Assumed) (%) 11 11 11 11 11 11 11 11

Return from operating liability leverage (ROLLEV) 4.9 6.2 15.4 16.6 12.5 14.4 20.8 25.8

Return on Net operating assets (RNOA) (%) 17.4 19.2 34.7 32.3 25.6 27.6 35.0 40.8

Net financial obligation (NFO) 231 228 102 276 (146) (654) (1,363) (2,402)

Financial Leverage (FLLEV) 0.31 0.26 0.08 0.14 (0.05) (0.17) (0.27) (0.37)

Net Financing expense (income) post tax 63 62 95 101 64 89 69 32

Return from Financial Leverage (RFL) (%) (2.5) (2.1) (3.6) (2.5) (1.8) (5.7) (9.5) (14.0)

Return on Equity (ROE) (%) 19.5 15.7 40.4 29.7 23.8 22.0 25.5 26.8


Dixon Technologies

Co

nsu

me

r E

lectr

on

ics


Long-term growth value (LTGV)

At current stock price, the market is building in:

Current business value of ~16%

Short-term growth value of ~23%, which is not at

risk. We build in a 33% PAT CAGR over FY18-21e on

the back of strong revenue growth and margin

expansion

Long-term growth value of ~58%, which we believe

is quite achievable, due to market leadership and

significant industry tailwinds. Key risk lies in revenue

loss from key anchor customers

Exhibit 28: Long-term growth value of ~58%


Key risks

Losing an anchor customer Losing an anchor customer is a key risk as two of its

anchor customers (Phillips & Panasonic) contribute ~60%

of overall revenue. However, the company has strong

relationships with key anchor customers (relationship

with Phillips of ~9 years) and Panasonic (relationship of

~5 years), and it has not lost any anchor customers to

date.

Anchor customer loses market share The company’s financial performance is linked to its

customer’s performance. For example, mobile maker

Gionee was one of its anchor customers which lost

mobile market share, thereby affecting mobile segment

performance.

We do not anticipate anchor customers losing significant

market share. Philips is a market leader in LED lighting

for the past few years and has been able to maintain its

market share. Panasonic is one of the top five largest

consumer durables brand in India. Our recent channel

checks (survey size: 27 consumer durables retail shops

across India) show Panasonic is a popular brand (Top 5

brand for a retailer) in 32-inch LED TV and semi-

automatic washing machine categories, thereby

providing comfort.

Exhibit 29: Channel check on popular Consumer

Electronics brands (Survey conducted in June/July

2018)

Brand Segment (all-India) (%)

SA-WM LED TV Mobile Phone

Panasonic 32.4 25.0 13.0

Samsung 26.5 29.4 69.6

Sony 0.0 27.9 13.0

LG 41.2 17.6 4.3


Change in technology

In case technology supported by clients becomes

obsolete, they may face reduce demand, thereby

dragging profitability of EMS firms. For example, launch

of fibre-to-home (FTTH) by Reliance Jio may impact

demand of set-top boxes by DTH companies.

Large dependency on foreign suppliers

The company procures plastic parts, packaging, printed

circuit boards, electronic components and open cells

from suppliers form China. Around 82% of total purchase

comes from foreign suppliers:

No control over the delivery schedules, and, hence,

there can be a delay in receiving raw materials,

forcing it to increase its inventory days

No bargaining power against global suppliers,

thereby affecting creditor days

Not in a position to detect defective products,

resulting in increase in input component cost

Exposed to exchange rate fluctuations, which it may

be unable to pass on during the production cycle

Exhibit 30: Foreign suppliers contribute 82% towards

net purchases


17.0

25.2

57.7

0

20

40

60

80

100

120

CBV STGV LTGV

(%)

0

20

40

60

80

100

FY15 FY16 FY17

(%)

Foriegn Domestic

Dixon Technologies


Company snapshot

Diversified product portfolio

The company has six verticals: 1) consumer electronics

(flat panel display TV & home theatres), 2) home

appliances (semi-automatic washing machine, 3) lighting

(CFL, LED bulbs & tube lights), 4) mobile phones, 5)

reverse logistics (set-top boxes, FPD TV & phones), and 6)

security surveillance (recently added).

Exhibit 31: Revenue breakdown by verticals (%)

Note: FY18; Source: Company, Elara Securities Research

Exhibit 32: EBITDA breakdown by verticals (%)


Exhibit 33: Market leader in most product verticals

Revenue (INR mn)

Margin (%)

ROCE (%)

Units sold

(mn)

Capacity Utilization

(%)

ODM Share

(%)


10,729 2.1 298 1.0 83 5.0

Home Appliance

2,483 12.4 22 0.5 70 100.0

Lighting 7,742 6.1 20 170 65 40

Mobile 6,698 1.0 415 2.7 27 0

Reverse Logistics

734 7.8 21 0.7 19 0


Consumer electronics

We have a positive view, given 1) high industry growth

rate supported by the cut in GST rate from 28% to 18%;

2) new client additions, 3) an increase in value addition

due to backward integration, 4) market leadership

position, and 5) weak competition in the EMS LED TV

segment.

Exhibit 34: Revenue CAGR of 30% and EBITDA CAGR

of 45% over FY18-21E


Revenue 10,729 13,947 18,550 23,743

Growth (%) 27 30 33 28

ODM (%) 6 7 9 10

EBITDA 226 335 501 712

Growth (%) (9.6) 48 50 42

EBITDA Margin (%) 2.1 2.4 2.7 3.0

Source: Dixon Technologies RHP, Elara Securities Estimate

Exhibit 35: EMS Production in the FPD TV segment


Exhibit 36: Growth drivers for EMS FPD TV category


Consumer electronics,

37.8

Lighting Products,

27.3

Home appliances,

8.7

Mobile phones,

23.6

Reverse logistics,

2.6

Consumer electronics,

20.1

Lighting Products,

42.0

Home appliances,

27.4

Mobile phones,

5.8

Reverse logistics,

5.1

0

10

20

30

40

50

0

2

4

6

8

10

12F

Y1

3

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

E

FY

20

E

FY

21

E

(%)

(mn

un

its)

EMS Production Share of outsourcing (RHS)

Expect >15% demand growth in FPD due to rising surplus disposable income, growing middle class & easy microfinance

Revise inverted duty structure to bolster local manufacturing and increase exports (the Middle East, South Africa and Southeast Asia)

Tier II brands like Salora, Oscar, Zebronics, T-Series, Panorama, BPL, Haier, Skyworth, TCL increasingly opt for outsourcing

EMS companies jointly working with brands to increase

product localization

Dixon Technologies

Co

nsu

me

r E

lectr

on

ics


Exhibit 37: High ROCE-generating business

(INR mn) FY15 FY16 FY17 FY18

Revenue 7,755.5 7,701.2 8,445.4 10,728.5

EBITDA 134.5 159.4 249.6 225.7

EBITDA margin (%) 1.7 2.1 3.0 2.1

No of units sold (mn)

0.8 1.0

Installed capacity (mn)

1.2 1.2

Capacity utilization (%) 51.8 48.1 62.5 83.3

Capital employed

98.2 70.1

EBIT

227 209

EBIT margin (%)

2.7 1.9

ROCE (%)

231 298

ODM share (%) 4.2 9.1 11.8 5.0


Product portfolio: LED TV (19-65” and 4K2K) and home

theatres (2.1 and 4.1 channels)

Anchor customers: Panasonic India constituted ~65%

revenue of this segment in FY17 (increased from ~37%

in FY15). Around 90% of Panasonic LED TV sold in India

are manufactured by Dixon. Customers include Haier,

Intex, Reliance Retail, Vijay Sales, Mitashi and Abaj.

Recent customer additions include TCL, Flipkart,

Skyworth and Xiaomi. The company is currently in

discussions with Samsung to assemble FPD TV for them.

Exhibit 38: Customer-wise revenue breakdown

(FY17)


Closest competitors: Malhotra Electronics (focus on own

brand), SVL (focusing on recently acquired brand

licensee for Kodak TV), Videotex and Noble Electronics

Exhibit 39: Production by EMS (FY16)


Exhibit 40: Consumer brand – EMS relationship

Source of production

Brand owner

Foxconn Sony

Skyworth Resolute

Dixon Panasonic, Reliance Retail, Intex, Haier, TCL, Flipkart, Skyworth, Xiaomi, Vijay Sales, Mitashi, Abaj

Malhotra Electronics

T-Series, Intex, Weston, Beltek, Crown, Texla, Kortex, Akai

Videotex Intex, Zebronics, T-Series

Super Plastronics

Thomson, Kodak

In-house Samsung, LG

Import Sony, Vu Television


Exhibit 41: FY16 FPD TV market share

Source: Company

Strategy for the consumer electronics vertical

Strengthen relationships with existing customers

Add new customers (entered into strategic

partnership for Flipkart, Skyworth, TCL and Xiaomi

Migrate toward ODM business model

Develop new product portfolio like smart TV and

ultra-high definition etc

Increase value addition through backward

integration (LCM assembly)

Main raw materials used to manufacture LED TV: Open

cell, electronic components, mechanical and plastic parts

ODM capability: Panel designing, main electronic board

designing, mechanical and acoustics from 24-39”.

Exhibit 42: ODM contribution


Panasonic India65%

Reliance Retail10%

Intex9%

Haier3%

Others13%

Dixon51%

MEPL8%

SVL8%

Videotex8%

Noble7%

Others18%

Samsung24%

LG19%

Sony18%

Videocon14%

Panasonic10%

Others15%

4.2

9.1

11.8

5.0

0

2

4

6

8

10

12

14

FY15 FY16 FY17 FY18

(%)

Dixon Technologies


Manufacturing facility, capacity & process: The company

currently manufactures LED TV at the Tirupati plant with

an installed capacity of 2.4mn units pa (FY18 Installed

capacity of 1.2 mn units pa) and has increased value

addition in LED TV manufacturing by setting up an open

cell assembly line. The company has plans to increase the

capacity to 3.4 mn units p.a which will be one of the

biggest LED TV manufacturing unit in India.

LED TV manufacturing has four main stages:

Printed circuit board assembly: This requires surface

mount on manual insertion process.

Open cell assembly: This is the most significant part

of manufacturing. Open cell constitutes ~70% cost

of FPD TV. The company has set up the largest

capacity in India for LCM assembly

Final manufacturing & assembly

Plastic moulding: The company does not plan to do this

part.

Our Dehradun plant visit

The company until recently assembled flat panel display TV units at its Dehradun unit. We had visited the Dehradun

unit to understand FPD TV manufacturing process. The whole process was manual, with the use of conveyor belts to

move products.

Exhibit 43: Panel assembly in the clean room


Exhibit 44: Packaging


Our Tirupati plant visit

We also visited Dixon’s new manufacturing facility at

Tirupati, Andhra Pradesh. The plant has been

operational since September 2017. Our key takeaways

include:

Seven sheds of ~50,000 sq/ft each

Assembles FPD TV (22-55”) from Shed 2

Two production lines with total production capacity

of 4,000 units in a single shift of eight hours

Key customers for LED TV include TCL, Panasonic,

Flipkart, Reliance Retail, Sanyo, Xiaomi, Intex and

Skyworth

Two production lines of LCM panel assembly, with

total capacity of 4,000 units in a single shift of eight

hours (assuming 32-inch FPD TV assembly)

Launch a new concept of integrated LCM panel and

TV assembly by December 2018.

Exhibit 45: Glue pasting machine in Shed 2


Dixon Technologies

Co

nsu

me

r E

lectr

on

ics


Exhibit 46: Light bar assembly in Shed 2


Exhibit 47: Reflector assembly in Shed 2


Exhibit 48: Open cell in Shed 2


Exhibit 49: Panel inspection stage in Shed 2


Exhibit 50: Visual inspection in Shed 2


Exhibit 51: Back covers screwing in Shed 2


Exhibit 52: PCB installation In Shed 2


Exhibit 53: Testing area in Shed 2


Dixon Technologies


Exhibit 54: Key steps involved in the manufacturing of LED TV are …


Plastic raw materials

sourcing

Component procurement

Moulding

Panel assembly TV assembly Testing Ageing Finishing Packaging &

dispatch

PCB SMT PCB MI

Dixon Technologies

Co

nsu

me

r E

lectr

on

ics


Home appliances

We have a positive outlook on home appliances (semi

automatic washing machine) segment, given 1) strong

industry growth outlook, 2) significant volume growth

from major customers (Samsung which has a ~20%

market share in the semi-automatic washing machine

category), 3) market leadership position, and 4) entry

into top load automatic washing machines.

Exhibit 55: Revenue CAGR of 31%, EBITDA CAGR of

33% over FY18-21E


Revenue 2,483 3,228 4,293 5,581

% Growth 32 30 33 30

ODM % 100 100 100 100

BITDA 308 387 537 726

% Growth 1 26 39 35

EBITDA Margin (%) 12.4 12.0 12.5 13.0


Exhibit 56: Washing machine CAGR of 40% over

FY16-21




Exhibit 58: 100% ODM business


Revenue 1,067 1,306 1,880 2,483

EBITDA 62 140 306 308

EBITDA margin (%) 5.8 10.7 16.3 12.4


0.4 0.5

Installed capacity

0.6 0.7

Capacity utilization 45 53 69 70

Capital employed

459 1214

EBIT

285 267

EBIT margin (%)

15 11

ROCE (%)

62 22

ODM share (%)

100 100


Product portfolio: Semi-automatic washing machines in

the range of 6.2-8.0kg. Top load fully automatic washing

machine is currently in the planning stage.

Anchor customers: Panasonic, Haier and Intex are its

anchor customers. The company also manufactures for

Godrej (100% of its outsourcing requirement). It

currently has an orderbook of 75,000-80,000 units per

month until December 2018 and has recently added

Samsung as its customer (currently manufactures

~15,000 units per month).

Exhibit 59: Customer-wise revenue breakdown

(FY17)


Exhibit 60: Noble Electronics is one of its closest

competitors

Note; FY16: Source: Company, Elara Securities Research

0

10

20

30

40

0

1

2

3

4

FY

13

FY

14

FY

15

FY

16

FY

17

E

FY

18

E

FY

19

E

FY

20

E

FY

21

E

(%)

(mn

)

EMS/ODM volume in WM Share of Outsourcing (RHS)

Panasonic21%

Haier16%

Intex16%

Others47%

Dixon43%

Noble28%

Others29%

>15% growth in washing machine demand, due to low penetration level, rising surplus disposable income, growing

middle class population and easy microfinance

Exports potential and increased level of outsourcing for SA WM because of low production cost, local design capability and focus of global consumer brands on FA WM

Dixon Technologies


Exhibit 61: Semi-automatic washing machine

customer market share (FY16)


Exhibit 62: Consumer brand – EMS relationship

Production source Brand owner

In-house LG, Whirlpool, Samsung, Godrej

Dixon Samsung, Panasonic, Godrej, Haier, Intex, T-Series

Noble Electronics Haier, Daeynx


ODM capability: develop new design concepts with

additional features like magic filter, water fall, side

scrubber and air dry.

The company also undertakes in-house early life test of

parts as well as complete washing machines, water

leakage testing and noise testing.

Company’s strategy for home appliances vertical

Expand product portfolio in the semi-automatic

category

Introduce top load, fully automatic models (currently

in the planning stage

Acquire new customers (recently added Samsung as

a customer — currently manufactures ~15,000 units

per month)

Strengthen relationships with existing customers

Reduce inventory days from ~45 to less than 30 days

Expand geographical footprints and manufacturing

capacity by way of the proposed facility at Tirupati

for the servicing market in South India, and

Commence exports of washing machines

Raw materials used for manufacturing: Mechanical and

electrical items such as gears, timers and motors, which

are imported primarily from China


has been manufacturing semi-automatic washing

machines since 2010 from its Dehradun II facility, with

installed capacity of 0.72mn units pa. Plan is to expand

capacity to 1.08mn units pa.

Exhibit 63: Key steps involved to manufacture

washing machines


LG37%

Samsung19%

Whirlpool15%

Godrej7%

Videocon15%

Others7%

Plastic raw material

sourcing Molding

Component

procurement Testing Ageing Finishing

Packaging

& dispatch

Dixon Technologies

Co

nsu

me

r E

lectr

on

ics


Our Dehradun plant visit to understand manufacturing of home appliances

Exhibit 64: Plastic molding machine


Exhibit 65: Outer plastic body of washing machine


Exhibit 66: Outer (bottom) plastic body of washing

machine


Exhibit 67: Assembly of mechanical and electric

items


Exhibit 68: Assembly of mechanical and electric

items


Exhibit 69: Final product (T-Series washing

machine)


Dixon Technologies


Lighting products

We have a positive outlook on LED lighting, given 1)

strong industry growth outlook, 2) exports opportunity

as the company is globally cost-competitive, 3) market

leadership position, 4) strong relationships with

customers having market leadership (Phillips), 5) product

portfolio expansion, and 6) new customer addition.

Exhibit 70: Revenue CAGR of 16% and EBITDA CAGR

of 24% over FY18-21E


Revenue 7,742 8,516 10,219 12,059

% Growth 40.6 10.0 20.0 18.0

ODM % 40 42 44 45

EBITDA 472 605 746 892

% Growth 164 28 23 20

EBITDA margin (%) 6.1 7.1 7.3 7.4


Exhibit 71: ~INR 180bn outsourcing opportunity exists




The company diversified its product portfolio outside

consumer electronics by entering into the lighting

business in 2008 by manufacturing CFL lamps and

drivers. Over the years, it has developed capabilities to

produce LED products as well.

Exhibit 73: Benefits of operating leverage playing out


Revenue 3,006 4,295 5,508 7,742

EBITDA 91 221 179 472

EBITDA margin (%) 3.0 5.2 3.2 6.1


102.6 170.0


260.4 260.4

Capacity utilization (%)

39.4 65.3

Capital employed

833.2 2027.4

EBIT

139 397

EBIT margin (%)

2.5 5.1

ROCE (%)

16.7 19.6

ODM share (%) 12 40 45 40


Product portfolio: The company currently manufactures

the following lighting products:

Exhibit 74: Product portfolio in the lighting vertical

LED products CFL lamps Lamp drivers

LED bulbs 0.5-20W CFL lamps 5- 27W

Indoor LED 5-20W

Down lighters 5-15W

Outdoor LED 20-150W

Battens

Electronic lamps 10-40W

T - LED 20-24W


Key customer: Phillips is an anchor customer and

contributed ~90% revenue of this vertical in FY17, up

from 66% in FY15. The company has received an order

of 15mn LED lamps and 30mn LED lamps from Philips

Lighting India (which won a contract from a government

entity) in August 2015 and in September 2016,

respectively.

The Ministry of Power aims to replace traditional lighting,

with LED by 2019 and is expected to procure 200mn

LED light lamps via an open tender in 2018. Phillips is

likely to win the contract of at least 50mn LED lamps.

Exhibit 75: Key customers


34.8

214.4

0

50

100

150

200

250

FY16 FY21

(IN

R b

n)

EMS Opportunity

Phillips, 90%

Others, 10%

Expect >15% growth in domestic demand, largely driven by replacement demand, Government initiatives include UJALA,

DELP and SLNP schemes

Decline in the share of imports and rise in exports, due to tilting of cost advantage towards India’s manufacturers

Increase in localization and share of outsourcing

Dixon Technologies

Co

nsu

me

r E

lectr

on

ics


Key competitors: Some major competitors are NTL

Electronics, Compact Lamps, Avni Energy Solutions,

Kwality Photonics, Promptec Renewable and Instapower.

Two of the company’s biggest competitors (NTL &

Compact Lamps) have their brand of lighting products,

which has created a conflict of interest with consumer

brands.

Exhibit 76: Key competitors (FY16)


ODM capability: The company had acquired in-house

capabilities to design (main electronic boards,

mechanical & light sources and packaging) CFL and LED

lighting solutions from 0.5W to 20W, which has led to

emergence as an ODM firm in this space.

Exhibit 77: Rise in higher margin ODM business


Company strategy for the lighting vertical

Bolstering product portfolio by including higher

wattage of existing products, street lights and

industrial lighting

Adding new customers (Orient, Everready, Havells,

Wipro, Panasonic, Anchor, Bajaj, Jaguar and Usha)

Expanding geographical footprints and

manufacturing capacity at the Tirupati facility for

servicing market in South India

Increasing existing and new product basket for

exports (currently exports CFL & LED lamps to

Kenya, France, Poland, Netherlands, Dubai, Malaysia,

Thailand & Sri Lanka) and new geographies

Raw materials: PCB, electronic components, including

capacitors, mechanical and plastic parts


manufactures CFL lamps, LED bulbs, battens and T-LED

at the Dehradun I Facility and LED drivers, LED bulbs,

PCB assembly of CFL lamps at our Noida I Facility and

CFL lamps at our Noida III Facility, which have an

aggregate installed capacity of 260.4mn units pa. The

company is also in the process of setting up another

facility at Noida and Tirupati to manufacture lighting

products

Exhibit 78: Installed capacity

(mn unit)

LED bulbs 1,260

Downlighters 12

Tube lights & battens 36

LED drivers 60

CFL lamps 480

Electronic ballasts 156

Others (CFL PCB, Deco lamp) 600

Total 2,604

Note; FY18; Source: Company, Elara Securities Research

Dixon39%

NTL30%

Compact Lamps28%

Others3%

12

40

45

40

0

10

20

30

40

50

FY15 FY16 FY17 FY18

(%)

Dixon Technologies


Exhibit 82: Key steps involved in the manufacturing of lighting products


Plastic raw material sourcing

Component

procurement

Moulding

Housing

assembly Products

assembly Testing Ageing Finishing Packaging &

dispatch

PCB SMT PCB MI


The Dehradun I facility manufactures LED lamps. We had visited the Dehradun facility to understand the

manufacturing process of LED/CFL bulbs.

Exhibit 79: Manufacturing plastic cover


Exhibit 80: Surface mounting technology lines


Exhibit 81: Surface mounting technology lines


Dixon Technologies

Co

nsu

me

r E

lectr

on

ics


Mobile phones

We believe the mobile phone segment will remain under

pressure, due to 1) increased competition from global

EMS firms, such as Foxconn, Flextronics & BGM, 2)

expansion of manufacturing facility by consumer

durables brands (Samsung has set up the world’s largest

manufacturing facility at Noida, Uttar Pradesh with a

capacity of 120mn handsets, 3) aggressive pricing of

feature phones by Reliance Jio may squeeze Tier II & III

mobile brands, which are Dixon’s customer base, 4) the

recent customer additions (Tembo) have been at a low

price, and 5) loss of market share of key anchor

customer, Gionee.

However, margin for this segment may increase, due to

1) an increase in value addition by setting up a printed

circuit board assembly (50% value for the mobile phone)

at Noida by September 2018 (delayed by ~3-6 month),

and 2) backward integration for mobile phone chargers.

Exhibit 83: We expect revenue/EBITDA contraction

of 29%/18% CAGR over FY18-21E


Revenue 6,698 2,679 2,545 2,418

% Growth (17.4) (60.0) (5.0) (5.0)

ODM % 0 0 0 0

EBITDA 65.2 34.8 38.2 36.3

% Growth 30 (47) 10 (5)

EBITDA margin (%) 1.0 1.3 1.5 1.5


Exhibit 84: Huge growth opportunity




The company entered into a shareholders’ agreement on

November 10, 2015, with other shareholders of PEPL,

i.e., Pardeep Jain (founder of Karbonn Mobile), Ashish

Aggarwal and Sanjay Jain. PEPL is engaged in the

business of manufacturing, selling, exporting, repairing

or dealing in mobile phones and related components,

parts, spares, devices and accessories. Commercial

production started in January 2016.

Exhibit 86: FY18 saw margin expansion due to better

cost efficiency

(INR mn) FY16 FY17 FY18

Revenue 200 8,107 6,698

EBITDA (4) 50 65

EBITDA margin (%) (2.2) 0.6 1.0


3.5 2.7


10.1 10.1

Capacity utilization (%) 34 27

Capital employed

106.5 13.9

EBIT

43 58

EBIT margin (%)

0.5 0.9

ROCE (%)

41 415

ODM share (%) 0 0 0


Product portfolio: The company manufactures feature

and smart phones (2G, 3G, 4G & LTE, VoLTE and CDMA).

During FY18, the company had sold ~2.7mn mobile

handsets

Key customers: Panasonic, Karbonn and Gionee (have

significantly lost market share) were anchor customers in

FY17. Recent customer additions include Intex, Karbonn,

Blaupunkt and Tempo

34.4

383.7

0

100

200

300

400

500

9M FY18 FY21E

(mn

un

it)

EMS production

Expect 15-20% growth due to the launch of new smart-phones, declining prices, rise in disposable prices and decrease

in replacement cycle

Increase in localization and fall in imports due to fovernment initiatives (phased manufacturing program & Make in India), correction of inverted duty structure, tilt in cost of production

in favor of domestic manufacturers

Increase in exports to Africa, the Middle East and Europe

Rise in share of outsourcing

Dixon Technologies


Exhibit 87: Key customers in FY17


Key competitors: Foxconn, Flextronics, BGM and PG

Electroplast are key competitors

Exhibit 88: Global EMS firms dominate this segment

Note: YEAR; Source: Company, Elara Securities Research

Exhibit 89: Consumer brand – EMS relationships

EMS firms Customers servicing

Foxconn Xiaomi, Motorola, Gionee, Sony, Oneplus, Oppo, InFocus, Asus

Flextronics Huawei, Lenovo and Motorola

Dixon Gionee, Karbonn, Intex and Panasonic, Blaupunkt, Tambo

BGM Onida, Spice, Celkon Mobile, Hitech Mobiles, HSL Mobile, Intex, JIVI Mobile, Lemon Mobile

PG Electroplast Lava, Hitech and Salcomp

Wistron Apple, LG

In – House Vivo, Oppo, Micromax, Intex, Lava, Samsung


Strategy for mobile phone vertical

Increase capacity utilization by focusing on feature

phone (Blaupunkt & Tambo)

Strenghten relationships with existing key customers

Add new customers (Karbonn entered into a

partnership with Airtel to manufacture mobiles for

them; Blaupunkt, Tambo)

Increase value addition by migrating towards PCB

level assembly (capacity of ~350k for smart phones

or ~750K for feature phones)

Backward integration for mobile phone chargers

Key raw materials: The key raw materials and components

used to manufacture mobile phones include touch panels,

LCD, PCBA, FPC and front & back housing

ODM capability: The company currently does not have

designing capabilities in the mobile phones vertical


manufactures feature and smart phones at its Noida II

facility with an installed capacity of 10.08mn units.

Mobile phone manufacturing requires controlled

environment and testing mobile devices need special

equipment and methodology

Our Noida plant visit

The plant assembles mobile phone. During our visit we

noticed that only one out of two production lines was

functioning and the company was manufacturing

Panasonic mobile phone.

Refer to the following youtube video to understand

smartphone manufacturing at Dixon Noida plant.

Source: Youtube

Panasonic44%

Gionee50%

Karbonn6%

Dixon8%

Foxconn35%

Flextronics22%

BGM15%

Others20%

Exhibit 90: The key steps involved in manufacturing mobile phones


Mobile assembly Testing Final visual inspection Outgoing quality inspection Input packing

Dispatch Pre-dispatch inspection Shrink wrap Paste labels on gift box

(MRP, EAN, service labels)

https://www.youtube.com/watch?v=IQZycjXZAKI&t=37s

Dixon Technologies

Co

nsu

me

r E

lectr

on

ics


Reverse logistics

Set-top box business, which is the largest sub-segment

within reverse logistics, may come under pressure,

because 1) its largest customer (Airtel DTH) is struggling,

2) industry growth rate has reached saturation, due to

completion of the digitization process, and 3) launch of

Reliance Jio GigaFiber may hamper growth of DTH and

cable market in India. However, in the short term,

segment-wise performance may be supported, as 1) the

company has an orderbook of ~0.25-0.30mn set-top box

refurbishment, and 2) the company has recently started

repairs of CCTV and laptop panels.

However, repair & refurbishment of mobile phones and

consumer electronics can get a big boost. Currently,

selling old imported mobile phone is restricted in India —

a segment where consumer brands intend to focus. Also,

in FY19 Union Budget, the government has allowed

imports of second-hand electronics goods for the

purpose of repair or refurbishment.

Exhibit 91: Revenue CAGR of 3% and EBITDA

contraction of -8% over FY18-21E


Revenue 734 734 771 809

% Growth 17.1 0.0 5.0 5.0

ODM % 0 0 0 0

EBITDA 58 40 62 65

% Growth (53) (30) 53 5

EBITDA margin (%) 7.8 5.5 8.0 8.0


Product portfolio: The company commenced reverse

logistics in 2008 with repair services for set-top boxes

and later expanded into mobile phone, LED TV, home

theatre and computer peripherals. It also undertakes

spare parts management services for a mobile phone

brand in India (which has a low EBITDA margin of ~3%).

The company focuses on B2B reverse logistics and does

not have a consumer-facing service center, which is in

line with its strategy of building relationships with brand

owners.

Exhibit 92: Reverse logistics business under pressure


Revenue 184.4 391.4 626.9 734.0

EBITDA 35.3 70.7 122.8 57.5

EBITDA margin (%) 19.1 18.1 19.6 7.8

No of units (mn) repair/refurbishment (mn)

1.4 0.7


3.7 3.7

Capacity utilization (%)

38 19

Capital employed

423.6 234.8

EBIT

107 48

EBIT margin (%)

17.0 6.6

ROCE (%)

25.2 20.5

ODM share (%) NA NA NA NA


Exhibit 93: Reverse logistics capacity

(mn) FY17

Set-top box 2.40

Mobile phone 1.20

LED TV panel 0.06

Total 3.66


Key customer: Intex Technologies, Airtel and Dish infra

services

Key competitors: iQor India and R-Logic Technology

Services India

Raw materials: Open cell, backlight units, electronic

components, including microprocessors, IC, COF, touch

panels, OCA glue, mechanical, plastic parts and other

consumables like paint and thinners

Strategy for reverse logistics vertical

Diversify into new product categories within IT

peripherals (recently started repair of CCTV and

laptop panel repair)

Add new customers

Expand geographic footprints by setting up centers

across India

Manufacturing facilities, capacity & process: The

company carries out reverse logistics services at Noida III

Facility and has six service centers in major cities. Its

capacity of repair and refurbishment is around 3.7mn

units pa.

The company has a dedicated technology department to

1) analyze circuits in different product categories and

prepare technical guidelines of fault finding & solutions,

and 2) train professionals engaged for carrying out

repair and refurbishment.

Dixon Technologies


Our Noida reverse logistics facility visit

We have visited company’s reverse logistics facility in

Noida to understand company’s repair and

refurbishment capabilities. Few key take-aways from our

visit are as follows:

TV Repair centre: Company repairs LED panel for

~35 brands which can act as a feeder for new

customer addition

Mobile refurbishment: Major customer are Gionee,

Comio, Tembo and Electronic Bazaar. This can

become a big business as FY19 Union budget allows

import of second hand electronics for the purpose of

repair and refurbishment

Set top box repair/refurbishment centre: Airtel and

Dish TV are two of its big customer. For Airtel, it

does both repair and refurbishment, while for Dish

TV it does only repair.

The company has started doing Laptop panel repair

Exhibit 94: Mobile repair line


Exhibit 95: LED panel repair – automatic polarizing

film changing machine


Exhibit 96: LED panel repair – automatic bonding

machine for COF replace


Exhibit 97: LED panel PCB repair line


Exhibit 98: Automatic bonding machine for mobile

LED displays


Dixon Technologies

Co

nsu

me

r E

lectr

on

ics


Exhibit 99: Set-top box refurbishment


Exhibit 100: L4 repair


Dixon Technologies


Security system

We have a positive outlook on the security system

segment, as 1) the company manufactures for a

dominant market leader (CP Plus has a ~40% market

share in India), and 2) robust industry growth

expectations.

Exhibit 101: Revenue CAGR of 31% and EBITDA

CAGR of 44% over FY18-21E


Revenue 5 2,000 3,067 3,435

% Growth NM NM 53.3 12.0

ODM % 0 0 0 0

EBITDA (4.3) 50.0 82.8 103.0

% Growth

NM 66 24

EBITDA margin (%) (87.8) 2.5 2.7 3.0


Product portfolio: The company entered into a joint

venture with Aditya Infotech and ADTPL in May 2017.

ADTPL is principally engaged in the business of

assembling, manufacturing and selling CCTV security

cameras, DVR, NVR, IP cameras, cables, power supply,

video door phones, bio metrics and allied products.

Key customers: CP Plus (market leader for CCTV) and

Dahua Technologies (one of the global leaders of video

surveillance) are likely to be the company’s only

customers.


manufactures CCTV and DVR from its Tirupati plant.

Installed capacity for CCTV and DVR is ~5.0mn units pa

and 1.2mn units pa, respectively.

Strategy for security system segment

Strengthen relationship with existing customers

Gain new customers

Our Tirupati plant visit The plant assembles CCTV cameras and Digital Video recorder.

Exhibit 102: PCB assembly for CCTV


Exhibit 103: CCTV assembly (one out of five lines)


Exhibit 104: CCTV assembly

Exhibit 105: Ageing

Exhibit 106: Testing machines


Dixon Technologies

Co

nsu

me

r E

lectr

on

ics


Board of Directors & Management

Sunil Vachani – Executive Chairman and Promoter

Sunil Vachani has an associate degree in Applied Arts in

Business Administration from American College in

London. He has two decades of experience in the EMS

industry. Sunil has been awarded the “Man of Electronics

Award” by CEAMA in 2015, the “Outstanding Citizen

Award 2012” by the Sindhi Chamber of Commerce and

one of the “Top 100 people influencing EMS” in 2012 by

the ventureoutsource.com. He has held positions as

Chairman of the Electronics and Computer Software

Export Promotion Council of India and Co-Chair of the CII

ICTE Committee. He is currently vice President of North

region of CEAMA.

Atul Lall – Managing Director

Atul Lall has a master’s degree in management studies

from the Birla Institute of Technology and Science, Pilani.

He has been with the company since its inception and is

responsible for overall business operations. Atul has

more than 25 years of experience in the EMS industry.

He has served as a member of the Technical Evaluation

Committee for Electronic Manufacturing Services under

M-SIPS constituted by the DeitY and served as a

representative of ELCINA on the Committee for Reliability

of Electronic and Electrical Components and Equipment

of the BIS.

Pankaj Sharma – Chief Operating Officer

Pankaj Sharma is Chief Operating Officer of consumer

electronics and mobile segment. He holds a bachelor’s

degree in Arts from the University of Delhi. In the past,

Pankaj has worked with Bigesto Foods, Satkar Exports,

Bestavision Electronics, Samsung, Jain Tube Company &

Shirllon and has 28 years of experience in factory

operations, manufacturing, supply chain, global sourcing

and business development. He has been working with

the company since 2010.

Rajeev Lonial – Chief Operating Officer

Rajeev Lonial is the Chief Operating Officer of the home

appliances segment. He holds a post graduate diploma

in plastic processing technology from the Central

Institute of Plastic Engineering & Tools. In the past,

Rajeev has worked with Dipty Lal Judge Mal, Noble

Moulds, Evershine Moulding, Ever Shine Plastic

Industries, Essen Fabrication & Engineering and Shree

Krishna Keshav Lab. He has 30 years of experience in the

field of plastics moulding.

Vineet Mishra – Chief Operating Officer

Vineet Mishra is Chief Operating Officer of the lighting

segment. He holds a diploma in electronics from the

Board of Technical Education, Uttar Pradesh. In the past,

Vineet worked with Samsung India, Hotline Witties

Electronics and Onida Savak. He has 22 years of

experience in electronics engineering. Vineet has been

working with the company since 2008.

Saurabh Gupta – Chief Financial Officer

Saurabh Gupta is an associate of the Institute of

Chartered Accountants of India & an MBA (Executive

Program) from MDI, Gurgaon. Prior to Dixon, he has

worked with PVR, Gumberg India, Unitech and

Mckinsey. Saurabh has 15 years of experience in finance

& strategy. He has been honored with Business World-

Yes Bank most promising Future CFO in Large Corporate

category.

Company Description

Dixon Technology is a leading home-grown company engaged in manufacturing products across multiple

consumer electronics such as washing machines, LED TV, mobile phones, security system)s and lighting segment

(LED bulbs, tube & street lights). The company is an integrated electronic manufacturing firm covering sourcing,

manufacturing, quality checks, packaging and logistics solutions for various consumer brands within India.

Dixon Technologies

70

Coverage History

Date Rating Target Price Closing Price

1

23-Aug-2018 Buy INR 3,475 INR 2,510

Guide to Research Rating

BUY Absolute Return >+20%

ACCUMULATE Absolute Return +5% to +20%

REDUCE Absolute Return -5% to +5%

SELL Absolute Return < -5%

1

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000Se

p-1

7

Oct-

17

No

v-1

7

De

c-1

7

Jan

-18

Fe

b-1

8

Ma

r-1

8

Ap

r-1

8

Ma

y-1

8

Jun

-18

Jul-1

8

Au

g-1

8

Not Covered Covered


Glo

ba

l M

ark

ets

Re

sea

rch


Brand behind ‘Brands’

One-stop shop: sales CAGR of 25% vs industry’s ~12% in FY18-21E

Amber Enterprise (AMBER IN) is the largest manufacturer of room air

conditioners (RAC) in India. It is also a one-stop solutions provider for all

major brands in the RAC industry, serves eight out of 10 top RAC brands

in India. The company is a key beneficiary of rising demand in the less

penetrated RAC business in India (~4% vs 30% globally). We expect India’s

RAC industry to post a CAGR of ~12% over FY18-21E vs 25% revenue

CAGR for Amber, due to low penetration levels and running cost due to

introduction of energy-efficient AC, increase in power adequacy and

smaller product replacement cycles.

Market leader: dominates with 55% share & sticky customer base

The company commands a dominant market share of 55% in RAC

original equipment manufacturer (OEM) & original design

manufacturer (ODM) and 19% in the overall RAC market, with clients

which command ~75% market share (most >5 years association).

Switching cost (in terms of time invested for product approvals) for

RAC brands is significant, leading to stickiness. The company enjoys

high margin of ~8.8% as on FY18 with low risk, given high ODM

revenue contribution (~85%) and low client concentration.

Backward integration: all RAC & components except compressors

The company covers entire gamut of RAC across tonnage and

efficiency, with significant backward integration. It manufactures all

components except compressors unlike peers, adding competitive

edge. Recent acquisitions (IL Jin & Ever Electronics) added capability in

inverter RAC, which has 40% market share in current summer season.

Strong boost: EPS CAGR of 39% over FY18-21E

We expect 39% EPS CAGR over FY18-21E based on 1) a 25% revenue

CAGR (17.6% CAGR from existing business) due to customer, product

and geographical expansion, 2) 65bps margin expansion from existing

business, and 3) lower interest expense.

Valuation We initiate on Amber Enterprise with a Buy rating and a TP of INR

1,225, implying upside of 32%. Our TP is based on 24x June FY20E

EPS of INR 49. We conservatively value the company by arriving at

25xby assigning a ~30% discount to consumer AC companies (~36x

one-year forward P/E) due to the B2B business model and lower

FY18 ROE of ~10%. However, the company enjoys market

leadership, low risk of market share loss with a 39% EPS CAGR over

FY18-21E.

Price performance

Source: Bloomberg

Key Financials YE

March

Revenue

(INR mn)

YoY

(%)

EBITDA

(INR mn)

EBITDA

Margin (%)

Adj PAT

(INR mn)

YoY

(%)

Fully DEPS

(INR)

RoE

(%)

RoCE

(%)

P/E

(x)

EV/EBITDA

(x)

FY18 21,281 28.8 1,835 8.6 622 181.1 22.5 9.9 11.8 41.3 16.8

FY19E 27,142 27.5 2,117 7.8 989 58.9 31.4 10.6 10.8 29.6 14.4

FY20E 35,459 30.6 2,862 8.1 1,417 43.3 45.1 13.8 13.6 20.7 10.6

FY21E 41,842 18.0 3,607 8.6 1,901 34.2 60.5 16.4 16.8 15.4 8.4



Initiating Coverage

Amber Enterprise

Rating: Buy Target Price: INR 1,225

Upside: 32%

CMP: INR 931 (as on 23 August 2018)

Key data

Bloomberg /Reuters Code AMBER IN/AMBE.BO

Current /Dil Shares O/S (mn) 31/31

Mkt Cap (INR bn/USD mn) 29/417

Daily Volume (3M NSE Avg) 2,170

Face Value (INR) 10

1 US$= INR 70.1

Note: *as on 23 August 2018; Source: Bloomberg

Price & Volume

Source: Bloomberg

Shareholding (%) Q3FY18 Q4FY18 Q1FY19

Promoter 44.0 44.0 44.0

Institutional Investor 11.6 19.2 18.7

Other Investor 29.7 28.2 29.2

General Public 14.6 8.6 8.0

Source: BSE

Price performance (%) 3M 6M 12M

Sensex 10.6 13.4 22.5

Amber Enterprise (14.6) (17.2) -

Dixon Technologies (26.1) (23.7) -

Source: Bloomberg

80

100

120

140

160

Jan-18 Mar-18 May-18 Jul-18

Re

ba

sed

to

10

0

Amber Enterprises Sensex

0

5

10

15

600

800

1,000

1,200

1,400

Jan-18 Mar-18 May-18 Jul-18

Vol. in mn (RHS) Amber Enterprises (LHS)

Amber Enterprise


Valuation trigger

Source: Bloomberg, Elara Securities Estimate

Valuation overview

FY20E

P/E (x) 25


Target price (TP) INR 1,223


Upside (%) 31.6


Valuation driver

ROE improvement largely driven by asset efficiency and margin

improvement

PAT CAGR of 45% over FY18-21E, led by strong top line growth,

margin improvement and lower interest expense


Investment summary

Overall revenue CAGR of 25% over

FY18-21E, driven by acquisition,

products, clients and geographical

expansion

Margin expansion of 65bps to 9.5%

by FY21E due to benefits of higher

operating leverage as capacity

utilization reaches ~54%

Low risk of revenue loss as it caters to

eight out of 10 AC consumer brands

Valuation trigger

1. New customer addition

2. Product expansion: Introduction of

Internet of Things RAC, super

efficient RAC option across all

tonnage or AC components

3. Geographical expansion: Setting up

manufacturing facility in South India

or winning large export order

Key risks

Unseasonal rains drag revenue and

working capital efficiency

Impact on margin due to rupee

depreciation and rise in commodity

prices as price escalation with

customers happens with a lag of

around three months

Our assumptions

AC brands to opt for outsourced

manufacturing rather than going for

in-house production

RAC industry CAGR of ~12% over

FY18-21E

EPS CAGR of 39% over FY18-21E,

due to strong revenue growth,

margin expansion and saving in

interest cost

ROE expansion, from 9.9% in FY18 to

16.1% in FY21E, driven by margin

expansion and higher asset

efficiency

12

3

0

200

400

600

800

1,000

1,200

1,400

Jan

-18

Fe

b-1

8

Ma

r-1

8

Ap

r-1

8

Ma

y-1

8

Jun

-18

Jul-1

8

Au

g-1

8

Se

p-1

8

Oct-

18

No

v-1

8

De

c-1

8

Jan

-19

Fe

b-1

9

Ma

r-1

9

Ap

r-1

9

Ma

y-1

9

Jun

-19

Jul-1

9

Au

g-1

9

Geographical expansion: Setting up manufacturing facility in South India or

winning large export order

Product expansion: Introduction of Internet of Things RAC, super efficient RAC option across all tonnage or AC components

New customer addition

12.6 12.8

9.6

7.1

9.9 10.6

13.8

16.4

0

5

10

15

20


(%)

11.0

33.1

(16.2)(8.1)

181.1

58.9

43.3

34.2

(30)

(15)

0

15

30

45

60

75


(%)

Amber Enterprise

Co

nsu

me

r E

lectr

on

ics


Financials (YE March) Income Statement (INR mn) FY18 FY19E FY20E FY21E

Net Revenues 21,281 27,142 35,459 41,842

EBITDA 1,835 2,117 2,862 3,607

Less :- Depreciation & Amortization 490 545 626 668

EBIT 1,345 1,572 2,236 2,939

Less:- Interest Expenses 538 125 110 110

Add:- Non operating Income 87 66 41 79

PBT 893 1,512 2,167 2,907

Less :- Taxes 271 523 750 1,006

Adjusted PAT 622 989 1,417 1,901

Balance Sheet (INR mn) FY18 FY19E FY20E FY21E

Share Capital 314 314 314 314

Reserves 8,613 9,404 10,538 12,059

Borrowings 1,280 1,000 1,000 1,000

Deferred Tax (Net) 352 352 352 352

Trade Payable 5,720 6,693 9,229 10,890

Total Liabilities 17,285 18,768 22,438 25,621

Net Block 5,629 5,844 6,468 6,450

Intangible assets 1,674 1,674 1,674 1,674

Debtors 3,956 4,834 6,315 7,451

Inventory 3,786 5,057 6,606 7,451

Cash 1,338 515 531 1,749

Total Assets 17,285 18,768 22,438 25,621

Cash Flow Statement (INR mn) FY18 FY19E FY20E FY21E

Cash or operating profit adjusted for non cash items (before WC changes)

1,922 2,183 2,903 3,685

Add/Less : Working Capital Changes (693) (1,176) (494) (321)

Operating Cash Flow 1,229 1,007 2,409 3,365

Less:- Capex (1,481) (550) (1,250) (650)

Free Cash Flow (252) 457 1,159 2,715

Financing Cash Flow 2,123 (604) (393) (490)

Investing Cash Flow (1,481) (703) (1,250) (650)

Net change in Cash 1,600 (823) 16 1,218

Ratio Analysis FY18 FY19E FY20E FY21E

Income Statement Ratios (%)

Revenue Growth 28.8 27.5 30.6 18.0

EBITDA Growth 40.6 15.4 35.2 26.0

PAT Growth 181.1 58.9 43.3 34.2

EBITDA Margin 8.6 7.8 8.1 8.6

Net Margin 2.9 3.6 4.0 4.5

Return & Liquidity Ratios

Net Debt/Equity (x) (0.0) 0.0 0.0 (0.1)

ROE (%) 9.9 10.6 13.8 16.4

ROCE (%) 11.8 10.8 13.6 16.8

Per Share data & Valuation Ratios

Diluted EPS (INR/Share) 22.5 31.4 45.1 60.5

EPS Growth (%) 121.8 39.6 43.3 34.2

DPS (INR/Share) 4.5 6.3 9.0 12.1

P/E Ratio (x) 41.3 29.6 20.7 15.4

EV/EBITDA (x) 16.8 14.4 10.6 8.4

EV/Sales (x) 1.4 1.1 0.9 0.7

BVPS (INR) 283.9 309.1 345.1 393.5

Price/Book (x) 3.3 3.0 2.7 2.4

Dividend Yield (%) 0.5 0.7 1.0 1.3


Revenue & margin growth trend


Adjusted profit growth trend


Return ratios


8.6

7.8

8.1

8.6

7

8

8

9

9

0

10,000

20,000

30,000

40,000

50,000


(%)

(IN

R m

n)

Net Revenues (LHS) EBITDA Margin (RHS)

181.1

58.9 43.3 34.2

0

50

100

150

200

0

500

1,000

1,500

2,000


(%)

(IN

R m

n)

Adjusted PAT (LHS) PAT Growth (RHS)

9.9 10.6

13.8

16.4 11.8

10.8

13.6

16.8

0

5

10

15

20


ROE (%) ROCE (%)

Amber Enterprise


RAC industry 12% CAGR over FY18-21E

We expect a modest RAC industry CAGR of ~12% over

FY18-21E, primarily led:

Low penetration level;

Hot humid climate;

Rise in power adequacy;

Lower running cost due to introduction of energy-

efficient AC;

Lower product replacement cycle;

Multi-installations in households and commercial

places like colleges, schools, hospitals, offices &

shops;

Rise in disposable income;

Change in perception, from luxury to a necessity.

Dominates with a 55% RAC share

Amber is a market leader in RAC OEM & ODM with a

market share of ~55% in terms of volume in FY18 and a

~19% market share in terms of overall RAC market in

India, up from ~15% in FY15. The company has achieved

market leadership on superior execution capability and

experience in development and manufacturing of RAC.

Strategic manufacturing location

Manufacturing units are strategically located closer to

the customers manufacturing locations which help in

quicker turnaround, reduce logistics and operational

cost.

Expect robust volume growth

Product additions

The company continues to add more products to already

wide product offering (currently has ~250 SKU in RAC, 4

chassis for ODU, window and 3 chassis for IDU).

Recently, it added 1-tonne and 2-tonne indoor unit to its

product basket. Make it Bold The 1-tonne RAC is popular

in South and West India markets. The company is

currently working on internet of things (IOT)-based

inverter RAC, 0.75 & 1.2-tonne RAC and fan coil units.

The R&D team also is developing new Indoor Split AC

unit (IDU), Outdoor Split AC unit (ODU) and hybrid

chassis, which would further increase the share of

Original Design Manufacturing (ODM)-based

manufacturing in overall sales. The team also is working

on energy-efficient RAC across green refrigerants, such

as R-290 and R-32.

One-stop shop

Revenue CAGR of 25% over FY18-21E, led by products, clients & geographic cluster additions

EPS CAGR of 39% over FY18-21E due to operating leverage and savings in interest cost

Enjoys significant economic moat due to a) deep backward integration; b) strong R&D capability,

c) stickiness with large customers; d) strong execution capability; and e) significant entry barriers

Exhibit 1: Manufacturing units strategically located near customer cluster


Daikin

Blue star

Blue star

Blue Star

Voltas

Godrej

Whirlpool

Lloyd

Kala AmbRajpura

JhajjarFaridabad

Pune

Greater NoidaDehradun

Panasonic

Hitachi

LG

Carrier

Haier

Manufacturing Locations

Amber Plant

Customer Plant

Amber Enterprise

Co

nsu

me

r E

lectr

on

ics


In the components space, the company plans to add

new RAC components as well achieve further backward

integration. New products will include brushless DC &

resin core motors and inverter controllers. It currently is

developing heat exchangers for refrigerators and dryers.

Customer addition

The company is focused on adding new clients (existing:

8 out of top 10 AC brands in India)) and intends to have

relationships with all RAC brands in India and abroad.

Recently, it has added Carrier, Haier, Micromax, Vestar

and Flipkart. The benefits of recent additions would start

flowing, as customer ramp-up takes ~4-5 years.

Geographic expansion

The company has a strategy to expand operations at

Dehradun, Noida, Kala Amb, Jhajjar and Pune near

customer clusters, as it has seen market share erosion for

even market leaders. Hence, it does not intend to set up

a facility for just one customer. A few consumer brands

are considering setting up a facility in South India, as the

region contributes ~30% of overall demand. Currently,

Samsung has a manufacturing facility at Sriperumbudur

in Chennai, Tamil Nadu and Blue Star is planning to set

up a facility at Sri City in Andhra Pradesh. Amber may

add new customers by establishing a new

manufacturing unit in South India in the next 2-3 years.

Exports revenue may reach 5-7% by FY21

Amber currently exports to Saudi Arabia, Oman, Sri

Lanka, Nigeria and Maldives. The company is planning to

enter the Middle East, Southeast Asia & Europe and

expects to win orders, given 1) its low-cost

manufacturing base in India compared to China, 2)

India’s geographic location advantage vs other regional

hubs, such as China, and 3) its ODM capabilities.

However, selling air conditioners requires a long

approval process, which the company has already

initiated. It expects revenue of ~5-7% from exports by

FY21. In our view, higher exports sales will lower

seasonal volatility, leading to higher capacity utilization.

Exports would also help to act as a natural hedge against

imports of several components. The company recently

developed and supplied Fan Coil unit (for commercial

AC) in Saudi Arabia market for Carrier and Samco.

Fall in imports

We expect imports substitution to continue, due to 1)

lower lead time, 2) lower working capital cycle, 3)

greater flexibility to adjust market trends (weather

fluctuations & the share of efficient RAC), 4) cost

advantage tilting in favor of India vs China, and 5) higher

levels of localization (~65% of air conditioner

components are domestically manufactured).

Exhibit 2: 15% of domestic demand met through

imports


Increase in wallet share from existing customers

Company currently sells AC components to few RAC

brands. An opportunity exists to sell the entire RAC units

and cross-sell other components to an existing

relationship. For example, company currently sells only

few components to Daikin and Hitachi. Amber has

already started the critical reliability test of Printed Circuit

Board (recently acquired two of the India’s largest PCB

manufacturer - IL Jin Electronics and Ever Electronics)

with 5 of its existing customers. We believe that the

company will be able to provide PCB to them by April

2019. The company is working on developing new

products like brushless DC motor, resin-core motors,

inverter controllers and heat exchanger for refrigerator

and dryers which will help increase wallet share from

existing customers.

Increase in share of outsourcing

The share of outsourcing has been on a steady rise and

is expected to further improve from 34% in FY17 to 56%

in FY22 due to (a) Large industry growth potential has

led to the emergence of new consumer durable brands

that do not have much exposure into RAC

manufacturing; and (b) rise in competition leads brands

to focus on their core competency of branding,

marketing, distribution and innovation.

Exhibit 3: Outsourced manufacturing may increase

from 34% in FY17 to 57% in FY22


RAC brands 51%

OEM/ODM34%

Imports15%

FY17 market size: 4.7mn units

1720

23

29 3134 35

4046

52 57

0

10

20

30

40

50

60

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21

FY

22

(%)

Amber Enterprise


Exhibit 4: New brands entering India’s RAC market

Midea BPL

Marq by Flipkart Toshiba

Hyundai Billion

Samsung Intex

Sansui Micromax

Avoir Onida

Haier Mitashi


Entry into Commercial AC (CAC) segment

The company plans to enter into CAC segment and will

start supplying to Voltas from January 2019. The

company has dedicated ~40% of the total R&D space in

Rajpura of ~23,000sq ft for CAC segment and had

recently set-up a 10 tonne psychometric lab machines for

CAC. The company intends to operate CAC out of their

Rajpura facility.

Strong relationship with customers

The company has a relationship with eight of top 10 RAC

brands in India, which have a market share of ~75% of

India’s RAC market. It has a more than 5-year

relationships with most Top 10 customers, led by high

switching cost (a product approval cycle of 2-3 years for

some key components). Over the past 3-4 years, the

company has been able to acquire large MNC customers,

such as Diakin and Hitachi. Revenue concentration has

been declining with top 3 customers contributing ~45%

currently vs 75% contribution 5-7 years back.

Flexible cost-effective manufacturing

The company has a flexible assembly line that can shift

from assembling Window AC to outdoor units of split AC

in a short time. This flexibility helps it to handle changes

in market demands in an efficient manner.

The large scale of operations (a market share of ~19% of

India’s RAC industry in volume terms) has strengthened

its relationship with raw materials suppliers. The

company has a centralized system to procure raw

materials, ensuring cost efficiency and timely delivery of

supplies, thereby reducing the overall cost of production.

Its large operations also help the company achieve

economies of scale and higher operating leverage,

which allows it to compete against imports from China.

Amber’s strategically placed manufacturing facilities near

customers’ production centers have helped reduce

logistical and operating cost, thereby producing more

cost-competitive products.

The company is implementing innovative strategic cost

savings and efficiency measures, such as Safety

improvement & loss elimination by 50% (SLE50) to reduce

cost of input materials, and reduction of waste & power.

Exhibit 5: Safety improvement & loss elimination (SLE)


Significant backward integration

Amber has a comprehensive range of products:

RAC across different tonnage (0.75-2.00), efficiency

rating (including 5 Star ISEER) and refrigerants (R-32,

R-410A, R-22 & R-290)

Key components like printed circuit boards, heat

exchange, multi-flow condenser and motors

Non-key components such as sheet metal and

injection molding

The company manufactures significant components of

RAC, excluding compressor, which is primarily imported

(in terms of bill of materials, it manufactures ~49% of

outdoor units, 62% of indoor units and 54% of window

AC). This level of backward integration is not available

among peers, and, thereby creating a competitive edge.

Exhibit 6: Level of backward integration

(%) Outdoor unit Indoor unit Window AC

Amber 49 78 60

Outsourced 51 22 40


Exhibit 7: Amber vs peers

Amber LEEL E-Durable Zamil

Key components

Heat exchange Y Y N Y

Multi-flow condenser Y N Y N

Motor Y N N N

Printed circuit board Y N N N

Others

Sheet metal fabrication Y Y Y Y

Injection molding Y N Y Y

Tubing Y Y Y Y

Capillary Y Y N N


Strategic acquisitions help in backward integration

PICL (India)

The company is a leading exporter, manufacturer and

supplier of single phase induction motor for air

conditioning unit, commercial air conditioners, coolers

Amber Enterprise

Co

nsu

me

r E

lectr

on

ics


and washing machines. It has an installed capacity of

3.0mn motors pa at its Faridabad facility in Haryana. The

company produces and sells AC motors for domestic and

international markets. A few of its leading products

command a 55% market share in India. Amber has

purchased a 100% stake in PICL for INR 489.7mn in

2012. The company is well recognized for its emphasis

on quality and has won awards from customers. This

acquisition helped Amber acquire PICL’s customer base

and increase its product offerings.

Exhibit 8: Awards & recognition

Year Customer Award & Recognition

2007 Carrier Award for Best Supplier

2011 Carrier Award for Quality Circle Competition

FY14 Panasonic Award for Business Partners Meet

2015 Carrier Midea Award for Best Supplier for On-Time Delivery

2015 Samco Award for Supplier Performance

2017 Carrier Midea Award for Best Supplier of the Year


At the time of acquisition, ~55% of revenue was exports-

driven, which was adversely affected by the oil crisis in

the Middle East. Amber has changed its strategy and

reduced exports dependency (~20% of PICL revenue)

improving profitability. The company has recently

developed resin motors, which used to be completely

imported. It would be the first company in India to offer

domestic solutions. Currently, total market size is ~5.0mn

units, and the company expects sale of 1.0mn units in

FY20.

Exhibit 9: PICL financial snapshot

(INR mn) Sales Net profit Net asset

FY13 NA 12.9 100.8

FY14 1,510 29.4 129.7

FY15 1,740 35.0 231.9

FY16 1,330 42.2 274.1

FY17 1,220 (21.5) 252.6

FY18 1,430 (10.0) NA


IL Jin Electronics

The company is engaged in manufacturing, assembly,

dealing of electronically assembled printed circuit boards

for home appliances (washing machines, air

conditioners, refrigerators, microwave ovens & coolers)

and automobile products

Amber acquired a 70% stake in IL Jin Electronics in

September 2017 for INR 544.25mn with an option to

buy the remaining stake.

Exhibit 10: Shareholding pattern


Exhibit 11: Top-line CAGR of 18% over FY18-21


We visited IL Jin Electronics to understand its capabilities

and production process. Our key takeaways are:

Key customers are LG (~70% of revenue), IFB

(~15%) and others include Voltas, Bajaj, Hyundai,

Tata, Mahindra and Daesung (~15%)

The business is primarily on OEM basis. However,

the company has started working on Voltas inverter

AC PCB assembly and Bajaj air cooler PCB assembly

Within the home appliances business, the company

makes printed circuit board assembly, control box

and display assembly. Within the automobiles space,

it builds the PCB assembly used in power windows,

steering remote control and air bag safety indicators

It has an annual production capacity of 1.8mn units

pa and operates at a ~60% utilization level. The

company has a ~35% market share in the home

appliances category

Production facilities include five lines of auto insertion

(sequencer, auto eye, jumper, axial & radial), four

surface mounted technology lines (printer, dispenser,

high speed & vision mounters and reflow), five lines of

manual insertion (MI- conveyor, soldering machine,

conformal coating, UV coating & urethane Coating)

and advance quality testing facility (AOI, XRF testing,

ICT, inverter FT JIG & HV testing)

Amber Enterprise

70%

Hyun Chul Sim30%

1,320

2,000

3,000 3,250

3,600

4,500

5,310

0

1,000

2,000

3,000

4,000

5,000

6,000

FY15 FY16 FY17 FY18 FY19E FY20E FY21E

(IN

R m

n)

Revenue

Amber Enterprise


It is working on the upcoming Internet of Things

model (IFB washing machine PCB with Wi-Fi control

and LG air conditioner PCB with Wi-Fi control)

Exhibit 12: AC accounts for 23% of IL Jin’s PCB capacity



Customer Award & Recognition

LG Level 4 Achievement in WMC Award

LG Best Improvement S-Q Gate H-1

LG Best ‘’Q’’ System supplier Award

IFB Best Supplier Award

LG Sustain Q-Grade Award

DAESUNG Electric & Hyundai Motors

SQ Approval


Room Air

Conditioner

23%

Washing machine

34%

Microwave oven6%

Refrigerator4%

Others33%

Our site visit to IL Jin Electronics facility at Noida

Exhibit 13: One of five auto insertion lines at IL Jin

Electronics


Surface-mount technology line at IL Jin Electronics

Exhibit 14: IC mount


Exhibit 15: Chip mount


Exhibit 16: Reflow


Amber Enterprise

Co

nsu

me

r E

lectr

on

ics


Ever Electronics

The company based in Pune is engaged in the business

of assembling electronics PCB for air conditioners and

other consumer durables, home appliances and

automobiles. The manufacturing facility is at Pune, India.

Amber acquired a 70% stake in one or two trenches,

which is expected to be completed by December 2018

(earlier planned to be completed by June 2018) at an

acquisition price of INR 210mn (total enterprise value is

INR 300mn). It currently owns a 19% stake in Ever

Electronics.

Exhibit 18: Top-line CAGR of 16% over FY18-21


Strong R&D and design capability

The company has strong R&D and design capabilities,

with a dedicated center at Rajpura, which is equipped

with psychometric lab, 3D modeling, quality and product

testing. The company has the ability to manufacture

most products from the concept to the design stage until

final delivery, thereby covering the entire manufacturing

value chain. Amber’s R&D and design capabilities have

helped it win numerous awards.


Year Customer Award & Recognition

FY15 Panasonic Best Development Support Award

FY16 Panasonic Leadership Business Innovation Award

2016 LG Best Infrastructure Improvement Award


Focus towards R&D and innovation backed by in house

tools room has helped the company develop a wide

range of RAC, such as 5.2 ISEER outdoor unit, India’s first

window inverter 5 Star AC and an inverter AC, which

can withstand higher voltage fluctuation and a new

model of fan coil unit for the exports market.

The R&D team is working on developing new Internet of

Things-based inverter RAC, an affordable RAC which

may be priced similar to the cooler price point, a super-

efficient inverter RAC across green refrigerants, such as R-

290 and R-32. In the components business, the company

is working on new products, such as brushless DC motor,

resin-core motors, inverter controllers, hybrid chassis and

heat exchanger for refrigerators & dryers.

Strong R&D and design capabilities have helped the

company reach strategic partnerships with customers

(increase stickiness), and, thus, ~85% of its RAC business

is under the ODM business model, thereby commanding

higher margin.

We visited the Rajpura R&D center in Punjab to

understand R&D capabilities and were impressed with

management’s focus on developing new products and

investment plans to further build its research capabilities.

Exhibit 20: Psychometric lab at Rajpura facility


Significant entry barriers

Client acquisition is a slow process in the RAC industry.

So, switching cost (in terms of time invested in terms of

product approval) for RAC brands is significant, leading

to greater stickiness with quality vendors.

The product approval cycle for key components can be

as long as 2-3 years, especially for leading brands. Post

approval, the ramp-up is gradual as brands usually start

by giving small orders. Reaching sizeable client wallet

share takes another 2-3 years.

Benefits of operating leverage likely to accrue

We expect the company to enjoy benefits of operating

leverage as it is operating at a capacity utilization of

~58% and buying leverage due to scale, likely leading to

a margin expansion of 65bp over the next three years in

the existing business. We expect a ~200bp margin

expansion in ILJin Electronics and Ever Electronics, as the

company is working to add 3-4 new customers on the

ODM model.

901 1,178

1,415

2,250 2,500

3,000

3,540

600

1,200

1,800

2,400

3,000

3,600

4,200

FY15 FY16 FY17 FY18 FY19E FY20E FY21E

(IN

R m

n)

Revenue

Amber Enterprise


Exhibit 21: Average capacity utilization rate of 57.5%


Exhibit 22: Sales CAGR of 25% over FY18-21E,

supported by the recent acquisition


Exhibit 23: EBITDA margin over FY18-21


Exhibit 24: Finance cost as a % of sales to significantly

reduce due to debt repayment


Exhibit 25: PAT CAGR of 45% over FY18-21E, led by

strong top line growth, margin improvement and lower

interest expense


Exhibit 26: Expect fixed asset efficiency due to low

capacity utilization


Exhibit 27: Flattish working capital efficiency


Exhibit 28: ROE improvement largely driven by asset

efficiency and margin improvement


60

57

52

48

50

52

54

56

58

60

62

ODU of SAC IDU of SAC WAC

(%)

FY18

11

26

(11)

52

29 28 31

18

(20)

0

20

40

60

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

E

FY

20

E

FY

21

E

(%)

Sales growth

7.7 8.3

10.4

7.9 8.6

7.8 8.1 8.6

0

2

4

6

8

10

12

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

E

FY

20

E

FY

21

E

(%)

3.3 3.5

4.9

3.8

2.5

0.5 0.3 0.3

0

1

2

3

4

5

6

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

E

FY

20

E

FY

21

E

(%)

11.0

33.1

(16.2)(8.1)

181.1

58.9

43.3 34.2

(30)

(15)

0

15

30

45

60

75

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

E

FY

20

E

FY

21

E

(%)

3.3 3.4

2.5

3.1 3.5 3.6

4.2 4.3

0

1

2

3

4

5

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

E

FY

20

E

FY

21

E

(x)

49.3 53.1

63.7

29.4 34.7

43.0 38.0

35.0

0

10

20

30

40

50

60

70

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

E

FY

20

E

FY

21

E

(da

ys)

12.6 12.8

9.6

7.1

9.9 10.6

13.8

16.4

0

5

10

15

20

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

E

FY

20

E

FY

21

E

(%)

Amber Enterprise

Co

nsu

me

r E

lectr

on

ics


Exhibit 29: Return on operating asset to improve by

~200bp over FY18-21E


Exhibit 30: Negative net debt to equity


9.8 10.2 10.2

8.2

10.1 9.3

10.7

12.1

0

5

10

15

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

E

FY

20

E

FY

21

E

(%)

1.25 1.39

1.27

0.93

(0.01)

0.05 0.04

(0.06)

(1)

0

1

2

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

E

FY

20

E

FY

21

E

(x)

Exhibit 31: SWOT analysis – Amber Enterprise


Strengths Comprehensive product portfolio of room AC and key

components such as heat exchange, PCB, motors, metal

sheets and case liners

One of the largest manufacturers and suppliers of RAC

and key components and thus achieves economies of

scale and bulk sourcing

Market leadership with a 55% market share in RAC OEM

and ODM; at a ~19% market share in overall RAC (FY17).

Serves eight out of Top 10 RAC brands for over the past

years

High degree of backward integration (thereby enables

flexibility & helps in providing cost-competent solution)

and strong R&D capability resulting in ~85% revenue

driven through ODM

Twelve manufacturing facilities strategically near

customer location, resulting in faster turnaround Highly experienced senior management team

Significant entry barriers

Weakness Does not have a manufacturing presence in South and

East India

Opportunities Huge industry potential (low penetration level, increased

power adequacy shortening of product replacement

cycle and increased disposable income)

Product expansion (new models of RAC, such as IOT-

based inverter RAC, RAC components, such as DC motor,

resin core motors, inverter controller, and key

components, such as printed circuit boards)

Increase wallet share per customer

Entry into new customers through components

Exports potential primarily in the Middle East, Southeast

Asia and Europe

Threats Lower-than-expected industry growth due to unseasonal

weather changes

Lower imports substitution or consumer brands preferring

for in-house production

Increased competition

Amber Enterprise


Is it another Gree in the making?

China-based Gree is a world leader in air conditioner

integrating R&D, manufacturing, sales and services. One

out of three air conditioners globally is manufactured by

GREE. The company’s superior financial performance (it

posted a PAT CAGR of 36% over 2005-17) was primarily

supported by rapid industry growth (RAC penetration

increased from 54% in 2008 to ~100% in 2017), which

was driven by the rise in income levels. This superior

financial performance was significantly rewarded by the

markets, with stock returns of a 37% CAGR over 2006-

18.

Amber and Gree’s businesses are similar, as both are

market leaders in manufacturing air conditioners.

We believe Amber can deliver similar robust financial

performance over a longer period, given RAC low

penetration, high average temperature in India (India

Cooling degree days of 3,084 in 2016 vs World Average

of 1,905), and India’s per capita income on the

purchasing parity level is similar to 2007 China level

(~USD 7,000 per capita on purchasing parity basis) –

the year after which air conditioner penetration

increased rapidly..

Exhibit 32: India is currently at similar levels to China

in 2007…

Source: World Bank, Elara Securities Research

Exhibit 33: ...from when China AC penetration

increased significantly, from 54% to 100% in 9

years


Exhibit 34: GREE posts 36% PAT CAGR in CY04-

CY17


Exhibit 35: GREE stock returns 37% CAGR in CY06-18


7,285

16,807

3,699

7,056

0

3,000

6,000

9,000

12,000

15,000

18,000

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

(USD

pe

r ca

pit

a P

PP

)

China India

54

76

100

40

50

60

70

80

90

100

110

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

(%)

20

34 36

0

5

10

15

20

25

30

35

40

Revenue EBITDA PAT

(%)

CAGR (CY05-CY17)

0

1,000

2,000

3,000

4,000

5,000

6,000

Ma

r-0

6

Ma

r-0

7

Ma

r-0

8

Ma

r-0

9

Ma

r-1

0

Ma

r-1

1

Ma

r-1

2

Ma

r-1

3

Ma

r-1

4

Ma

r-1

5

Ma

r-1

6

Ma

r-1

7

Ma

r-1

8

(re

ba

sed

to

10

0)

Gree stock performance

Amber Enterprise

Co

nsu

me

r E

lectr

on

ics


Initiate with Buy & TP of INR 1,225

We initiate coverage of Amber Enterprise with a Buy

rating and a target price of INR 1,225, implying potential

upside of 32% from the current levels. Our target price is

based on 25x June 2020E EPS of INR 49. We

conservatively value the company by arriving at a

multiple of 25x by assigning a ~30% discount to

consumer AC companies (~36x one-year forward P/E),

due to its B2B business model and lower FY18 ROE of

10%.

Revenue CAGR of 25% & EPS CAGR of 39%

The company enjoys market leadership, no risk to market

share loss and a 39% EPS CAGR over FY18-21E. We

expect a PAT CAGR of 45% over FY18-21E, led by 1) a

revenue CAGR of 25% (17.6% CAGR from existing

business) due to customer, product and geographical

expansion, 2) 65bps margin expansion from existing

business, and 3) lower interest expense. We expect

improvement in ROE of average FY18-21E of 12.7% vs

FY14-17 of 10.5% and ROOA average FY18-21E of 10.6%

vs FY14-17 of 9.6%) on back of better asset efficiency.

Exhibit 36: Sales CAGR of 25% over FY18-21E,

supported by the acquisition and customer addition


Exhibit 37: PAT CAGR of 45% over FY18-21E led by

strong top line growth, margin improvement and

lower interest expense


Exhibit 38: P/E has a positive correlation with ROE…


Exhibit 39: … and PAT growth


11

26

(11)

52

29 28 31

18

(20)

0

20

40

60

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

E

FY

20

E

FY

21

E

(%)

Sales growth

11.0

33.1

(16.2)(8.1)

181.1

58.9

43.3 34.2

(30)

(15)

0

15

30

45

60

75

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

E

FY

20

E

FY

21

E

(%)

0

10

20

30

40

50

60

0 20 40 60

RO

E (

%)

P/E (x)

0

10

20

30

40

50

60

0 20 40 60

PA

T g

row

th (

%)

P/E (x)

Value creator

Initiate with a Buy rating and a TP of INR 1,225, implying 32% upside

Revenue CAGR of 25% and EPS CAGR of 39% over FY18-21E

Proprietary framework: ROOA of 12.1% by FY21E

Amber Enterprise


Exhibit 40: Comparative valuations

PAT Growth

(%) EBITDA margin

(%) ROE (%)


Name Ticker CMP

(INR)

Market cap

(INR mn) FY19 FY20 FY19 FY20 FY19 FY20 FY19 FY20 FY19 FY20

Amber AMBER IN 932 29,310 58.9 43.3 7.8 8.1 10.6 13.8 29.6 20.7 14.4 10.6

Dixon DIXON IN 2,510 28,431 27.0 46.0 4.7 5.0 22.0 25.5 36.7 25.1 20.5 15.1

India EMS average

42.9 44.6 6.2 6.5 16.3 19.6 33.2 22.9 17.5 12.9

Voltas VOLT IN 608 201,343 10.6 15.6 10.4 10.5 15.3 15.8 32.2 27.6 24.9 21.2

Johnson Controls Hitachi

Air JCHAC IN 2,010 54,651 19.2 39.6 9.2 10.2 20.2 23.1 45.6 32.7 23.7 17.7

Blue Star BLSTR IN 683 65,773 38.5 32.1 6.4 6.9 20.2 23.7 37.4 28.3 20.7 16.5

India AC average

22.8 29.1 8.7 9.2 18.6 20.9 38.4 29.5 23.1 18.4

Motherson MSS IN 302 635,532 47.2 30.6 10.0 10.7 23.8 26.5 25.5 19.5 10.8 8.5

Bosch BOS IN 18,864 575,739 16.4 20.9 18.4 19.1 16.0 17.0 34.6 28.7 21.3 17.5



Minda MNDA IN 410 107,417 25.8 20.7 12.4 12.6 22.7 22.4 32.3 27.1 16.4 13.6



average

25.8 22.6 14.9 15.4 19.8 20.5 35.9 29.0 18.7 15.5

USD USD mn

Flex FLEX US 14.1 7,496 11.7 21.0 4.9 5.3 19.0 21.1 11.4 9.3 6.8 5.8

Jabil JBL US 28.3 4,770 8.4 6.1 7.0 6.8 22.9 23.1 9.7 9.2 3.7 3.5

Hon Hai Precision Industry

2317 TT 2.7 46,099 8.0 9.8 4.3 4.5 10.9 11.2 10.6 9.6 6.2 5.5

Wistron Neweb 6285 TT 2.2 832 15.2 15.0 6.3 6.8 13.8 15.1 11.7 10.2 4.8 4.0

Global EMS average

10.8 13.0 5.6 5.8 16.6 17.6 10.9 9.6 5.4 4.7

USD USD mn

Midea group 000333 CH 6.1 40,363 18.9 17.5 10.9 11.1 26.1 25.7 10.8 9.2 7.6 6.3

Gree Electric Appliances 000651 CH 5.7 34,506 11.5 12.0 17.2 16.4 31.2 30.0 7.8 6.9 3.5 2.8

China AC average

15.2 14.8 14.1 13.7 28.6 27.9 9.3 8.0 5.5 4.5

Note: *pricing as on 23 Augsut 2018; Source: Company, Elara Securities Estimate

Exhibit 41: Valuation overview

FY20E

P/E (x) 25


Target price (INR) 1,223


Upside (%) 31.6


Amber Enterprise

Co

nsu

me

r E

lectr

on

ics


Our proprietary framework

ROE is often used as a measure of corporate profitability;

although it is a holistic measure of company profitability,

it does not provide a true picture of operating

performance. ROE includes return generated from

financial leverage (RFLEV) or use of debt and return from

operating liability leverage (ROLLEV) or use of suppliers

credit; therefore, the true operating performance of a

business gets clouded.

Return from net operating asset (RNOA) or ROIC or

ROCE is an improvement over ROE to understand

operating performance as it excludes the use of debt but

falls short of being a true measure of operating

profitability as it includes suppliers credit.

Return on operating asset (ROOA) is an “apples to

apples” measure which does not differentiate between

companies with high gross working capital or fixed

assets (including CWIP). It captures operating profitability

by stripping the impact of RFLEV and ROLLEV. The key

adjustment to arrive at ROOA is opportunity cost of

operating liabilities is added to post-tax EBIT to arrive at

adjusted operating profit.

Key inferences

Large part of ROE is derived from business

fundamentals (return on operating asset), and, thus,

there is lower variability or risk to ROE

Improvement in ROOA is through margin

improvement (better purchasing power) and asset

efficiency

The company does not derive significant benefit

from suppliers credit (as seen from return from

operating liability leverage) or debt (as seen from

return from financial leverage)

The company is expected to generate positive

spread (ROOA – WACC of ~10%)

Residual income model implies 8.75% terminal

growth in residual earnings (beyond FY21), which

we believe is achievable, given AC is a low-

penetration product, the company’s track record of

beating industry growth and market leadership

position

Exhibit 42: Proprietary framework - return on operating asset

Drivers of Profitability FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E

Operating revenues (OR) 9,734 12,303 10,890 16,519 21,281 27,142 35,459 41,842

Growth (%) 11.2 26.4 (11.5) 51.7 28.8 27.5 30.6 18.0

Adjusted Operating Profit 682 839 979 907 1,405 1,572 2,132 2,743

Growth (%) 135.7 23.0 16.7 (7.4) 54.9 11.9 35.6 28.6

Adjusted operating profit margin (%) 7.0 6.8 9.0 5.5 6.6 5.8 6.0 6.6

Operating asset (OA) 7,424 8,978 10,127 12,005 15,750 18,056 21,711 23,675

Operating asset turnover 1.4 1.5 1.1 1.5 1.5 1.6 1.8 1.8

Return on Operating Assets (ROOA) (%) 9.8 10.2 10.2 8.2 10.1 9.3 10.7 12.1

Operating liabilities (OL) 3,347 4,076 5,010 5,139 7,077 8,049 10,586 12,247

Post tax interest on interest bearing operating liabilities 272 291 368 346 468 544 670 821

Operating Liability Leverage (OLLEV) 0.8 0.8 1.0 0.7 0.8 0.8 1.0 1.1

Cost of operating liabilities (COOL) (Assumed) (%) 11.0 11.0 11.0 11.0 11.0 11.0 11.0 11.0

Return from operating liability leverage (ROLLEV) (%) 1.7 2.0 1.9 1.2 1.9 1.7 3.1 5.0

Return on Net operating assets (RNOA) (%) 11.4 12.2 12.2 9.4 12.1 11.0 13.8 17.0

Net financial obligation (NFO) 1,945 2,516 2,491 3,239 (254) 288 272 (946)

Financial Leverage (FLLEV) 0.9 1.1 0.9 0.9 (0.0) 0.0 0.0 (0.1)

Net Financing expense(income) 259 366 502 547 451 60 69 31

Tax on Net Financing expense (income) (71) (105) (132) (208) (137) (21) (24) (11)

Net Financing expense (income) post tax 189 261 370 339 314 39 45 21

Net Borrowing cost (%) 10.2 11.7 14.8 11.8 21.1 232.8 16.0 (6.1)

Return from Financial Leverage (RFL) (%) 1.3 0.5 (2.6) (2.3) (2.1) (0.4) (0.1) (0.7)

Return on Equity (ROE) (%) 12.7 12.7 9.6 7.1 9.9 10.6 13.8 16.4

Source: Capitaline, Elara Securities Estimate

Amber Enterprise


Exhibit 43: Residual income model indicates 8.75%

terminal growth


Operating Assets 15,750 18,056 21,711 23,675

ROOA 10.1% 9.3% 10.7% 12.1%

Spread 0.0% -0.8% 0.6% 2.0%

Residual Adjusted Operating Income (RAOI)

(135) 125 452

Present Value of RAOI

(122) 103 339

Enterprise Value 36,538

Operating Liabilities 7,077

Net Financial Obligations (254)

Equity Value 29,715

Current Market Cap 29,456

Growth implied in Market Cap 8.75%


Long-term growth value (LTGV)

At the current stock price, the market is building in

Current business value of ~19%

Short-term growth value of ~32%, which is not at

risk. We build in a 45% PAT CAGR on the back of

strong revenue growth of 25% (helped by

consolidation of IL Jin Electronics & Ever Electronics)

and lower interest expenses

Long-term growth value of ~49%, which we believe

is achievable, given AC is a low-penetration product,

the company’s track record of beating industry

growth and market leadership position

Exhibit 44: Long-term growth value of ~49%


19.0

32.0

49.1

0

20

40

60

80

100

120

CBV STGV LTGV

(%)

Amber Enterprise

Co

nsu

me

r E

lectr

on

ics


Rajpura, Punjab facility visit

We had recently visited Amber Rajpura plant in Punjab. Key take-away from our visit is as follows:

In house tool room and manufactures sheet metal

component for automobile (SML Isuzu, Swaraj Mahindra

and John Deere) and air conditioners (supply to Blue

Star, Carrier, Godrej and Dehradun facility)

Manufacture fuel tank, bus passenger /driver door

and roof for SML Isuzu & Swaraj Mahindra

Exhibit 45: Rajpura factory map


Exhibit 46: Tool room


Manufacture Truck chassis for SML Isuzu

Manufacture 320 different parts (header, feeder,

augur, feul tank etc) for John Deere

Key equipment: ~4 CNC machine, 40 Press machine

(includes 18 new imported)

Exhibit 47: Paint shop


Exhibit 48: John Deere’s area


Amber Enterprise



We had recently visited Amber Dehradun plant in Uttarakhand. This facility manufactures Room AC (ODU, IDU &

WAC) and AC components (Heat exchanger, System tubing, Plastic molding and sheet metal parts).

Exhibit 49: Indoor line


Exhibit 50: Assembly line


Exhibit 51: Window AC assembly


Exhibit 52: Pressing machine


Exhibit 53: Heat exchanger


Exhibit 54: Product safety inspection


Exhibit 55: Water leak testing machine


Exhibit 56: Packaging


Amber Enterprise

Co

nsu

me

r E

lectr

on

ics


Board of Directors & Management

Jasbir Singh – Chief Executive Officer & Promoter

Jasbir Singh holds a bachelor's degree in engineering

(industrial production) from Karnataka University and

holds a master's degree in business administration from

the University of Hull, United Kingdom. He has been a

board member since October 2004. Jasbir has been

instrumental in business growth. He has successfully

established six factories in the past 10 years and set up

relationships with large brands. Jasbir has 13 years of

experience in the RAC manufacturing sector. Under his

guidance, the company has initiated the concept of

additive manufacturing solutions. Jasbir has played an

instrumental role in successful acquisition of PICL (India)

in 2012.

Daljit Singh – Managing Director & Promoter

Daljit Singh holds a bachelor's degree in electronic

engineering from Nagpur University and master's degree

in information technology from the Rochester Institute of

Technology, the UK. He received the "Entrepreneur of

the Year 2016" award from Ludhiana Management

Association. Daljit has five years of experience in financial

services and nine years in the RAC manufacturing sector.

Sanjay Arora – Director Operations

Sanjay Arora holds a diploma degree in electrical

engineering with specialization in electronics & television

technology from the YMCA Institute of Engineering,

Faridabad. He has been with the company since July

2012 and has 34 years of experience in the

manufacturing industry. Sanjay is responsible for overall

operations. He is responsible for heading innovation,

security and legal matters. Prior to joining the company,

he was associated with Onida Savak, Monica Electronics,

Kortek Electronics and LG Electronics.

Udaiveer Singh – President RAC

Udaiveer Singh holds a diploma in mechanical

engineering from Board of Technical Education, UP. He

has been associated with the company since December

2003 and has 22 years of experience manufacturing

industry. Udaiveer is responsible for the planning and

operation of the RAC manufacturing facilities.

Sachin Gupta – Vice President, RAC

Sachin Gupta holds a bachelor’s degree in electrical

engineering from Punjab Technical University and a post

graduate diploma degree in business administration

from All-India Institute of Management Studies, Chennai.

He has been with the company since November 2014

and has more than 14 years of experience in

manufacturing industry. Sachin is responsible for

business development. Prior to joining the company, he

worked at LG Electronics India and Godrej & Boyce

Manufacturing.

Sudhir Goyal – Chief Financial Officer

Sudhir Goyal holds a bachelor’s degree in commerce

(Honors) from University of Delhi. He is an associate

member of the Institute of Chartered Accountants of

India. Sudhir has been with the company since October

2012 and has 13 years of experience in manufacturing

industry. He is the head of finance and accounts

departments. Prior to joining the company, Sudhir

worked at Hythro Power Corporation, Altima Systems,

ETA Ascon Group and Jamshedpur Mineral Wood

Manufacturing.

Company Description

Amber Enterprise is an integrated solutions provider in the room AC segment. It has leadership position in OEM and

ODM industries in the RAC segment. With its comprehensive product portfolio, it serves eight out of top 10

marquee brands in India, with a combined market share of more than 75% in the room AC segment. With over

three decades of history and 12 manufacturing facilities, strategic location near customer clusters and high degree

of backward integration, Amber is able to supply almost all critical and reliable functional components, except

compressors, in the room AC segment. With continued focus on ODM through R&D initiatives, the company is able

to develop new efficient products and functional components, which offer high value proposition and aids in

import substitution of products and components.

Amber Enterprise


Major events and milestones

Exhibit 1: Three decades of history

: 1990 Amber Enterprise was incorporated as a private limited company.


1994

2003-04

The first factory at Rajpura was established

Started Dehradun plant for RAC manufacturing for LG

2004 Dehradun factory units – four established

2005-06 Start manufacturing microwave ovens for LG

2007-08 Start manufacturing heat exchangers

2008 Start Noida Ecotech unit

2009 Dehradun factory unit – five established

2010 Kasna unit, Kala Amb Unit and Pune Unit established & Dehradun factory unit – six established

2011 Investment by Green India Venture Fund

2012 Jhajjar units was established. Investment by Reliance Alternative Investment Fund – Private Equity Fund Scheme – I; Acquisition of PICL

2017 Investment by Ascent and exit to Reliance Alternative Investment Fund – Private Equity Fund Scheme – I through purchase by Ascent

2017 Incorporation of new subsidiary, Appserver & Acquisition of a new subsidiary, IL JIN

Amber Enterprise

Co

nsu

me

r E

lectr

on

ics


APPENDIX

Exhibit 57: Key manufacturing facilities

Location Key products manufactured

1 Gautam Nagar, Uttar Pradesh (Unit 1) Inner case and plastic extruded sheets

2 Gautam Nagar, Uttar Pradesh (Unit 2) Painted and unpained sheet metal parts for AC, refrigerators, microwave oven cavity, and water purifier tank

3 Jhajjar, Haryana IDU and ODU, injection molding components, heat exchanger, kit assembly, and washing machine tub unit assembly

4 Selaqui, Dehradun (Unit 1) RAC-IDU and ODU, MFC and injection molding

5 Selaqui, Dehradun (Unit 2) Sheet metal AC parts and heat exchanger

6 Selaqui, Dehradun (Unit 3) WAC, ODU and system tubing

7 Ranjangaon, Pune AC ODU, sheet metal components

8 Rajpura, Punjab Painted and unpained sheet metal parts

9 PICL, Faridabad, Haryana Electrical motors for RACs and commercial AC

10 Himachal Pradesh Non-operational

11 ILJIN Electronics, Greater Noida, Uttar Pradesh

PCBs for home appliances (such as RACs washing machine, refrigerator, microwave) and for automobiles

12 Ever Electronics, Pune PCBs for home appliances (such as RACs washing machine, refrigerator, microwave) and for automobiles


Exhibit 58: Product wise installed capacity

(in nos) Installed Capacity (FY18)

RAC

ODU of SAC 15,86,406

IDU of SAC 13,65,000

WAC 5,85,000

Components

Case Liner 19,50,000

Plastic extruded sheet (kgs) 1,25,28,000

Heat exchanger 29,90,000

Multi flow condensor 5,20,000

Plastic injection moulding - RAC sets 11,29,042

Sheet metal components – ODU of SAC 26,21,667

Sheet metal components – WAC 3,90,000

Sheet metal components – IDU of SAC 5,52,500

Electric motors for RACs 32,02,284

Electric motors for air cooler 7,21,392


Product portfolio and manufacturing process

Exhibit 59: Window air conditioners

Window air conditioners (WAC) are a dingle cubicle unit,

assembled in a case consisting of all the components of an

air conditioning unit. It is installed and mounted in a

window. Window AC comprises ~15% of total India RAC

market; Amber manufactures more than 50% of India’s

Window AC, mostly as per the Original Design

Manufacturing business model. It has an installed capacity

of 5.85,000 units per annum and the company operates at

a capacity utilization of ~52% as on FY18.

Source: Amber Prospectus

Amber Enterprise


Exhibit 60: Step-wise to manufacture and assemble WAC


Exhibit 61: Outdoor units (ODU) for split air conditioners (SAC)

SAC comprises ~85% of India’s RAC

market and have an outdoor &

indoor unit. ODU of SAC is installed

outside the room containing parts

such as compressor, condenser and

expansion value. It is installed

outside for flow of heat exhaustion.

The company has an installed

capacity of ~1.6 mn units per

annum and it operates at a capacity

utilization of ~60% as on FY18.


Exhibit 62: Step- wise process to manufacture and assemble ODU


Exhibit 63: Indoor units (IDU) for split air conditioners (SAC)

IDU of SAC is installed for heat accumulation and

produced the cooling effect inside the room. The company

has an installed capacity of ~1.4 mn units per annum and it

operates at a capacity utilization of ~57% as on FY18.


Press parts

Heat exchanger

Copper tubing

Compressor fixing

Welding

Production validation

Leak checking (HLD)

Charging & Sealing

Vaccumization Flushing

Assembly, labels

& insulations

Product

validation Barcoding Packaging SMOG

Base & compressor assy Heat exchanger fixing Motor, fan & blower fixing

Front grille assy Quality validation Labelling & packaging

Amber Enterprise

Co

nsu

me

r E

lectr

on

ics


Exhibit 64: Step-wise process to manufacture and assemble IDU


Exhibit 65: Heat exchanger

A heat exchanger is a critical component used to transfer

heat between a solid object and a fluid, or between two or

more fluids. The fluids may be separated by a solid wall to

prevent mixing or they may be in direct contact. It is widely

used in RAC, refrigerators and other HVAC segment. The

company has an installed capacity of ~3mn units per

annum and capacity utilization of ~65% as on FY18.


Exhibit 66: Step-wise process to manufacture and assemble heat exchangers


Chassis loading

Pin press &

inserting tube

Expanding

tube

Inserting

return-band Welding Testing Nitrogen

fitting

Fin press Tube expander

Expansion Auto welding Leak testing

Chassis loading Cross flow fan & motor fixing Heat exchanger assy & fixing

Controller fixing Front grille & facia fixing Quality validation Labelling & packaging

Amber Enterprise


Exhibit 67: Multi-flow condensers

Multi-flow condenser is a type of heat exchanger, also called parallel flow condenser. In this, multiple flow trajectories

are provided instead of one for rapid heat transfer. This contains parallel cooling circuits and a slim design that helps in

utilizing space, thereby enhancing overall performance. The company has an installed capacity of 0.5 mn units per

annum and capacity utilization of ~55% as on FY18.


Exhibit 68: Step-wise process to manufacture and assemble multi-flow condenser


Exhibit 69: Electric motors

An electric motor is a machine that converts electric energy into

mechanical energy. The company manufactures a range of

residential and commercial electrical motors used in RAC, commercial

AC, air coolers and washing machines at its Faridabad unit through

its wholly owned subsidiary, PICL. The company has an installed

capacity of 3.2mn units per annum for RAC (capacity utilization of

~55%) and 0.7 mn units per annum for air cooler (capacity utilization

of ~30%) as on FY18.


Exhibit 70: Step-wise process to manufacture electrical motor


Shaft & rotor assembly Winding coating Coil winding

High speed

winder

Rotor

Rotor dam Rotor ring

Shaft

Final assembly Terminal fixing Electrical testing

Liquid flux spray

Aluminium tube to fin forming Header & fin assembly

Copper connector Coil leak testing

Amber Enterprise

Co

nsu

me

r E

lectr

on

ics


Exhibit 71: Sheet metal components

Sheet metal components are manufactured using the process of building

component structure by cutting, bending and welding. Subsequently,

painting is done on sheet metal to give required look as per customer

specifications. Press machines and paint booths are used for this process

along with welding machines and assembly lines. The company has

sheet metal component installed capacity of ~2.6 mn units per annum

for ODU (capacity utilization of ~50%), ~0.6mn units per annum for IDU

(capacity utilization of ~55%) and ~0.4mn units per annum for WAC

(capacity utilization of ~55%) as on FY18.


Exhibit 72: Injection molding components

Injection molding is a manufacturing process for producing parts by

injecting material into a mould. Material for the part is fed into a heated

barrel, mixed, and put into a mould cavity, where it cools and hardness

to take the shape and configuration of the cavity. It is commonly used for

thermoplastic and thermosetting polymers. The company has an

installed capacity of ~1.1mn units per annum with an installed capacity

of ~60% as on FY18.


Exhibit 73: Step-wise process to manufacture injection molding components


Exhibit 74: Plastic extrusion and vacuum forming components

Extrusion is a high-volume manufacturing process in which raw plastic granules are melted and formed into a

continuous profile. The company uses this process to manufacture plastic sheets. Different grades of plastic are

processed, such as acrylonitrile butadiene styrene, polyethylene and polypropylene.

Vacuum forming is a simplified version of thermoforming, where a sheet of plastic is heated to a forming temperature,

stretched onto a single-surface mold, and forced against the mold by a vacuum. This process can be used to form plastic

into permanent objects. The company uses this process to manufacture refrigerator inner cases.

The company has an installed capacity of 12.5 mn kgs with capacity utilization of ~65% as of FY18.


Resin granules Heating Molding Cooling

Amber Enterprise


Exhibit 75: Step-wise process to manufacture plastic extrusion and vacuum forming components


Exhibit 76: Copper tubing fabrication

Copper tubing is fabricated in different sizes to

provide flow refrigerant into the RAC units, such

as suction, discharge, capillary and sub-cooling.

The company manufactures copper tubes of

varied thickness.


Exhibit 77: Step-wise process involved in manufacturing and fabrication of copper tubing


ClampPreheated plastic

sheet

Mold Molded part

Vacuum pump

Pressure box

Air pressure inlet

Finished part

Tube drawing Tube straightening Tube cutting

Tube bending – 3D

Wiper

Bend die

Rotation

Punching & swazzing Welding assy

Amber Enterprise

Co

nsu

me

r E

lectr

on

ics


Exhibit 78: Printed circuit boards

The company manufactures, distributes and

exports electronic, assembled printed circuit

boards (PCB) for home appliances, such as RAC,

microwaves & washing machines and products

for automobiles through its newly acquired

subsidiary, IL JIN Electronics based in Noida,

Uttar Pradesh.


Exhibit 79: Step-wise PCB manufacturing process


Amber Enterprise


Coverage History

Date Rating Target Price Closing Price

1

23-Aug-2018 Buy INR 1,225 INR 931

Guide to Research Rating

BUY Absolute Return >+20%

ACCUMULATE Absolute Return +5% to +20%

REDUCE Absolute Return -5% to +5%

SELL Absolute Return < -5%

1

800

850

900

950

1,000

1,050

1,100

1,150

1,200

1,250

1,300

Jan

-18

Fe

b-1

8

Ma

r-1

8

Ma

r-1

8

Ma

r-1

8

Ap

r-1

8

Ap

r-1

8

Ma

y-1

8

Ma

y-1

8

Jun

-18

Jun

-18

Jul-1

8

Jul-1

8

Au

g-1

8

Not Covered Covered

Amber Enterprise

Co

nsu

me

r E

lectr

on

ics


Notes


100

Disclosures & Confidentiality for non U.S. Investors

The Note is based on our estimates and is being provided to you (herein referred to as the “Recipient”) only for information purposes. The sole purpose of this

Note is to provide preliminary information on the business activities of the company and the projected financial statements in order to assist the recipient in

understanding / evaluating the Proposal. Nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of

companies referred to in this document. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent

evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved) and should consult its own

advisors to determine the merits and risks of such an investment. Nevertheless, Elara Securities (India) Private Limited or any of its affiliates is committed to provide

independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Elara Securities

(India) Private Limited or any of its affiliates have not independently verified all the information given in this Note and expressly disclaim all liability for any errors

and/or omissions, representations or warranties, expressed or implied as contained in this Note. The user assumes the entire risk of any use made of this

information. Elara Securities (India) Private Limited or any of its affiliates, their directors and the employees may from time to time, effect or have effected an own

account transaction in or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking

or other services for or solicit investment banking or other business from any company referred to in this Note. Each of these entities functions as a separate,

distinct and independent of each other. This Note is strictly confidential and is being furnished to you solely for your information. This Note should not be

reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This Note

is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other

jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Elara Securities (India) Private

Limited or any of its affiliates to any registration or licensing requirements within such jurisdiction. The distribution of this document in certain jurisdictions may be

restricted by law, and persons in whose possession this document comes, should inform themselves about and observe, any such restrictions. Upon request, the

Recipient will promptly return all material received from the company and/or the Advisors without retaining any copies thereof. The Information given in this

document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This Information is

subject to change without any prior notice. Elara Securities (India) Private Limited or any of its affiliates reserves the right to make modifications and alterations to

this statement as may be required from time to time. However, Elara Securities (India) Private Limited is under no obligation to update or keep the information

current. Neither Elara Securities (India) Private Limited nor any of its affiliates, group companies, directors, employees, agents or representatives shall be liable for

any damages whether direct, indirect, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the

information. This Note should not be deemed an indication of the state of affairs of the company nor shall it constitute an indication that there has been no

change in the business or state of affairs of the company since the date of publication of this Note. The disclosures of interest statements incorporated in this

document are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. Elara Securities (India)

Private Limited generally prohibits its analysts, persons reporting to analysts and their family members from maintaining a financial interest in the securities or

derivatives of any companies that the analysts cover. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her

personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly

related to specific recommendations or views expressed in this report.

Any clarifications / queries on the proposal as well as any future communication regarding the proposal should be addressed to Elara Securities (India) Private

Limited.

Elara Securities (India) Private Limited was incorporated in July 2007 as a subsidiary of Elara Capital (India) Private Limited.

Elara Securities (India) Private Limited is a SEBI registered Stock Broker in the Capital Market and Futures & Options Segments of National Stock Exchange of India

Limited (NSE) and in the Capital Market Segment of BSE Limited (BSE).

Elara Securities (India) Private Limited’s business, amongst other things, is to undertake all associated activities relating to its broking business.

The activities of Elara Securities (India) Private Limited were neither suspended nor has it defaulted with any stock exchange authority with whom it is registered in

last five years. However, during the routine course of inspection and based on observations, the exchanges have issued advise letters or levied minor penalties on

Elara Securities (India) Private Limited for minor operational deviations in certain cases. Elara Securities (India) Private Limited has not been debarred from doing

business by any Stock Exchange / SEBI or any other authorities; nor has the certificate of registration been cancelled by SEBI at any point of time.

Elara Securities (India) Private Limited offers research services primarily to institutional investors and their employees, directors, fund managers, advisors who are

registered or proposed to be registered.

Details of Associates of Elara Securities (India) Private Limited are available on group company website www.elaracapital.com

Elara Securities (India) Private Limited is maintaining arms-length relationship with its associate entities.

Research Analyst or his/her relative(s) may have financial interest in the subject company. Elara Securities (India) Private Limited does not have any financial

interest in the subject company, whereas its associate entities may have financial interest. Research Analyst or his/her relative does not have actual/beneficial

ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of Research Report. Elara

Securities (India) Private Limited does not have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately

preceding the date of publication of Research Report. Associate entities of Elara Securities (India) Private Limited may have actual/beneficial ownership of 1% or

more securities of the subject company at the end of the month immediately preceding the date of publication of Research Report. Research Analyst or his/her

relative or Elara Securities (India) Private Limited or its associate entities does not have any other material conflict of interest at the time of publication of the

Research Report.

Research Analyst or his/her relative(s) has not served as an officer, director or employee of the subject company.

Research analyst or Elara Securities (India) Private Limited have not received any compensation from the subject company in the past twelve months. Associate

entities of Elara Securities (India) Private Limited may have received compensation from the subject company in the past twelve months. Research analyst or Elara

Securities (India) Private Limited or its associate entities have not managed or co-managed public offering of securities for the subject company in the past twelve

months. Research analyst or Elara Securities (India) Private Limited or its associates have not received any compensation for investment banking or merchant

banking or brokerage services from the subject company in the past twelve months. Research analyst or Elara Securities (India) Private Limited or its associate

entities may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject

company or third party in connection with the Research Report in the past twelve months.

Disclaimer for non U.S. Investors

The information contained in this note is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although

we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will

continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the

particular situation.


Glo

ba

l M

ark

ets

Re

sea

rch

101 101

Disclosures for U.S. Investors

The research analyst did not receive compensation from Dixon Technologies Limited and Amber Enterprise Limited.

Elara Capital Inc.’s affiliate did not manage an offering for Dixon Technologies Limited and Amber Enterprise Limited.

Elara Capital Inc.’s affiliate did not receive compensation from Dixon Technologies Limited and Amber Enterprise Limited in the last 12 months.

Elara Capital Inc.’s affiliate does not expect to receive compensation from Dixon Technologies Limited and Amber Enterprise Limited in the next 3 months.

Disclaimer for U.S. Investors

This material is based upon information that we consider to be reliable, but Elara Capital Inc. does not warrant its completeness, accuracy or adequacy and it

should not be relied upon as such.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or

strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice,

and are only correct as of the stated date of their issue. Prices, values or income from any securities or investments mentioned in this report may fall against the

interests of the investor and the investor may get back less than the amount invested. Where an investment is described as being likely to yield income, please

note that the amount of income that the investor will receive from such an investment may fluctuate. Where an investment or security is denominated in a

different currency to the investor’s currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that

investment to the investor. The information contained in this report does not constitute advice on the tax consequences of making any particular investment

decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation

of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is

suitable for your particular circumstances and, if necessary, seek professional advice.

Certain statements in this report, including any financial projections, may constitute “forward-looking statements.” These “forward-looking statements” are not

guarantees of future performance and are based on numerous current assumptions that are subject to significant uncertainties and contingencies. Actual

future performance could differ materially from these “forward-looking statements” and financial information.


102

India Elara Securities (India) Pvt. Ltd. Indiabulls Finance Centre, Tower 3, 21st Floor, Senapati Bapat Marg, Elphinstone Road (West) Mumbai – 400 013, India Tel : +91 22 6164 8500

Europe Elara Capital Plc. 6th Floor, The Grove, 248A Marylebone Road, London, NW1 6JZ United Kingdom Tel : +44 20 7486 9733

USA Elara Securities Inc. 950 Third Avenue, Suite 1903, New York, NY 10022, USA Tel: +1 212 430 5870 Fax: +1 212 208 2501

Asia / Pacific Elara Capital (Asia) Pte.Ltd. 30 Raffles Place #20-03A, Chevron House Singapore 048622 Tel : +65 6692 0174

Harendra Kumar Managing Director [email protected] +91 22 6164 8571

Sales

Hitesh Danak India

[email protected] +91 22 6164 8543

Karan Rathod India [email protected] +91 22 6164 8570

Prashin Lalvani India


Shraddha Shrikhande India


Sushil Bhojwani India


Sudhanshu Rajpal India


Gangadhara Kini US, Australia


Quantitative, Alternatives, Sales Trading & Dealing

Sunil Jain Quantitative & Alternates [email protected] +91 22 6164 8531

Manan Joshi India


Manoj Murarka India


Nupur Barve India [email protected] +91 22 6164 8532

Ravi Sundar Muthukrishnan Ph D Head - Institutional Equity Research [email protected] +91 22 6164 8572

Research

Akhil Parekh Analyst Midcap [email protected] +91 22 6164 8519

Ankita Shah Analyst Infrastructure, Ports & Logistics [email protected] +91 22 6164 8516

Biju Samuel Analyst Quantitative & Alternate Strategy [email protected] +91 22 6164 8505

Gagan Dixit Analyst Oil & Gas, Aviation [email protected] +91 22 6164 8504

Garima Kapoor Economist


Harshit Kapadia Analyst Capital Goods [email protected] +91 22 6164 8542

Jay Kale, CFA Analyst Auto & Auto Ancillaries [email protected] +91 22 6164 8507

Param Desai Analyst Pharmaceuticals, Healthcare [email protected] +91 22 6164 8528

Pankaj Chhaochharia Analyst Strategy [email protected] +91 22 6164 8503

Pradeep Kumar Kesavan, CFA Analyst Strategy [email protected] +91 22 6164 8541

Rakesh Kumar Analyst Banking & Financials [email protected] +91 22 6164 8559

Ravi Menon Analyst IT Services, Internet, Telecom [email protected] +91 22 6164 8502

Ravi Sodah Analyst Cement [email protected] +91 22 6164 8517

Ritika Dua Analyst Diversified Financials [email protected] +91 22 6164 8526

Sagarika Mukherjee Analyst FMCG, Dairy [email protected] +91 22 6164 8594

Hetal Gada Sr. Associate Metals & Mining [email protected] +91 22 6164 8536

Manuj Oberoi Sr. Associate Midcap [email protected] +91 22 6164 8530

Aarti Rao Associate Pharmaceuticals, Healthcare [email protected] +91 22 6164 8535

Ashish Agrawal Associate IT Services, Internet, Telecom [email protected] +91 22 6164 8573

Chintan Shah Associate Banking & Financials [email protected] +91 22 6164 8521

Harsh Jhanwar Associate Cement [email protected] +91 22 6164 8546

Praneet Nikumbh Associate Diversified Financials [email protected] +91 22 6164 8506

Priyanka Trivedi Associate Agri, Travel & Hospitality [email protected] +91 22 6164 8588

Rachael Alva Associate Oil & Gas, Aviation [email protected] +91 22 6164 8525

Shubham Maheshwari Associate FMCG, Dairy [email protected] +91 22 6164 8562

Vijay Gyanchandani Associate Auto & Auto Ancillaries [email protected] +91 22 6164 8511

Vinayak Patil Database


Priyanka Sheth Editor


Gurunath Parab Production


Jinesh Bhansali Production


Access our reports on Bloomberg: Type ESEC <GO> Also available on Thomson & Reuters


CIN: U74992MH2007PTC172297 SEBI RA Regn. No.: INH000000933

Member (BSE, NSE)

Regn Nos: CAPITAL MARKET SEBI REGN. NO.: BSE: INB 011289833, NSE: INB231289837 DERIVATIVES SEBI REGN. NO.: NSE: INF 231289837 Website: www.elaracapital.com Investor Grievance Email ID: [email protected]

Documents

Ready to Roar - i.marketsmojo.com · Pankaj Chhaochharia • [email protected] • +91 22 6164 8503 Ready to Roar Room for more: domestic EMS industry CAGR of 30%