Dixon Technologies can make a revenue of around Rs 17,000-17,500 crore next year: Saurabh Gupta, CFO

Saurabh Gupta, Chief Financial Officer, Dixon Technologies, talks about margins, JV with Rexxam, tie-up with BoAt, PLI Scheme and how beneficial it is for the company among others during a candid chat with Swati Khandelwal, Zee Business. Edited Excerpts: 

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Q: Tell us about the impact of input cost on margins and are you re-negotiating your contracts?

A: We have two models of business and they are (i) OEM and (ii) ODM.

We do not have any risk in our OEM business as an increase in the commodity and currency cost is immediately passed on to the customers. Almost 80% of our total revenue comes from the OEM business. The rest of our 20% business, which is majorly the lighting and washing machine business, is our ODM business. But there is always a lag of any increase in the currency and commodity between the time we pass on the cost increases to the customers. The ongoing Russia-Ukraine issue has increased the commodity prices, which was softened a bit for some time. So, the prices have moved up a bit and we have passed on the older price increase to our customers a bit but the new increase will be passed on gradually. So, in short term, the margins will be impacted a bit but over a period, maybe in a couple of quarters, I think we will get back to the normal margins that we make in lighting and washing machine. 

Q: Chip shortage has been a grave situation for the entire industry. What kind of situation is emerging now and do you think that there is some improvement in the situation compared to the past or the geopolitical tensions has added on to the situation? 

A: Shortage of semiconductors and chips is not an issue for our business, in fact, our situation is better than what it was earlier. We are watching it closely so that the situation remains as it is for us. But you have rightly said and certain reports say that few of the raw materials that are used in semiconductors comes from Russia and Ukraine. So, going forward, possibly, there can be some impact but currently, we cannot find any issue and we have enough availability of the semiconductors to execute the order book that we have. 

Q: What sort of growth do you foresee from JV with Rexxam for circuit board manufacturing?

A: Rexxam is quite a big company that supplies to Daikin, which is the world's largest air conditioning company. They are specialists in designing the inventor controller board and we have made a 60:40 JV with them. They are clearly looking that to make India a manufacturing hub for both the Indian domestic market and the global market. I think as soon as our JV is operational in April of the next financial year. I expect that this business will turn into at least a Rs 300-350 crore business for the JV in the next two to three years. We will manufacture just not for India but also for Rexxam's clients globally. 

Q: What kind of investments can we see and how big this market can be in terms of contribution to your revenue and what would be the outlook and timelines for the same?

A: We are the beneficiaries of the government's production linked incentives (PLI) scheme for white goods and the JV has already been approved. So, the committed CapEx for the JV under the PLI is around Rs 50 crore, which we have to invest in five years. So, starting the next financial year, we have to make a CapEx of Rs 50 crore in the next five years and I feel that this CapEx of Rs 50 crore can create revenue of at least Rs 2,000-2,500 crore over the next five years from domestic as well as the global markets. 

Q: How much the tie-up with BoAt is contributing to revenue right now and what sort of growth do you expect from TWS? 

A: As you know that BoAt is India's largest brand and is among the top five brands globally. They are doing very well. Overall, the segment variables and wearable is growing at 100% in India. So, we feel that our JV with BoAt, which is a 50:50 JV, in the next two years can make a revenue of around Rs 2,000 crore. The mandate of the JV is that initially, it will be into manufacturing, which will be followed by manufacturing of components because the government has a Phased Manufacturing Programme (PMP) under which it wants to create capacities for components within India so that they are manufactured in the country. The third mandate of the JV is that the designing of those variables, hearable, EWS, neckband, smartwatches, Bluetooth speakers will happen in India. So, gradually, things will be manufactured first after which we will move on to designing. 

Q: Can you tell us about the volumes of Laptops and Mobile phones you are manufacturing at present and what growth rate you are anticipating in this area in the next two to three years? 

A: India is a huge market for laptops and tablets and the government has also brought a Production Linked Incentive scheme in this. We are the beneficiary of the scheme. It has a market of almost $5-6 million (almost Rs 45,000 crore) in India and 90% demand of the market requirement is imported. So, the government's Production Linked Incentive scheme will encourage domestic manufacturing and lead to the deepening of manufacturing of components. There will be a value addition in India. The first customer with whom we have tied up is Acer, which is among the top five global brands. Our outlook with it is very good and I think that we can make a revenue of around Rs 600-700 crore next year. We are also in talks with other customers who fall under the top three to four customers. I feel, our growth visibility in this will also be quite good and working capital intensity in these businesses are low generally so the ROC profile will also stay good. 

Q: In our previous interaction you have said that mobile manufacturing will be the largest revenue contributing segment going ahead. So, can you please share that number with us or is there any upward revision in the same?

A: The business is looking great, we have continuously made customer addition to it. So, our customers are for the domestic as well as the global markets. They, the customers, have made a strong outlook for the next year. So, I think, we will close the year at around Rs 2,600-2,700 crore in the mobile business, which used to stand around Rs 700-800 crore till last year. The business outlook for the next year suggests that  it will generate a revenue of around Rs 6,500 crore to Rs 7,000 crore. So, it is going to be a very big revenue contributor and almost one-third of our revenues will come from this vertical from the next year. 

Q: Dixon's portfolio has grown exponentially over the years. Do you have any plans to enter chip manufacturing as well?

A: The government is engaging strongly with the Indian and global players and has come up with a good scheme to attract players in chip manufacturing. I think, it is a high CapEx investment and will require an investment of anywhere between $5-10 million. So, it is hard for Dixon to come into chip manufacturing but we are trying for LED chip packaging and the government also have a PLI for the same. We are evaluating it a bit but overall it is hard for Dixon to enter into semiconductors or chip manufacturing. 

Q: Tell us about your CapEx plans? Are there any plans related to new facilities or capacity expansions, if yes, what are the capacity plans and where it would come up geography wise?

A: We have bought two land parcels, recently, in Noida and Greater Noida. It includes a 5-acre land bank in Noida and a 20-acre land bank in Greater Noida. We will consolidate our entire mobile business that is running across different factories. As we are coming into the refrigerator as a category and the 20-acre land bank will be used for expansion for it. We are also buying land banks in Tirupati and are expanding there. There is a place called Kopparthi in Andhra Pradesh, where we are shifting our entire security surveillance business to the place from Tirupati. We will expand our capacities further at Kopparthi. So, we are expanding at many places and the maximum of expansion work will happen in Noida and Tirupati, which are our existing setups. 

Q: What would be the CapEx for it?

A: We will close the year with a CapEx of around Rs 380-385 crore but we have made quite a big CapEx this year and to a large extent this CapEx has been front-ended and its results will be seen in the coming years. Next year, the CapEx will be around Rs 235-240 crore and our EBITDA generation will increase significantly from a much higher base of revenue. So, I think that next year our free cash flow should be much better than this year. 

Q: You are already a beneficiary of the PLI scheme at many platforms and the government is bringing PLI schemes at different avenues. Tell us about the PLI schemes where you will show an interest and also the one for which you have applied?

A: We are already a beneficiary of five PLI schemes namely in  Mobile, laptops and tablets IT hardware Telecom and networking products where we have a JV with Bharati and Airtel is our anchor customer. 
As you have talked about the circuit board manufacturing JV with Rexxam at the start of the talk and we are the PLI beneficiary here as well. 
We are also entering into the LED lighting component, although, we are India's largest player in lighting and if we will enter the LED lighting component then it will be the largest captive requirement for the same, which will also increase our margins. 
In addition to these, I have already talked about the LED chip packaging. So, we have a lot of growth opportunities of growth in these. If the government will come up with some other schemes in which we will feel that the backward integration and designing can be done we will go for it. 

Q: Lastly outlook & guidance for FY23 and what could be the possible headwinds that can be for your business?

A: We will close the year at a revenue of around Rs 10,700-10,800 crore. Next year, as per the growth in the mobile segment, I have talked about, and the growth of the rest of the verticals including the new verticals, it seems that we can make a revenue of around Rs 17,000-17,500 crore and there can be some margin expansion as well. However, it is very difficult to provide any guidance on the margin because there are many moving parts, what impact commodity movement, crude will have and how long this Russia-Ukraine situation will last. So, we will 

get better visibility in the next couple of months when things will settle down. But revenue-wise, we are absolutely sure as we can see that visibility. On the margin, we are confident that as the benefits of operating leverage will come, the backward integration will be done, and the solutions that we will offer to our customers - the drivers of the margin - will take the margin up.