Dixon Tech and Amber Enterprise: Credit Suisse on India’s Consumer Durables Sector

The Indian electronics and consumer durables market is about Rs 4 tn in FY20 and is likely to grow to Rs 6.5 tn by FY25E. Imports intensity is high and the government is trying to capture more value domestically by imposing duties, standards/non-tariff barriers, and focussed incentives such as production-linked incentives (PLIs). While both Amber Enterprises, Dixon Tech have outperformed, Credit Suisse initiates coverage on both with OUTPERFORM ratings and target price of Rs 3000 / Rs 14000.

Credit Suisse prefers Dixon of the two on its diversified business across categories and dominant ODM share in LEDs and washing machines. Key risks for both stocks relate to execution, contract workforce, and own manufacturing by brands/global contract manufacturers.

Apart from brand owners, Amber/Dixon are leading competitors from a manufacturing perspective. While both stocks have outperformed recently, Credit Suisse initiates coverage of them with OUTPERFORM ratings based on their strong extant platform and growth outlook, multiple medium-term opportunities, still-reasonable valuations on FY23E basis, strong cash flows and return ratios, and incremental catalyst of activation of phased manufacturing programme and incentive scheme beyond mobiles.

Amber, Dixon are well placed to leverage this manifold tide.

The opportunities are:

(1) growing domestic market (10-15% CAGR);
(2) market share;
(3) new categories (commercial AC, laptops, refrigerators, components);
(4) vertical integration/own designs (enabling higher margins);
(5) export markets (trials on; may take time to scale)

 Amber now manufactures about 25% of ACs sold in India, with 15 manufacturing facilities and has built/acquired capabilities for vertical integration. Dixon has dominant capacity market share across multiple categories, i.e., TVs, mobiles, washing machines, LEDs, set top boxes, etc., with its own design in washing machines and LEDs. Dixon is one of the approved domestic manufacturers in the PLI scheme for mobiles.

Prefer Dixon; highlight ABB/Siemens on manufacturing investments:

Credit Suisse prefers Dixon to Amber, based on Dixon's diversified business across categories and dominant ODM share in LEDs and washing machines. Key risks for both stocks relate to execution (e.g., management bandwidth, choosing partners, investment decisions, etc.), contract workforce, and own manufacturing by brands/global contract manufacturers. Risks. The risks for Amber are dependence on seasonality, weather dependency, AC, and slow exports ramp-up; and that for Dixon is a surprising stake reduction by its promoters in its IPO. We highlight ABB/Siemens on related manufacturing investments and automation.