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Dixon Technologies IPO opens today, analysts say valuation stretched

LiveMint logoLiveMint 06-09-2017 Nasrin Sultana

Mumbai: As the initial public offering (IPO) of Dixon Technologies (India) Ltd opens for subscription on Wednesday, concerns have been raised about its steep valuation. The company aims to raise around Rs600 crore through a fresh issue and offer for sale of shares at a price band of Rs1,760-1,766 per share.

Ahead of its IPO, the company has already raised Rs179.79 crore by selling shares to institutional investors from the so-called anchor book allocation. Institutional investors who participated in the anchor book allocation include Steadview Capital Mauritius Ltd, DSP Blackrock, Kuwait Investment Authority, Goldman Sachs India Fund, Franklin Templeton Mutual Fund, HSBC MF, Nomura Funds, HDFC MF, Birla Sunlife MF, SBI MF, ICICI Prudential AMC and Kotak MF.

However, analysts said that the valuation looks stretched for low single-digit Ebitda (3.7% in FY17) margin business. Ebitda stands for earnings before interest, tax, depreciation and amortization. “We do not find anything wrong with the business model but we are not comfortable recommending investors to invest in such low margin business. At the higher price band of Rs1,766, the stock is valued at 39.7 price to earnings (PE) on FY17 basis. There are many listed opportunities with better financials available at lower and comfortable valuation,” said Centrum Broking Ltd in a note on 5 September.

According to the brokerage firm, even if money raised at such valuations was flowing into the company, it would have ultimately belonged to shareholders. “However, in this case it may be noted that 90% of the money raised is going to the selling shareholder and not into the company,” it added.

However, Jaikishan J. Parmar, research analyst - midcaps, Angel Broking, feels that despite the company operating on thin margins, it has registered a huge return on capital of 33.3% in FY2017 and has been generating positive cash flow from operations over the last five years with negligible debt post the IPO.

ICICI Securities Ltd finds the valuation to be fairly valued, considering its presence in mass products categories, high dependency on a few clients and low Ebitda margin profile. “Additionally, increasing focus towards the mobile segment would further dilute the profit margin,” it said in a note on 5 September.

At the consolidated level, the company recorded a revenue at a compounded annual growth rate (CAGR) of 34%, mainly due to a sharp jump in sales of the mobile segment. “EBITDA margin remains volatile owing to addition of low margin products and higher employee cost. DTL recorded net profit CAGR of 78% in FY13-17 owing to sharp sales growth. Lower capex requirement on assembling capacity has translated to higher asset turnover, which, in turn, drives the return ratios of the company,” ICICI Securities added.

Backed by Motilal Oswal Private Equity (MOPE), Dixon is the largest home-grown design-focused and solutions company engaged in manufacturing products in consumer durables, lighting and mobile phone segments in India. The company manufactures electronics products for Panasonic, Philips Lighting India, Haier Appliances, Gionee, Surya Roshni, Reliance Retail, Intex Technologies, Mitashi.

Proceeds of the funds raised via IPO will be used will be used for repayment of debt (Rs22 crore), capital expenditure including facility expansion and IT upgradation and backward integration (Rs27 crore).

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