Dixon Technologies (India) Limited (DIXON) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to Dixon Technologies Limited -- India Limited Q4 FY '20 Earnings Conference Call hosted by Ambit Capital. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Dhruv Jain from AMBIT Capital. Thank you, and over to you, sir.

Thank you, and welcome to the 4Q FY '20 Earnings Call of Dixon Technologies. From the management, we have with us Mr. Atul Lall, CEO; and Mr. Saurabh Gupta, CFO. Over to you, sir, for your opening comments.

Thank you, Dhruv. This is Atul Lall, and we also have with us Saurabh Gupta, our CFO. Good afternoon, ladies and gentlemen. Thanks for joining this call. Before I touch upon our Q4 FY 2020 results, I would like to update you on how we have fared during the lockdown and the latest update in the post relaxation. So we resumed our operations in all our factories, in all our 9 factories between 4th of May and 18th of May. This was with limited capacity utilization in May because we had to implement various safety training measures and other guidelines and new standard operating procedures. So we've had a complete business continuity in all our factories and verticals within the permissible norm and regulations. New standard operating procedures have been prepared to ensure safe resumption of operations across all our factories. This is with regard to social distancing; sanitization of premises, buses; temperature checks of all our personnel; availability of the protective gear; and the complete new infrastructure. We're slowly ramping up our capacity at all our factories without any compromises on the safety side. So as we speak, our factories in Tirupati, Noida and Dehradun are completely operational. During these extremely difficult times, we mentioned before, our key focus was on cash and to reduce our costs. So we have identified significant cost-saving measures from April onwards, which is to the tune of around INR 8 crores to INR 10 crores a month. A task team, a task force has been set up, which is monitoring, at a very granular level, the implementation of this cost reduction. Our balance sheet is strong, and we closed the year with a strong cash balance of more than INR 100 crores. We have adequate working capital lines to ensure that even if things worsen, we are fully protected and continue to build our business and capability through an extremely difficult and uncertain period. Now coming to the financial and operational performance of the last quarter, it needs to be contextualized around the unprecedented health and economic crisis triggered by COVID-19, starting from China, with whom we have large relationships and then globally and within India. So when it started off in January, February, we had supply side issues from China. They were concerned about the availability of material. And as the first signs of pandemic emerged in India, from second week of March, the India sales slowed down, and it came to a particular absolute halt from March 22, 23. So we lost almost 10 days of sale in March. Currently, where the lockdown situation has eased to some extent in select markets, we expect the effect of pandemic to last for a few months before the situation reverts to normal. However, with cost rationalization measures undertaken, along with resumption of operations at all factories, and now we have reached a decent level of capacity utilization, we may break even financially or book a marginal loss at EBITDA level in Q1 2021. This is what I wanted to update the [ house ]. Now if we analyze the Q4 FY '20 performance, the company's revenue and profitability, it has been, I think, a fairly good performance. It was a very good performance in February, and we were expecting it to be one of our best quarters. But we were hit in the last 10 days of March. And as for our estimates, in this quarter, we lost the revenue of almost INR 165 crores and the EBITDA of almost INR 10 crores across all segments. So this is what I wanted to update you on, where we are, how we performed during the pandemic and what is the state of Dixon. Any questions pertaining to this are most welcome after my opening remarks. Now the financial highlights for the year ended March 31, 2020, on consolidated basis. The consolidated revenues for March quarter were INR 857 crores, which is almost flat as compared to the same period last year. If we had included this INR 164 crores of sale loss, the growth would have been around 19%. The consolidated EBITDA for the quarter ended March 31, 2020, was INR 55.9 crores against INR 39.4 crores in the same period last year. This is a growth of 42%. Excluding this, again, the EBITDA would have improved by another INR 10 crores. A significant thing is that the margins, the EBITDA margins have improved from 4.6% to 6.9 -- 6.5%, which is a significant improvement. This is primarily because of the operating leverage kicking in, in various verticals, improved sales mix, new and expanded mobile business, value engineering of products, cost efficiencies and slightly benign commodity prices. So we have seen margin expansion across all our verticals. Consolidated PBT for the quarter ended March 31, 2020, was INR 37.3 crores against INR 24.4 crores, which is a growth of 53%. Consolidated PAT was INR 27.6 crores against INR 16.5 crores, which is a growth of 67%. This would have been higher by another INR 7 crores if we had been able to execute the sales in the last 10 days. We also demonstrated a solid free cash flow generation post CapEx of around INR 91 crores in '19/'20. This is on account of strong profitability and working capital efficiency, which has resulted in a negative debt of INR 13.5 crores. There has been a decent reduction in the interest cost also after adjusting for Ind-AS. In addition, the strong return ratio is maintained. We had an ROE of 26.2% and return on capital employed of 33% at the end of Q4 financial year '20. So as we have been sharing with you, the future, also the focus and the few drivers are going to be cash flow innovation, money expansion, working capital efficiency and disciplined capital allocation. So in the operating cycle side, we've had a negative 4 days' operating cycle in our business. I've always been sharing that the focus across all our businesses is to achieve a scale that kicks in operating leverage; migrate more and more to our own design solutions; focus on backward integration, which gets -- in which the payback is within 18 to 24 months; more customer acquisition; and deepening of relationship with existing customers to enhance the stickiness. So across all our verticals, we, as a team, have done well on all these accounts. We have seen that when we meet these objectives, we're able to generate significant operating leverage and become more and more competitive. So also, I'm very happy to share with you, this is something very prestigious for our company, our foray into the space of medical electronics. We have signed a memorandum of understanding with Molbio. This is for manufacturing of RT-PCR test device. This is for COVID-19. Now this is a disruptive test device, RT-PCR for COVID-19, in which we can conduct the test within 55 minutes of taking of the swab. It has 2 stages. The first stage is the collection of the swab. We remove the [indiscernible] from it. And in the second part, on 35 minutes since swab has shifted on the chip, it gives the result of positivity or negativity. It's highly sensitive equipment. It has been approved by ACMR. This is a disruptive technology developed by our principal, Molbio. We are very proud of getting associated with them. We've got a large order from them. In Dixon's case, we have to upgrade ourselves on our quality systems for medical grade. So we are going to qualify for a ISO 13485. And we are also in a learning process of handling the medical-grade components. So the team is gearing up for it. The trials are expected to start sometime in July. That is next month, and we should be able to start the commercial production in August. A significant thing also is that there is no CapEx being made for this particular project. This is going to be done in our Tirupati plant, in the DVR and the security surveillance plant, where the capacity utilization is at present, low. So we are very excited about this project. This is for the national cause. And this is Dixon's entry into this space in medical electronics. Now coming to specific verticals, starting with consumer electronics, the LED televisions. Our revenues in this quarter were INR 393 crores as against INR 323 crores in the same quarter last year. That's a growth of 22%. Operating profit saw a growth of 138%. In this quarter, we generated an operating profit of INR 9.8 crores against INR 4.41 crores in the same period last year. We presently have a capacity of 3.6 million, which is the largest capacity in India. I had shared last time that we are increasing our capacity because of a very healthy order book. So we are on way to expanding our capacity to 4.4 million, which has happened within August this year. So this increased capacity means that we will be able to service almost 30% of Indian requirement. As I shared in my last call also that we are doubling our capacity of our PCBA lines, assembly lines. That's also on the course. So we will be increasing from at present around 1 million to 1.8 million, 1.9 million. That will also happen within the next quarter. So with this, Dixon will be most vertically integrated, largest capacity LED TV facility in India. We are investing hugely into our R&D also, both in the China lab and India lab. In the new customer acquisition, on the TV front, now we have signed up Toshiba, Nokia and Hisense. We expect to start the production of these brands in July next month. In the month of May, we produced around 1.25 lakh sets, which is around 35% utilization. This month, we should be doing more than 200K sets, which is almost 65% utilization. Coming to lighting. In lighting, we witnessed a small degrowth, a degrowth of almost 16%. So that's INR 255 crores against INR 305 crores last year. However, the operating profit grew as compared to last year by 18%. So against INR 21.6 crores in the same period last year, we have INR 25.4 crores in Q4. The margins in Lighting business have expanded from 7.1% in Q4 '18/'19 to 10% in Q4 '19/'20 due to operating leverage, favorable commodity prices and migration more and more to ODM. So in our last quarter, the ODM business of lighting increased to 94%. So we practically have all the brands in lighting with us, all the major brands. We are the largest OEM in lighting vertical. We have a capacity of almost 20 million bulbs a month, which is 45% of the Indian requirement. We have also developed smart LED bulb solutions, battens and downlighters and emergency bulbs. A recent customer acquisition, because we practically have almost all the brands, is Reliance private labels, for which we start supplying to them in August. As I have shared with you in my last call that we are on the path of capacity expansion for battens and downlighters. So that has already been done in Phase 1. The capacity of battens has been increased from 250,000 to 1.5 million a month and downlighters is already moving from 150,000 to 600,000 a month. So we've seen that with this kind of volumes, customer relationship, a large product portfolio of capacities, ODM strength, we have a great operating leverage and cost competitiveness for the global markets. So we will start exporting in this fiscal for our anchor customer to large developed markets like U.S. We also have significant traction from some large retail chains in Europe and U.S. So we are working towards that. Post the opening up, now we are at 50% capacity utilization. We hope that the -- we will be able -- though the order book is increasing, we hope that we will be able to ramp up. This is a labor-intensive business. So the labor availability is a bit of a challenge, but we are working on it. In Washing Machine, Home Appliances segment, there was a degrowth of 3%. It was INR 92.5 crores versus INR 90 crores -- it was INR 92.5 crores in '18/'19, which reduced to INR 90 crores in Q4 '19/'20. Operating profit, however, increased to INR 9.9 crores. Operating margin also expanded to 11% against 10.2% in the same period last year. We have 140-odd models and have large portfolio, ranging from 6 kgs to 10 kgs in the semi-automatic category with an annual capacity of 1.2 million, which is approximately 27%, 28% of Indian requirement. As I have shared with you on the last call, we are on way of setting up the top loading factory in Tirupati campus of ours. So that's on course in spite of the pandemic. And we are trying our best, and we are confident that by Q3, we should be able to have trials of top loading. This is capacity, annual capacity of almost 6 lakhs, which is again almost 25% of the Indian requirement. This is completely ODM, all [indiscernible] from 6 kgs to 9 kgs with 30 variants. We have already closed the agreement with a large MNC brand for this particular business. Next is Mobile Phones segment. Overall revenues in the quarter 4 was INR 60 crores against INR 67 crores in the same period last year. Overall, operating profit saw a very significant growth of 416%. It increased to INR 8.5 crores against INR 1.6 crores in the same period. This is primarily because of our new account acquisition, which has led to this increase. So we have now a capacity of 2 million feature phones per month for our anchor customer. And the production is -- it had touched in February, almost 110% of the capacity. The business has started post pandemic, I mean lockdown lifting, quite well. The order book is very healthy. However, because of the manpower constrain, we have been able to reach only -- this month, we should do around 70% of our capacity. As I had shared with you that in our other mobile factory where the capacity utilization was slightly low, and we have ventured into set-top boxes for Jio. We have received a large order from Jio for cable set-top boxes to be supplied from [indiscernible]. So the commercial production for that has started. That's an order of almost 0.5 million sets. Also for Jio set-top boxes, we have started producing the hybrid set-top box for fiber connectivity in our Tirupati plant. So on Mobile, I would like to share with you further what our plan was. You would have read the [indiscernible]'s focus on mobile manufacturing, on local manufacturing for domestic and exports. And they have come up with something called a "production-linked incentive scheme," which has been announced. In that, we have given a financial incentive linked to manufacturing, linked to investment and turnover. And the total [kit] is almost INR 41,000 crores. The incentive is in the range of 4% to 6%. Now in this, there is 1 category for the foreign companies, and there is another category for domestic companies. For the foreign companies, the threshold for investment and incremental sales is much larger. But that incentive is applicable only for the mobile phones above $200. Now please appreciate that in India, more than 75% of the market is for phones: smartphones, sub INR 15,000. And for that, only domestic companies are entitled. They are in the process -- I mean they have shared that they're going to be identifying 5 domestic champions who would emerge as very, very major players for mobile manufacturing, both for domestic market and exports. So we are going to be very aggressively bidding for this. Our application will be filed shortly. And this is going to be a significant growth for us. So we are already receiving very, very good traction from large global brands for both domestic market and exports. So this is going to be a very significant domain for us for both. Next is security surveillance systems. So there is a 20% degrowth in our share of 50% revenue. This is in JV, [indiscernible]. However, the operating profit witnessed a growth. So the operating profit has increased from INR 1.6 crores to INR 1.9 crores in Q4 of its business. This business is under pressure because this is a discretionary item, and the order book is under pressure. So this facility, this capacity -- you see, one of the strengths we have at Dixon's is the fungibility of the assets. I've always been maintaining the assembly line which we use for, let's say, mobile, the same lines can be used for TV or for DVR or for cameras. So this particular capacity is being used for Jio hybrid set-top boxes. And the same capacity is going to be used for RT-PCR medical devices. In Reverse Logistics, there is a significant turnaround in the business. Revenues have grown by 84%. And also, this was a loss-making business. So we have been able to turn it around, and we generate -- we have generated an operating profit of 43 lakhs in this business. This is a growing business because we have a large customer relationship in LED TV panel repair. So this is what I wanted to share, and thanks for this. And any questions, you are most welcome. Please, me and Saurabh are there.

[Operator Instructions] We take the first question from the line of Renu Baid from IIFL.

Congratulations for strong results despite challenging market environment. So as you've mentioned in some of your comments, would it be helpful if you can share some more insights in terms of how do you expect the demand outlook for the end brands to pick up? Because somewhere, you have mentioned across LED TVs and Washing Machines are back to 60%, 70%, 80% utilization level. But do you perceive any risk to the initially budgeted volumes for the current year based on any likely slowdown in consumption patterns? And accordingly, what would be the kind of growth that one should anticipate in your volume numbers -- if one should anticipate for the current year in these segments?

Renu, you see, at present, it's very difficult to share that -- how this whole year is going to pan out. It's very, very difficult. I'll share with you what's happening as of now, and I'll share with you some sense of what we feel how it will be.

Correct. In terms of how you ramp-up, in terms of volume can happen from where we are today?

I will share with you. So starting with Televisions, our anchor customer is having a very large online play, and we have large customer acquisition. So we were very pleasantly surprised that in the month of May, they were able to sell a very large quantity. Whether it's a pent-up demand and that was being filled in and then it's going to flatten, it's difficult to say. So even June is going very, very strong. Even the July numbers are looking very, very strong. We need to really wait and watch how it's going to pan out.

Sure. Similar would be the case for Washing Machine, where we are seeing some volumes slowing from Samsung?

So in Washing Machine, I can see the slowdown. The May lifting was minimal. June lifting, normally, we do around 70,000, 80,000 sales in this month. June, order book was around 44,000. So one should wait and watch how July over September is going to pan out. So the kind of puts that I'm seeing in Televisions, I'm not seeing similar things in Washing Machine. And when it comes to Lighting, so we opened up the factories only between 10th and 18th of May. The present order book in this month, we're going to do -- I mean, last month, we did around 4 million. This month, we're going to do around 9 million to 10 million. Normally, we do around 15 million. So there is a traction, and I feel that Lighting should be slightly better because the product range that we have is a low-value item, probably slightly better. But whether it's going to be a huge boost, I have no idea. One has to wait and watch how do the brands fair. Mobile looks extremely, extremely strong because it's a low-end feature phone that we do for Samsung. So there is no -- this is for both export and domestic market. There's no slowdown. In the other factories also, the order book is very, very, very good. We have acquired a new customer in LG, LG as a brand. So LG production starts in July -- in June only. So I see the Mobile business doing well. And also, we have a large order book of Set-top Boxes. In Set-top Boxes, we've added a new customer in DISH TV. So the order book is not an issue. In Security Surveillance system, the order book is very, very bad.

Sure. Sir, second question...

How are the numbers are going to pan out? I think it's very difficult for both me and Saurabh to -- go ahead.

Yes. Renu, Saurabh this side. Yes. So as Mr. Lall mentioned, it's very difficult to give an outlook for this year. But as of now, things have started on a good note, better than what we had thought about it. So May, June, as Mr. Lall mentioned in his opening remarks, that even the first quarter, we are looking like an EBITDA breakeven or a marginal loss kind of situation, which, according to us, it's a very good situation considering the entire April or mid of May -- till mid of May was completely shut down.

So definitely a strong [trade] on that side. And 2 other small questions. A, in terms of -- given that currency depreciation has been meaningful over the last 6 months and last quarter per se, so what is the kind of impact that we are seeing? And was there any ForEx impact in the fourth quarter? And second question after this would be in terms of the CapEx for FY '21, what would be the outlook, given that most of your capacity expansion plans you mentioned have been on track?

Yes. So Renu, yes, sorry. With this lockdown happening and -- so definitely, last few weeks of March, there was a significant depreciation in rupee. It went to -- went up to -- as low as [ INR 76 ], and we had of course, not all of our foreign sales liability hedged because it generally helps you almost 45%, 50% -- between 50% to 60% of our imported liability is hedged. So definitely, there is a loss which we took. The loss was somewhere around INR 4.5 crores. So that's reflected in these numbers. So our numbers would have been higher by that particular number. And of course, the impact of the lockdown for the last 10 days, which Mr. Lall had already mentioned, which was INR 10 crores of EBITDA. So that is already reflected in the results. Your second question on CapEx. So CapEx intensity, we don't see it reducing this year because we think we are sitting on a big opportunity right now, and we have good cash balance. And so if I just break down the CapEx, so our majority CapEx this year is going to the fully automatic top load version, almost INR 45 crores, INR 50 crores which is already committed, and we are committed to start the production by Q3 of this financial year. We already have agreements signed up with a very big MNC. So that is committed, and that will continue. The second CapEx was our expansion of capacities in TV, where we were expanding the capacities from 3.6 million to 4.8 -- 4.4 million. So that is also included because we have a big order booked from Xiaomi, and we are adding these 3 new customers: Toshiba, Hisense and Nokia. So we need to do that. We are committed to do that as well. And then Lighting, we foresee that there will be labor issues. So we have -- initially, we had built an automation kind of a plan in [phase wise]. And we'll continue to pursue it, in fact, we are accelerating that whole CapEx on automation so that we are able to -- so that the dependency on labor reduces further, and we are not impacted by that. And the fourth biggest CapEx that can come will be on the part of the PLI scheme, which for a domestic company, there is a commitment of INR 200 crores CapEx over 4 years. The first year of CapEx should be somewhere around INR 50-odd crores. So that will also -- we will be doing because that really opens a big opportunity for us, and that will be really very profitable for us. So as far as CapEx intensity is concerned, it will be higher this year. We have -- the good part is we have enough cash balance. We have enough -- I would say, we can always get more debt to pursue our organic growth CapEx. And we are not restricting -- we are not slowing down our CapEx this year. So we will continue to have a CapEx of around anywhere from INR 90 crores to INR 120-odd crores.

Okay. That is including PLI CapEx on 2020?

That is including the PLI CapEx, right.

[Operator Instructions] Next one is from the line of Bhoomika Nair from IDFC.

Congratulations on a good set of numbers, sir, in a challenging environment. I wanted to touch upon the margin profile that we saw in Lighting. It was fairly strong despite the quarter end revenue miss, which happened because of the lockdown. Now, as we move ahead and it takes time to kind of ramp it back up, what drove this 10% margin? Is it a one-off? And will it come back to the normalized rate of something like 7%, 8%? And my second question was around this medical electronics that you spoke about. How quickly can it scale up? What's the potential of revenues, margin profile, et cetera, if you can touch upon that? And lastly, for Mobiles as well, by when do you think this benefit of the local manufacturing and production incentive will accrue? Only after 4, 5 years? Or is it something that we can start seeing immediately?

So Bhoomika, responding to your first question on the margin profile of Lighting. So I won't say it's one-off. But I would say -- I would like to give a guidance of around 8% on Lighting. It's somewhere between 8% to 8.5%. That's what one estimates. Coming to the second question on PLI. The PLI scheme sales -- so we have to file for an application before 31st of July. We are confident that we should be one of the domestic champions identified by the government. We're sitting on a sweet spot. What I'd say is that once you do a CapEx of INR 50 crores, and you reach a certain threshold turnover, which is INR 500 crores, which we're very confident of, then you start getting incentives. The first year incentive is 6% of your revenue. So this is -- if we are able to crack it, then this will start getting reflected from Q2 next fiscal. Third is Medical Electronics. So we have got the first order for 1,000 [ quad rows ]. That's 4 -- so 4 swabs can be tested at one time. And this is just a start of the business. The first order book is of INR [ 30 ] crores. But I see that it's going to be large. It's going to take some time [indiscernible] because it's a -- I mean, there's a huge, huge demand from state governments, from central government, from private labs. And at present, they've banned exports because there's a huge requirement for upgrading the Indian testing for infrastructure, but then for exports also. So please appreciate that this is not only a testing device for COVID-19, for this particular virus, it's for 27 infectious diseases, include tuberculosis. So it's a very disruptive kind of technology. And ICMR has stated in its report that the sensitivity is ahead of the conventional testing process of RT-PCR. So it's difficult to give numbers, but this is the first order book I'm sharing with you.

We take the next question from the line of Nitin Arora from Axis Mutual Fund.

My first question, when you look at your gross margin, that has moved quite significantly on a year-on-year basis and sequential. If you can tell us what is the reason attributed to this improvement?

So thanks, Nitin. So you see, it's a combination of factors of migrating more and more ODM, let's say, in Lighting, which gives us an opportunity to value engineer more and more. So that helps in bringing in operating leverage and margin expansion. Second is also the scale that is bringing in further operating leverage. And third, this is both in Lighting as well as Television. All that you see a significant turnaround is in Mobile business. And this growth this business till a year back was laggard, and we were always struggling to acquire a large anchor brand, which we have been able to do. I think team has done a very fine job in setting up this facility within a record period of 3 to 4 months, and the capacity utilization touched 100%. So that's the reason and the combination of these 3. This margin expansion has happened, please appreciate, in spite of 10 days of no sale and a hit on the account of foreign exchange. So these are the reasons that this is...

Sir, why I'm asking this because you have a negative inventory sitting out in your P&L, which is almost to the tune of very unexceptionally high -- about INR 68 crores of negative inventory in quarter and an annual basis about INR 53 crores, a change in inventory, which is straight away hitting your gross margin, going into EBITDA in a big way. Normally, we don't see that much change in inventory. That would have benefited you because of the 10-day shutdown. If you can throw some light there because it's clearly reflecting the EBITDA gross margin getting improved from there. So if you can throw some light on that.

Nitin, we didn't get your question. Can you just repeat kind of...

When you look at your P&L, the profit and loss account, you almost had a change in inventory of finished goods of INR 68 crores against the cost of material of INR 791 crores, which benefits you in terms of your gross margin. Normally, when you see them on an annualized basis, you generally don't run with the INR 1,450 crores of positive change in inventory. It gets added back. Now when you look at the annualized result or your quarterly result, it's a big number of negative, which is impacting in a very big positive way to your gross profit and your EBITDA. So -- and that is primarily because I'm assuming the 10-day shutdown was not able -- you would not be -- to get to [indiscernible] would have result in this number. So just need some thought of yours [indiscernible] coming from here?

Yes. So definitely, there was inventory, which was supposed to be -- so there was inventory. It was lying with us on FG. And there's also raw materials which were imported, which could not be converted to finished goods. So that is the reason why it is reflecting as a negative. So I actually didn't -- I'm not understanding.

Sorry, sir?

What exactly is your question.

Sir, I'll take it off-line. I'll take it off-line with you. My second question is related to this medical device, which sir talked about. Sir, it's a micro PCR, which is a step down to RT-PCR in India, and it's a step down technology right now. So I just want to understand because you already -- we already have in India about 500 devices of micro PCR and the [weigh] testing is going up. Obviously, we require double of that. So just wanted to understand, what's -- I mean, the [indiscernible] is more important than the device, the way we look at this business. But in your assumption, India itself, once this COVID goes down and the testing goes down, are there any other opportunity? Where do you see that coming from this micro PCR?

So as I shared with you, Nitin, that one can test almost 27 infectious disease on that. Initially, this device was developed for tuberculosis. So this is disruptive in the sense that it is going to be available at all points of care. That's the scalability. So one, it's of course, for COVID. Second, it's for almost 27 other infectious diseases.

We take the next question from the line of Keyur Pandya from ICICI Prudential Life Insurance.

The question is on -- so you mentioned that now we have turned almost -- so now we have turned net cash companies whose cash is more than debt as of March. So is it right to assume that for this year, say, for Q1, we might need some working capital debt? So barring that, there won't be much need of working capital debt for FY '21? I mean how do you see interest cost and debt figure moving, looking at this Q1 disruption and then subsequent quarters of the year?

Yes. So basically, I will tell you the position currently. So as against negative net debt of INR 13-odd crores because we had, of course, a mismatch in cash flows, and we also needed to cover our fixed costs for April and May as well. And the business has just started to basically, obviously, come back to normal utilization levels, and that's also not across all the segments. So the debt levels have increased, debt levels since 31st March to date. So net -- so presently, the net debt leverage is around INR 50-odd crores. So we have enough -- but we had enough working capital lines this year. I would see net debt levels growing marginally for next couple of months. And then once the quarter 2 kicks in ahead of the festive season, then I think we should keep start -- keep coming down. But as of now, between 31st March and today, it has increased.

Okay. And so going ahead, will we need working capital debt once things normalize? I mean looking at our cash generation, I was just asking, sir, will we need working capital debt going ahead? Or it will only be project debt?

See, ultimately, working capital debt is a function of how much earnings I'm able to generate. And it's very difficult to give you an exact number of what is the EBITDA outlook would be. So ultimately, it will be a function of earnings and the cash flow generation in the business, which will kind of determine that what will be the working capital debt that is required in the business.

[Our country] is going to be absolutely the same, where there's going to be -- that we'll also see a very significant focus on the current assets. So the increase in detail and matching creditors will always be absolutely focused. The capital allocation for the CapEx investment is going to be, again, in the same norm of payback within 18 to 24 months. So if the situation doesn't come back to normal, then possibly the limit has got to be drawn. Otherwise, they are not allowed.

Right. Right. Perfect. Second question in Washing Machine, you mentioned that as of right now, the order book is low and pickup is slow. So what is the -- one [indiscernible] on the negative impact of operating leverage and on the other side. And the contract that we have with Samsung of revising the prices, so whatever the contract we have. So in this context, currency would impact us. So margin would have dual impact of currency as well as the negative operating leverage? And just if you can clarify the new customers which we have added for semi-automatic Washing Machine. Are the terms similar or the repricing?

Yes. So as you know, that in Samsung's case, it's a fixed monthly revision of price. In the currency situation, we were hit negatively with all the impact. However, the other commodity prices are benign and there's a reason. There was a small margin expansion from 10.1-odd percent to 11% even in Washing Machine case in spite of the volumes. I feel that in this quarter, of course, the margins are going to be significantly impacted. But if the quantity recovers because the other commodity prices, copper, aluminum is benign, right? I feel that we should be able to sustain once we attain the volume of 70,000, 80,000 a month of 10% to 11%. That's what my take is. Now the new customer acquisition that we had in Washing Machine segment was Voltas, the commercial production of Voltas Beko and also Reliance. So Reliance has acquired certain brands for their private label. That's Kelvinator and BPL. So we have already started commercial deliveries for these. As far as the arrangements with them are concerned, in Voltas' case, it's a monthly price revision, and also [in the case...].

Next question is from the line of Aditya Bhartia from Investec Capital.

My first question is on margins. During fourth quarter, we had revenues getting impacted on account of COVID and therefore, negative operating leverage flowing through. But despite that, we have seen fairly strong margins across all segments, whether it's Consumer Electronics, Lighting, Home Appliances, Mobile Phones. So what has that been on account of? Is there any one-off over there? And how should we be thinking about segmental level margins once things normalize?

So Aditya, one of the reasons for the margin expansion has, of course, been the Lighting business, where you -- where we have delivered 10% kind of operating profit margin, and that has happened on account of even further migration to our own design solutions. So last quarter, it was 90%. We have even gone now to 94% of our revenues coming from our own design solutions. Second, a lot of our engineering work has been done. And scale, of course, is delivering that operating leverage benefits. So lighting is definitely a category where economies of scale and operating leverage benefits are kicking in. Secondly, if you look at the other reason, if you look at our Mobile margins, it has jumped to 14%. So in Mobile, there are 2 verticals. One is, of course, our subsidiary company, Padget Electronics, where we do our mobile phones for other customers apart from Samsung, which is Gionee, Panasonic, Karbonn and other customers, which continues to be on a basis where we book the entire revenues and we book the entire cost. And the margins for that vertical or that company were in the range of 2.5% to 2.7%. So they are absolutely in the same levels of 2.5%, 2.7% levels in this quarter. But what has changed since last quarter or since last year is our ramp-up and stabilization of our Samsung Feature Phone business. So we started in November. November was, of course, some small loss. December, we started to break even. And in the last quarter, we -- it has completely ramped up and stabilized, and we are doing almost a monthly quantity of 2 million. So we are doing the entire range of feature phones for Samsung.

Also, I'll just comment. I'm sorry, Saurabh. Also Aditya, the revenue being booked in the case of this new anchor customer business of Phone is not including the material costs. It's only the low working [indiscernible].

It's on the contribution basis.

So basically, as a percentage, the operating profit is significantly higher. One of the important reasons for this is that -- and coming back to your question that how do you feel it's going to sustain. So I think Mobile is going to be healthy, right? It will be similar rates. I feel LED Television is going to sustain. It will even possibly expand. I feel that Washing Machine would be, possibly in this quarter, under pressure; next quarter would come back to same 10%, 11%. Lighting will not be sustainable at 10%, I think so. It's going to be somewhere around 8%, so something like that.

Yes. So just to give you some numbers, [Aditya]. So these are the main reasons, main reason I'd say, both Lighting and Mobile as a category helped us to improve our margins this quarter.

Most specifically, I was interested with the TV vertical, wherein we had a fairly significant negative operating leverage because we had planned for much higher quantity but despite that, managed to deliver 2.5% margin. So is it partly on account of PCBs for AC which have contributed? Or is it just the benefit of backward integration that we have started now realizing?

So it's a combination of both. One, the order book is extremely good. And the second is that the backward integration of PCBAs with one of our customers, one of our large customer, a global customer, they have started. So the valuations are better.

Better. Yes.

And with the expansion of capacity of PCBAs and higher utilization keep on improving. So that's the reason -- that's what I shared with you. I think that the margins in Television business are going to improve.

Understood, sir. And sir, my second question is on labor availability and cost. Do you think that social distancing norms may make it slightly more difficult to operate in an industry like ours? And do you see employee costs and incentives going up in the post-COVID world and the possibility of margins consequently getting impacted?

So it varies vertical to vertical. In Lighting, we are -- in Televisions, one, availability of labor in the Tirupati plant is not much of a challenge. However, the costs have increased because of social distancing on the line. The production is impacted slightly, for which we are making significant efforts in automation, but it's going to take some time to recover. So in the interim period, there's going to be an impact. And similar impact is going to be there in Lighting, in fact even more. In that, the automation exercise will take a longer time. And that's the reason I said that I feel that margins of 10% will not be sustainable. There's going to be a cost to that. In Mobile, at present, the lines were structuralized that social distancing was always kind of maintained at that level. However, the labor availability as of now is a big challenge in Noida. So it's going to take some time to recover. So it's a mix of things.

And if the labor cost still goes up once things normalize, then in segments like Mobile Phones or even Lighting, despite automation happening, can margins materially get impacted? Like Lighting you mentioned, but even in Mobile Phones, do you see that possibility?

So I don't see that much happening in Mobile. I don't see that.

We take the next question from the line of [ Dehan Subramanian ] from [ CH1 ANC ].

Sir, first question was on the Consumer Electronics side. You already expanded capacity to like 4.8 million from like around 1.8 million in the last couple of years. So just -- and you're already at like probably 25%, 30% of the market in India. So just wondering what is the potential you're seeing here to scale in terms of like the, say, next 3 to 5 years. Like what percentage of the TV market do you think you can eventually be making?

So customer acquisition is a continuous exercise. And today we have a very large set of customers who are very, very dominant players in the domestic Indian market. And when they're seeing the trend that more and more brands, even when they're having their in-house factories or global factories, are looking at outsourcing and outsourcing not only from manufacturing. They're looking at outsourcing even on our design. So what number we're going to do 3, 4, 5 years down the line? It's slightly difficult to say, but the growth potential of this vertical is, I think, is extremely positive. And more and more migration for our own design solution? Yes, that's going to be the course. So just like -- today, our ODM percentage in Television is miniscule. But if you see in Lighting, the ODM percentage used to be sub 20% 3 years back, is more than 90% now. So that group, that's what's going to happen. And our vision, and let's see, let's hope where we reach, let's -- one has to wait and watch and see. Then we emerge as a complete solution provider, completely backward integrated, large product portfolio, multiple customers in Television also.

Right, sir. So the only reason I was asking because TV as a category is pretty overpenetrated, right, in India? So if you're still seeing sort of potential, basically, you're still saying that there's still a lot of room for like more customer acquisition, et cetera. So -- and the second question I have is actually on the Mobile Phones side, like could you tell me like what are the new customers you have actually acquired in like the last kind of few months? And based on the PLI incentive and everything, what is the scalability potential here, like over the next 2 to 3 years?

So in our existing 2 factories, one, of course, you know of Samsung. So we are doing complete quantity of Samsung feature phones, both for domestic market and exports, more than 2 million a month, and largest in India. Now we are about to start a smartphone also today. On the other portfolio, we have acquired LG as a customer, so LG smartphone is a start. And then the customer that we acquired at InFocus, which is an in-house brand of Foxconn, so we started manufacturing for them also. We are talking to some very, very large customers, large global customers. At present, I am not in a position to share more details. But we feel very strongly and very positively on Mobile as a vertical, particularly after the announcement of the PLI schemes. Let's wait and watch how it's pan out, but we're definitely going to be focused on this particular vertical a lot.

Sir, you said LG and in-house brand of Foxconn and which was the third one?

So third -- so basically, the future customers will be with the PLI scheme, which we are -- as Mr. Lall mentioned, we are aggressively working on. There's a lot of traction in that because the incentive is quite significant. So we are talking to some of the global brands who have very strong market share, both India and globally. So we will...

And this is only Smartphone or even Feature Phones?

This will be...

Smartphones.

Smartphones.

Okay. Okay. And like in Samsung, are you like already making smartphones for them or only feature phones?

So we are making feature phones, but next 3 weeks' time, we start smartphones also.

We take the next question from the line of [ Vabed Mislani ] from SBI Mutual Fund.

Congratulations for good performance despite challenging times. So if you can just help me -- so I have 2 questions. One is if you can help me with your market share in individual verticals and maybe especially in Lighting, if you can help with the sub verticals. And where do you see potential you mentioned Battens and Downlighters? So that's my first question.

So you wanted me to share the market share in Lighting business, specifically?

No, no. So across the verticals, what is the change in the market share during the financial year '20 versus financial year '19? And...

Lighting, we have a market share of almost 30% as far as LED bulb is concerned. In Battens, we have a market share of around 12%, 13%. And Downlighter is 7% to 8%. So we feel in Bulbs, we'll continue to maintain between 30% and 35%. And there will be a significant increase in the market share, both for Battens and Downlighters. In Televisions, we have done almost 2.1 million in Televisions last year against the total Indian requirement of 14 million. So we are somewhere around 15% share. In Washing Machines, we have done around 850,000 of semi-automatic Washing Machine, and the Indian market is around 3.3 million, 3.4 million. So we are around 27%, 28%. On Mobile Phones, on the Smartphone side, we are very small. But on the Feature Phone side, the Indian market is around 8 million to 9 million a month, and we are at a level of 2 million a month. So that's almost 25%. So that's where we are.

Sir, sure. And in Washing Machine, your market share is as a percentage of the total Washing Machine market or the percentage of Semi-auto?

Only Semi-automatic.

Only Semi-automatic.

The total Indian market is around 7 million, 6.5 million to 7 million. Out of that, we've done 850,000. So on an overall basis, we have somewhere around 12%. And only for Semi-automatic, we were at 26%, 27%.

Understand. My second question is more -- like you mentioned that the labor availability is challenging. And it's for some time now that you will have to adhere to the social distancing. In your business, you need to continuously cut costs. And this year, you're seeing that the productivity will get impacted. So if you can just highlight how soon can you ramp up in the automation plan and how much of it can it offset in terms of your productivity loss.

So on the Television side -- on the Lighting side, I think it's going to take almost 8 to 9 months to completely utilize it through the automation process. There is a CapEx plan made for automating our half part of the assembly line, which will improve the productivity from 32 per man-hours at present to almost 55, but that's going to take some time. Some machinery for that is already in transit and should be installed in the next quarter. But the balance, we also need to order. In the Washing Machine side, I don't see a significant impact because it's not very, very manpower intensive. In Television side, there is an impact, but I think the team is working on small, small automation. And I think by the mid-sometime of Q2, we should be able to neutralize the additional cost impact. In Mobile, I don't see a significant impact. So the area of concern for me is Lighting, which is going to take some time to neutralize.

We take the next question from the line of Mr. Dhruv Jain from Ambit Capital.

Just wanted to know, sir, are the margins with respect to the Mobile Phones or the Samsung Feature Phone business, are they sustainable? And a question related to that would be that as you enter the smartphone market, I mean, is it going to be a similar job work sort of structure where you do not take on the P&L and just do job work for them?

No. So as far as the Smartphone for our anchor customer is concerned, the methodology of business is going to be the same as Feature Phone. But when I'm talking about the scale-up of this business, there is not going to be this [demand]. There, we're able to book the material cost in the revenues. The margin profile will be significantly lower there as a percentage of sales, right? Are you getting my answer, Dhruv?

Yes.

Next question is from the line of [ Shambiq Alkit ] from HSBC.

It's [indiscernible] from [ HSBC ]. Sir, I just wanted to understand this PLI scheme operationally slightly better. So the way when should we see that because we have got registered as a domestic champion. That's why you see you are still in a better position to attract customers? Or you already have a client who can come directly to you, and that's why you want to apply this? First, I just want to understand that. And sir, on the PLI scheme, there are 2 criterias. One is on the investment side and another is on the incremental revenue side. So just wondering is that the incremental revenue that you see that can happen only if we get the PLI -- if we get to participate for the PLI? Will it be more from an export market? Or do you see opportunity for the domestic customers speaking to you because you have PLI license? So I just want to understand operationally that one first.

So first, the discussions are on with our existing customers and some large global customers. Second, this is both for domestic market but large export also. Third, the criteria for a varying incentive scheme requires 2 thresholds. One, when you make a CapEx of INR 50 crores; and second, in year 1, you obtain a threshold level of INR 500 crores or incremental sales over the base period of last year, and then it becomes eligible for incentives. So we analyze this in detail internally, and we feel that for Dixon to achieve those criteria should not be a challenge. Now the [indiscernible] is that, again, as I shared with you in my opening remarks, 70% of the Indian market is [up] $200, and that can be done only with a domestic company. So obviously, it opens up a large opportunity. And domestic companies, there are very few who are eligible to meet this criteria.

Sir, my question really it comes from -- we know that the large domestic market is [indiscernible].

Sorry, can you be a bit louder? I'm not able to hear you. [Technical Difficulty]

Next question is from the line of Ansuman Deb from ICICI Securities.

Congratulations for a good set of numbers. My question was regarding the Mobile segment. So when you say that next Q2 fiscal, we should be eligible for this 6% incentive, that implies that we will be able to do this CapEx of INR 50 crores and additional top line of INR 500 crores by Q2 of next fiscal. So if you can just let me know the revenue outlook of Mobile segment in FY '21 and '22, that would be great.

Well, I think it's slightly early for me to tell you about the revenue numbers because it's still in...

Discussions.

In actualization stage. But on the base of the discussions that we have had, we feel, this is in response to the question to Bhoomika, that how this PLI scheme incentive will be executed and given by the government. As per our plans, we feel that we should be able to get the facility running within this fiscal. Second, we also feel that we should be able to achieve the threshold revenues which are required as for their [eligible criteria]. So we are confident of start availing that incentive. Now how the revenues are going to pan out for '21, '22 for Mobile, it's slightly early for me to share those numbers.

Next question is from the line of Naval Seth from Emkay Global.

Congratulations, sir, on good set of numbers. I have 3 questions. First is on margins. You have elaborated in detail on margins, how it will fare out across the segment. But in your initial remarks, you stated cost savings of INR 8 crores to INR 10 crores per month. So how will that reflect in your margin if across the segments margins are expected to remain stable in FY '21?

So Naval, responding to that question, this cost reduction is pertaining to the period of lockdown. This is not going to be on an absolute basis month-on-month. This was the cost elimination when the production was not there and also huge focus on costs for significant reduction in expenses as the production is getting ramped up. So first thing was to convert most of the fixed costs into a variable cost structure. The second is an absolute reduction in fixed costs. So this is going to be a frugal year for us, undoubtedly. But finally, how this number is going to pan out is going to be linked to how the business comes into us this year.

Okay. Sir, second question is on free cash flow. If I remember in the last earnings call, you had stated FCF was close to around INR 92-odd crores. And if I look at your year-end FCF again, statement is INR 92-odd crores. So can you throw some insights over here what can happen on the cash flow in 4Q?

Yes. So one of the reasons why it has remained same between Q3 and Q4 is our CapEx intensity has increased. So last Q4, CapEx is slightly higher than our average quarterly run rate of CapEx, and that is mainly on account of the full year automatic top load CapEx. So there are a lot of advances and payments have been done on account of that. As I mentioned, we need to start the production by Q3 of this financial year. So if you look at the CapEx number and if you just compare the CapEx number of 9 months, I think, so there has been significant growth in the last quarter. And that is the reason, despite generating good -- despite having good results on the working capital generation also being there both in 9 months as well as 12 months, the cash flow is -- the free cash flow is same.

Understood. And last question is on TV, where you had added 3 new customers. So can you share what would be their order book, initially, in terms of number of units?

So between the 3 customers that I mentioned, it's going to be almost 60,000 to 70,000 a month.

We take the next question from the line of Bhalchandra Shinde from Max Life Insurance.

Sir, as we stated that the relative labor constraint is there for us, but when we [can] expect things to normalize and at least on the production side, we will not have constraint of labor and we can reach to the particular capacity utilization levels?

So our Tirupati plants are almost normalized. We don't see a challenge there. Our Mobile plants are on the way to getting normalized. I think by July, July end, it should be normalized. Our Washing Machine plant is not a challenge right now. But Lighting, we have 3 plants in Noida and 1 plant in Dehradun. So there because the labor intensity is high and also there's a new norm of social distancing, there is an impact there. So one has to wait and watch how soon we do to address that issue.

Okay. And because why was I was asking this is like I read an article where it has been stated that to cater pent-up demand and because of all these constraints, most of the brands are preferring right now to import as much to cater to demand. So will we be able -- will we lose that pent-up demand-related volumes? Or what is your take on that?

In our case, I don't see it happening much. I don't see anybody importing the Lighting product. I don't see anybody importing Washing Machines. I don't see that happening. There might be some tactical import for some large brands for Mobile, but not -- they're not our customers. So in our case, I don't see that as a challenge.

And the customers which we have added for Smartphones especially, will it be for the high end or relatively low- and mid-end smartphones?

So this is for mid- to high-end smartphones, the complete category.

Okay. Mid- to high-end.

We take the last question from the line of Pritesh Chheda from Lucky Investment.

Sir, I just have 1 question. On the Mobile Phone side, the 2 million units per month that we produce once the LG and the Foxconn and Samsung's feature smartphone ramp up happen, what kind of volumes do you foresee in these 3, 4 clients put together? And does this need the PLI-related expansion? Or it can happen without PLI expansion at your existing facilities, whatever number you shared?

So this is without the PLI linkage.

Okay. And what volumes can it scale up from 2 million per month to?

So between -- 2 million is for feature phones. The additional volume of the Smartphone that I'm looking at is between 0.3 million to 0.4 million more.

And so this is Samsung smartphone, right? And then you have the LG business.

So a combination of everything.

All put together.

So all put together, 2 million will go to 2.3 million?

Something like that.

Something like that, 2.3 million, 2.5 million, whatever. And this includes your Samsung smartphone, plus LG business, plus whatever you get from Foxconn.

That's right.

That's right.

Okay. And you -- for that, the 2 facilities that you have is sufficient enough?

That's right.

Well, ladies and gentlemen, that was the last question for today. I would now like to hand the conference back to the management for their closing comments.

So thanks very much for organizing this call. And in Dixon, we are committed to what we have been sharing with all the stakeholders. These are difficult times, but we feel deeply that as a company and as a sector, we are sitting on an inflection point. All of the pieces of value remain the same. We are electronics manufacturer. We'll keep on getting into new verticals, touching the same core. We'll keep on building to scale. We'll keep on acquiring customer. And wherever we acquire the bandwidth, we'll keep on migrating to our own design solution. That's our thesis, and we feel that we have a strong thesis, and that's what we're going to pursue. Thank you so much, everyone.

So thank you, everyone. If any of the questions are unanswered, I am always available. You can call me and I can answer your questions.

Thank you.

Thank you very much. On behalf of AMBIT Capital, that concludes this conference. Thank you all for joining. You may now disconnect your lines.

Thank you.