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

Ladies and gentlemen, good day, and welcome to Dixon Technologies India Limited 1Q FY '21 Earnings conference call hosted by AMBIT Capital. [Operator Instructions] Please note this conference is being recorded. I now hand the conference over to Mr. Dhruv Jain from AMBIT Capital. Thank you, and over to you, sir.

Thanks. On behalf of AMBIT Capital, we welcome you all to today's earnings call of Dixon Technologies. From the management side, we have with us Mr. Atul Lall, Managing Director; and Mr. Saurabh Gupta, CFO of the company. Over to you, sir, for your opening remarks.

Thanks, Dhruv. Thanks very much. Good evening, everyone. Thanks for attending this call. I hope that you and your families are safe and healthy. So I'll just give you a brief on the Q1 performance in Dixon and where does the business stand as of now, and then you're most welcome to raise your queries. So while -- the headline numbers during Q1, it was quite badly impacted by the pandemic. But the numbers, we believe, show and it has demonstrated that there's a fairly strong resilience in facing these extremely challenging times. So we were in a shutdown mode from 22nd of March to May 3 when in parts we started reopening our factories. So effectively, some of the factories, they operated for around 45 days, and some of them operated for barely 30 to 35 days in the last quarter. We complied with all the government advisories and paid full wages to our workmen during the lockdown period despite the 0 production in the April and in large part of May. However, there has been huge focus on controlling the fixed cost, which has helped in delivering some profitability in this quarter. We continue to prioritize safety and well-being of our people. So the lines have been redesigned, and they've been reengineered to maintain adequate social distancing. So the months of April and May were very deeply impacted. Month of April, there were 0 revenues, and May was also hugely under pressure. But in June, we came back to almost 70% of our normalized revenue. I'll share with you the status across all verticals. So in LED televisions, in the month of June, we did almost 200,000 televisions. And in the month of July, we have done almost 250,000 televisions. So the order book in this particular vertical is extremely strong. And we have an order book that is more than our capacity, more than our increased capacity. So you know that we had planned to increase the capacity from 3.6 million to 4.4 million. And now because of certain government notifications and advisories, we are further expanding our capacity, which will happen in the next 6 months, from 4.4 million to 5.5 million, which is almost 33%, 34% of 14 million demand that India has. This business was slightly under pressure but now, with large anchor customers, it has normalized. The other vertical of ours, lighting, we had some challenges in the first quarter because of redrawing of lines and certain supply chain constraints. But here also now, the order book is extremely healthy. And now we are back to almost 85%, 90% of our business. So normally, we do around 15 million to 16 million LED bulbs and 1 million battens. So in the month of July, we have delivered almost 13 million LED bulbs and almost 1 million battens. However -- I'll share with you the other verticals shortly. So in the vertical of washing machine, we had a very laid-back quarter. In the month of June -- normally, we do around 80,000 machines a month. In the month of June, we did around 48,000. But now we are back to normal, and we delivered 80,000 machines in the month of July. The order book in this quarter looks extremely healthy. We have an order book of almost 120,000 machines a month. So we are further expanding our capacity by installing a third line, which will be operational in the next 7 days in the existing factory. Now this is apart from what we are doing in our Tirupati campus. However, at the same time, we remain cautious because, although the order book looks healthy, the production is normalized, but we're not very sure in terms of the localized lockdowns, and that may cause some supply constraints. We are also keeping our fingers crossed. And the order book that we have, which looks extremely good in Q2, I hope it sustains beyond Q2, and there are no surprises for us. Now coming to the financial and operational performance of this quarter. So we had a consolidated revenue of INR 517 crores. We had a consolidated EBITDA for the quarter of INR 17.1 crores. And the EBITDA margins declined to 3.3%, owing to a decline in the production and related under absorption of overheads. The PAT was INR 1.6 crores. We are well positioned with a robust balance sheet with a cash balance of INR 64 crores and have enough working capital lines to ensure that even if things worsen, we are fully prepared to and continue to build our business and capability through the extremely tough period. We have liquidity and enough cushion in the balance sheet if required to raise debt, although we're extremely conservative about it. But we have enough cushion to face the circumstances. So we have been sharing, and I've been insisting, that we have a strong conviction. The consumer durable and electronic items that we sold in India are going to be made in India, and that's what the thesis on this business model is based. Brand owners, and I can see and sense more traction, will be outsourcing and even -- and not only the manufacturing, it was also designing as a part of the strategy. And we feel that in Dixon, we have now the scale, the skill set, the capability and [ marquee ] customers to execute this well. Also, the government policy framework is getting more and more aligned towards domestic manufacture in this particular product vertical. So the government has announced the PLI, production-linked incentive schemes, for the mobile phones wherein they're going to be selecting 5 foreign companies and 5 domestic companies. There's a huge focus on creating 5 domestic channels. So we have filed 2 applications in Dixon. In all, there are 7 applicants, and the 5 have to be selected out of it. We are fairly confident that we are a strong contender. We will be making the requisite investments and ramping up our capacities in the smartphone sector significantly. Capital allocation, in our case, we've always been prudent and proven. We have a hurdle rate of return on capital employed of 30% and return on equity of 25%. And this is what's going to be sustained and maintained in the coming quarters and years. And now I'll share with you the performance and the strategy in each of the verticals going forward. So in LED television segment, we have expanded -- so we had a revenue of INR 347 crores and an operating profit of INR 8.6 crores. We have already alluded at a capacity expansion, which will become operational in the next 2 weeks, from 3.6 million to 4.4 million. This is an extremely strong order book from our anchor customers and newly acquired customers like Samsung. You know that we have also acquired various new customers like Nokia, Toshiba, Hisense and the private labels of Flipkart. The recent notification to curb the imports of LED TV and place them into a restricted category will further enhance domestic manufacturing. And not only the domestic manufacturing, it will also enhance and accelerate the sourcing by brands of domestically designed solutions. So please be rest assured that we are gearing up, building our R&D infrastructure for offering smart solutions. And hopefully, for a very large brand, we'll be offering the full solutions in the smart category very shortly. Because our order book is, again, more than the expanded capacity. We have taken a goal to further expand that capacity to 5.5 million by Q4 of this fiscal, which will be almost 40% of the Indian requirement. The capacity expansion on the PCBA side is already on the way and will be done within August wherein we are installing 1 more SMT line. So this will be the largest Indian capacity, vertically integrated, and the next phase is going to be to offer more and more solutions, which [ are all in from Dixon's stable ]. On the lighting segment side, the business was under pressure. So we had revenues of INR 77 crores in this quarter with an operating profit of INR 5.8 crores. So you know that all the -- practically, all the brands in the lighting business are on ODM business and also now a very large part of their wallet share is with Dixon now. We have a capacity of almost 20 million bulbs a month, which is 40% to 45% of the Indian requirement. And also our capacity expansion of LED bulbs -- of battens and downlighters has already been executed. The recent brand acquisition is the Reliance private label. We feel now the kind of operating leverage that we have with the enhanced volumes and the entire range of product portfolio, we're now globally competitive, and we are among the top 5, 6 companies for indoor LED lighting. Now we have taken a call to enter into outdoor lighting. So the line teams are working on the solutions for commercial lights, LED streetlights and floodlights. And I'm very confident that these solutions will be launched and offered to our customers by Q4 of this fiscal. In home appliances segment, the revenues for the quarter were INR 24 crores with a small operating profit of INR 40 lakhs. Now we have gone back to 80% utilization levels, delivering 80,000 machines in July, and we have an extremely healthy order book. We have 140 models, and this is being further expanded by another 40. And our expansion and the new factory in Tirupati campus for fully automatic top loading is on schedule. We hope to conduct trials. We are confident of conducting trials in this factory by December this fiscal. Coming to mobile phones. Revenues for the quarter was INR 33 crores with an operating profit of INR 2 crores. We have capacity of 2.3 million feature phones, 2G phones for Samsung, both for domestic market and exports. So in the month of July, we have delivered 2.5 million phones. And the order book, again, is extremely healthy. So for our anchor customer, now we also started manufacturing smartphones. And this capacity for a smartphone would also be further increased to almost 700,000 per month. In our other factory for mobile phones, we're mainly doing the 2G phones and the smartphones for Gionee and LG. The LG order book looks very healthy. And the balanced capacity, we are now servicing the set-top box business, which is emerging as a very major vertical for us. We are having an extremely healthy order book. We have an order book of almost 0.5 million set-top boxes a month. We feel, in a couple of quarters, this can be built up to almost 800,000 to 1 million order books of set-top box a month, which will generate a revenue of almost INR 1,000 crores in next fiscal for us. So from next quarter, I've advised Saurabh to treat it as a separate category, this particular thing. We have, under the PLI scheme, submitted 2 applications. We hope, and we are fairly confident, that we will be an improved entity. I'm pleased to share with the stakeholders that we have already concluded an agreement with a very large global brand under this scheme for executing not only the domestic business but large global business. And with another brand, we are almost at the final stages of conclusion. We strongly feel that if we get the approvals, this is going to be pathbreaking for Dixon. We're committed to make these investments and ramp-up of capacity. And once we do that, we'll almost have 30% of smartphone capacity for the Indian market. On the security surveillance side, the revenues for the quarter were INR 14 crores. We had a small order book. And this business is under pressure because I think it's a discretionary item. And this order book continues to be under pressure. However, we are utilizing this capacity by medical electronics devices. So we are going to be starting manufacturing of Quattro RT-PCR analyzer machine for COVID-19. It's going to start within another 2 to 3 weeks. And there are repeat orders for that. So that's going to be, again, an important vertical for us. On the reverse logistics side, the revenues were only INR 1.4 crores, and this is a small strategic business for us. And it's going to carry on in a small, profitable way for us. So that's where we are. We feel that we are sitting on an inflection point. There are going to be challenges in the short term if there is another wave of the virus or the demand falters. But however, we feel that we're sitting on a strong wicket, and hopefully, we will do extremely well. So any questions, please, most welcome.

[Operator Instructions] We have the first question from the line of Niket Shah from Motilal Oswal AMC.

Congratulations for the PLI scheme application that you've done in advance on this. I just had a couple of questions. The first question was on the PLI scheme part of it. Is there a limit which the government has set out? For example, if you do INR 1,000 crore turnover, is that a limit, or a INR 2,000 crore limit per year, which keeps going up? So is there a laddering which we can expect there? That's the first question. And the second question was on the panel side of the business. While you did allude that the demand and the order book continues to remain extremely strong, we do know that TLC (sic) [ TCL ] is obviously coming to India, and they have also set up their plant in Tirupati. So do you think some of the customers with a view of derisking might also move to TLC over the medium to longer term, if not in the near term? So those are the 2 questions, sir.

So Niket, responding to the first question on the PLI, there is a threshold turnover to be -- so there is a budgetary allocation of INR 41,000 crores as an incentive to be distributed between 5 foreign companies and 5 domestic companies. So what the policy guideline states is, let's say, in year 1, you are to achieve a threshold turnover of INR 500 crores or your baseline turnover. And then on the incremental basis, and they're going to give, let's say, in year 1, 6%. They have not stated, but our understanding is that they are going to be putting some upward ceilings. So let's say, your baseline turnover is INR 500 crores, there would be an upward ceiling of INR 2,000 crores. So that means the maximum incentive that you can get is in achieving INR 2,500 crores, an incentive of 6%, that's INR 120 crores. So it's something like that. So there would be an upward ceiling. Officially -- informally, we have -- we know what those ceilings are. But officially, they have not disclosed until now. I think they'll be disclosing once they have the approvals through. Responding to the second question, yes, TCL is coming up with a campus in Tirupati. Any campus coming up would always -- yes, it's going to be competition. However, we feel that Dixon is sitting in a much better position, primarily because of 2 reasons. One, that the focus of TCL is more on its own branding. And the brands, which are with us, usually do not ship to a factory, which is promoting its own brand. And second, we strongly feel that we are much, much more proven, and we have the cost competitiveness. And third, we also feel that now with launching of our own solutions, even on the smart side, we have an edge. But then, yes, competition is going to be there.

Sure, sir. And the second question -- a third question that I wanted to understand, you did mention that you already signed an MOU with 1 large customer, and you're obviously in discussion with a second large customer. Is it safe to assume that per customer, you will use 1 PLI and for the second, you'll use the second PLI? Because, as you rightly said, there is an upward ceiling, so how should I really think about allocation? So is it per PLI, you get 1 application? Or for a particular PLI application, you can have multiple vendors under that PLI application? How would it work?

So Niket, there is no restriction as per the policy guidelines at how many customers you can have. You can have any number of customers. Government's requirement is that you commit a certain amount of CapEx, that is INR 50 crores per year for the domestic company, with each approval. And then you have -- you need to have an additive incremental turnover, preferably from exports. However, they have not stated that. There's no restriction. And we are going to be working with as many customers as possible. But that, again, depends upon what the ceiling is.

[Operator Instructions] We have next question from the line of [ Ankush ] from HDFC Life Insurance.

Just again on the PLI scheme. So while there are large numbers being targeted by the government in terms of manufacture/assembly of cell phones in India, if you could just talk about how easy will it be for companies like Dixon and also others to kind of ramp up to such kind of numbers. How do we get that kind of manpower? And also, how long will it take for us to set up these factories because we're talking of INR 200 crores over the next 4, 5 years? So just some sense there.

So [ Ankush ], I strongly feel that in Dixon now we have acquired adequate bandwidth to execute these projects. As you see last year, when we got this opportunity from a large anchor customer for ramping up the capacity up to 2 million 2G phones a month, we were able to do it in 90 days. And now within a very short span of time, we are operating at 110%, 115% of our capacity. So to reiterate, we feel that we have that internal capability and skill set. We have our plans ready. A lot of groundwork by the team has been done. And we feel that if the approvals are given, we will be able to utilize the PLI incentive scheme benefits within this fiscal itself. So that effectively means that we should be able to set up the plant and get it running within the next 4 months and achieve also the threshold turnover and cross-sell in this is small opening -- a small period of just 7 months. We feel confident about it. But any deliverable is always a challenge and all the more a challenge on account of pandemic, but we are fairly confident that we'll be able to deliver on this.

Okay. And just a second question on the margins you expect to make here. Obviously, there is -- one is, of course, the incentive, which you get, 6% for the first 2 years and so on and so forth and then on the value added by you or any of the EMS players. So how should we look at that? I mean you currently make margins in that 2% to 4% range. So is that a minimum? And then plus how much you decide to share with the brand, is that how we should look at it in terms of the kind of margins you make out of this PLI scheme-based cell phones?

So [ Ankush ], it will be difficult for me to share the granular level details because they're confidential. And what I can just share is that margins are going to be better than what we do presently in our mobile business.

Okay. Okay. And just one last to Saurabh. I'm sure that we had the interest expenses in the P&L. While we had debt of close to about INR 86-odd crores end of March, our quarterly interest cost, when I look at Q1, is at around INR 6 crores. So is there something else sitting here? Even last year, it was around INR 35-odd crores. So I'm just wondering why the high interest expense.

So we also do -- so this INR 86 crores of debt does not include the discounting of receivables that is done. So that is not included in the debt number of 31st March, which we had just mentioned. So that is over and above. So as a result, the interest cost is slightly higher. So yes, so that interest on discounting would be a different -- would also be over and above this number.

Okay. So would you have the split between the interest and the discounting charges for the full year maybe, for FY '20 at this point, or for Q1, which -- either way? I'm just trying to understand how much that is.

Yes. So in this quarter, our discounting number was around -- interest on discounting was around INR 2-odd crores. So out of this INR 5.5 crores kind of interest number, INR 2 crores was the interest on discounting.

We have next question from the line of Aditya Bhartia from Investec India.

My first question is on margins in lighting and TV businesses, which have remained fairly steady despite the drop in revenues. So just want to understand how has that been made possible, what kind of cost reductions have you taken? Is it that fixed cost in the business itself has gone down? And should we assume that sustainable margins can be slightly better than what we have seen in the past?

Yes. So I'll say you're right. You'll see a slight improvement in the margins in the coming quarters.

And what exactly is that on account of, sir? What kind of cost reductions have been done? If you could just kind of elaborate on that.

First, taking you through the LED televisions, it is primarily because of the deepening of manufacturing. For the new customers and the new large customers, one, we are doing PCB [ in-house ] for which the capacity is being doubled. The second is there is a shift more and more to the larger increased sizes -- screen sizes. So the numbers for large screen sizes, like 50, 55 inches, are significantly increasing wherein the margins are better. So this is the primary reason for margin expansion. And on the LED -- on the lighting side, it is a combination of value engineering, the design [ route ]; second, operating leverage kicking in because of a large share of business; third, good focus on productivity enhancement on which the team is putting everything under the lens. In any case, the fixed cost is the lighting business has always been hugely under control. So you have seen the traction in the lighting business that the margins have been expanding primarily because of these 3, 4 reasons. We'll see a small expansion in the lighting margin in the coming quarters.

Sure, sir. And sir, in the past, you have indicated that we'll be going for increased automation on the lighting business. So if you could just share some details about what could be the time lines of this automation? Is current social distancing restrictions having an impact on lighting performance? And what kind of margin bump-up could we see on account of that?

So 7 automated lines have already arrived, and they are under installation at Noida plant. There are some challenges because the technical experts because of the travel restrictions have not been able to travel to our factory. So our engineers are installing these lines themselves. And there are -- they are basically [ P&C-based ] lines. So through virtual interaction, they're installing it. There could be some challenges, but I see that in September, these lines would be installed. And this -- on the LED bulb side, it improves the production cost by -- or the margins by almost 1.5% to 2%.

We have next question from the line of Renu Baid from IIFL.

So, my first question would be to understand a bit more on the categories like washing machines, where we have seen volumes struggling now for almost quite recent quarters. So is that again a reflection of overall weakness in the consumption side of the business? And could -- again, I mean, this trend has been continuing since last year post Diwali, so almost 3 to 4 quarters now. So does that worry you that given the pandemic impact, the festive season might not be as exciting and which can also have an implication on the growth prospects for some of the revenues for your brands in this category as well?

So Renu, you're absolutely right that the washing machine numbers are under pressure post last Diwali. And the pandemic did the final back job of hurting the business. However, in the month of July, we have done 80,000 machines. And as I'm sharing with you, we have an order book now of almost 115,000 to 120,000 machines a month. So there is a very definitive uptick in this particular segment. And all the more, I'm seeing that the competition is much more under pressure so a lot of business from large anchor customers is shifting to Dixon. On a short notice -- on very short notice, I have to put out my third line to expand this capacity, which is 100,000 to almost 120,000. So I don't see a challenge. And I feel that it's going to be on a growth path, unless because of the pandemic and virus, the demand absolutely collapses. That's something different.

Sure. And 2 more questions. The second would be on the PLI scheme, just a clarification. When we talk of incremental sales, the government hasn't specified whether these incremental sales coming to the overall market or the brand. So for an applicant, say, the domestic manufacturing side, where today almost more than 2/3 of the 77% -- 70% to 80% of volumes are manufactured or assembled in India only. So does this imply that the interest revenue numbers also include the potential reallocation of our production unit from the existing manufacturing units to the newly allocated PLI partners of schemes here.

So what you're understanding is right. However, in Dixon's case, the agreements that we're concluding, most of it is going to be additive because large part of it is going to be global.

Okay. So it would not involve much of reallocation in your case with your OEM partners with whom you signed with.

I'm saying that there will be reallocation, but a large part of it would be additive because it's from the global markets.

Sure. Sir, I have a couple of questions. What is the gross debt that we have on the books today, gross and net debt at the end of the quarter and overall on average during the quarter.

So the net debt is actually -- the latest net debt is around INR 55-odd crores. So cash, we mentioned in the call that the cash balance is around INR 64 crores. So the gross debt is somewhere around INR 125-odd crores.

Sure. And broadly, the working capital during the year has [indiscernible] upon the impact of discounting of receivables, et cetera. What would have been the average working capital or short-term debt that you would have used during the quarter?

Similar -- so we would have used -- so one thing which I forgot mentioned. So within that INR 5.5 crores of interest, there is also an interest obligation on the lease, India's accounting IAS 19. So that number is also INR 1.8 crores. So if you exclude INR 1.8 crores and the INR 2 crores of discounting, we are just talking about a number of only INR 3-odd crores, INR 2.5-odd crores. So that is basically the interest on the working capital facilities. So the average utilization would have been somewhere between INR 60 crores to INR 70-odd crores.

[Operator Instructions] We have the next question from the line of Tejas Sheth from Nippon India AMC.

What would be the criteria for the selection under the PLI scheme? I mean what would be the government's top criteria? And I just wanted to understand how can we land with both the application getting passed out?

So there is no absolute clarity that what all would be the criteria because they've asked for a lot of information on the export potential, on the employment generation, on value addition. However, our understanding from informal sources is that it's primarily going to be the revenues of mobile manufacturing generated in the year '19/'20.

Okay. Okay. And so the PLI scheme will kind of have a cap when you do with the benefits you'll be getting from the government. So would the contract, which you're signing with the brand companies be beyond -- would also have volume beyond PLI incentives, which they claim just to get benefited from economies of scale?

Yes, yes. It's going to be like that.

Okay. So even the volume could be much larger than what you can claim under PLI scheme?

Yes. The other numbers would be higher than the prospective ceiling of those revenues in each of the years, which is, of course, the government has not notified. But whatever was based on our informal sources or earlier mentioned, the numbers would be significantly higher than that.

I guess, if you -- I mean, I shared in the opening remarks that the capacities we'll be generating, creating in mobile would be almost 30% -- 30% to 35% of the Indian requirement. Now this is much more than the ceiling.

Okay. Got it. Got it. So last, just on what is the chances of PLI coming in the other electronics and white goods, be it TV, washing machine, refs and ACs. I mean how do you see that panning out?

That's a very difficult question to answer. But you know that PLI has already been announced for the medical devices. And what our understanding is they're working on various other products. They're looking at set-top boxes. They're looking at lighting. These are some of the product categories in which Dixon is.

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

My question is with respect to capital expenditures. Given the PLI scheme and other CapExs, which we were putting in -- wanted to put in the refrigerator, can you throw some light how much would be our CapEx in the next 2 to 3 years, including this PLI scheme?

So if you see, our normal run rate of CapEx is around INR 80 crores to INR 90 crores. The PLI, depending upon the number of applications that get approved, the application requires a CapEx of INR 50 crores a year. So that's what the range is going to be. I think that if we get 1 approval is going to be in the range of INR 130 crores, INR 140 crores. If we get 2, then it's going to be higher.

So for example, even if you get 1, does that entail, including the ref line, I think that is also what we discussed you have a plan for that, and plus your normal CapEx of what you are doing of increasing TV capacity as well and washing machines, do you think that given that CapEx is in the next 2, 3 years to be in the range of INR 300 crores to INR 350 crores, it's better to raise funds? Or you think that sufficient cash flows will be there to meet the requirement if it's in the range of INR 350 crores plus?

As per our business plan, we can see that we're generating adequate cash. We can raise debt also. So no final decision has yet been taken on any fundraise till now.

So Nitin, so one other moving part is, of course, whether we get 1 PLI or 2 PLI application, so that would determine and that will help us firming our CapEx plans. And we think there is enough cushion on the balance sheet today. So the debt-to-equity ratio, the debt-to-EBITDA ratios are still very low. So we can always raise some more debt. The balance can be funded out of internal accruals as well. So we are discussing it, deliberating it internally. But yes, we haven't firmed up on the CapEx. So once we update our full clarity on the CapEx plans and then we will finalize any fundraising plans, if any.

We have next question from the line of Nitin Bhasin from AMBIT Capital.

Now you mentioned about the PLI. One of the first questions around the PLI and the mobile manufacturing smartphone is that when we look at people like Topscom, Flex across the world and we see their margins are very low at about 1.5% to 2.5% margins. And whereas in India already in the smartphones, we're making really good numbers. And you also mentioned that the numbers could be even higher. Do you think when these global brands now work at such large scale with you, would you be able to build on these margins? Or the bargaining power will possibly force us to be around here only. Just give a better sense on the margin structure, how should one look at it where the global experience suggests otherwise?

So what we have internally designed the business model, I feel that under the PLI, our margin profile is going to be better. Not hugely better, but fairly better. So we strongly feel that we are much more frugal and cost-conscious than the large global unit. And that's the way we're going to run it.

Okay. Okay. Okay. Sir, because why I was asking that is because globally these guys get over a 6.5% gross margin and land up making 1.5% of these things. But you're saying that the cost structure in India is much favorable and possibly because of which you can make higher [indiscernible]. So how does one think about working capital as you work for possibly a global brand to export? Because though the CapEx requirement is not materially high, how should one think about working capital in the smartphone business?

So in Dixon's case, you know that we are extremely conscious on the operating cycle and the cash deployment. So it's going to be working capital indifferent. However, in the initial ramp-up phase, there might be some working capital deployed. Otherwise, it's going to be on a neutral side. There'd be no funds provided by Dixon on the working capital. Finally, when the business stabilizes, this can take a quarter or a couple of quarters.

So Nitin, that would be the understanding with the customers that we are talking about, that there will be no working capital deployed once the business stabilizes. So initially, yes, for a couple of days or maybe over a month, there can be some working capital deployment. But otherwise, that broad understanding will be captured and that will be completely met, that there will be no working capital in the business -- in the mobile PLI business.

Okay. So basically, working capital in that business could be lesser and possibility margins could be higher, which means that the stated guidance of ROC would be materially equal to what it is today and materially much better than whatever reflects globally report. That's the right way to look at it and summarize it.

So we strongly feel that if we are able to get these PLI approvals, the kind of agreements that we're closing on, they will significant flip to the return ratios.

ROCs would be significantly higher in this mobile PLI business, the paybacks would be significantly higher. And as a result, the company level since mobile PLI will start contributing significant portion of our revenues and mobile as a category will start contributing a significant portion of our revenue, so the overall ROC at the company level, we expect to see a significant growth there.

And sir, that will be FY '22, right? The first good year of revenue?

Yes, yes. So this year, it will be mostly 3 months of operations. And there also, you may end up deploying some bit of working capital, yes. But for next year onwards, you would see a significant growth in ROCs coming mainly from this mobile strategy.

Sir, the last one, very brief -- small one. When you think of these 2 PLI licenses that you applied, and let's say you get both of them also or for that matter, let's say, you get one. In either the scenarios, how much of your smartphones one should think of could be exports?

So the contracts are being negotiated.

Sure.

It depends whether we get 1 or 2. But we feel that if we get one, then almost 50% to 60% would be exported. Then overall percentage would be slightly lower.

Sure, sure, sure. And sir, these -- because in the domestic market, you have to look at the under $200 phone. But in the export market, would the brand still choose you for an under $200 phone or it could be anything?

It's going to be a mix. It's going to be sub-$200 phone. It's going to go up in the very high-end phones as well.

We have next question from the line of Vihang Subramanian from Samsung Asset Management.

Sir, as you mentioned, you'll be creating almost 30% of India's smartphone capacity, which is a pretty significant number, right, like almost like a USD 6 billion to USD 8 billion. So just wanted to know how should one think about when will all this crystallize in terms -- like an overall time horizon because this even entails like a significant investment of almost, I think, INR 3,000 crores, INR 4,000 crores, right, from your end? So just wanted your thoughts on this.

So the investment number that you're mentioning, those are not investments required. As per our internal plans, the investments to approval is going to be INR 200 crores spread over 4 years. And these kind of significant revenues will be generated by year 4 or so.

Okay. But how much in your opinion, sir, would be like 10% of India's smartphone capacity, if you said that 30%. So 30% would entail almost a turnover of like INR 60,000 crores or INR 70,000 crores, right? So for that, it would obviously require more CapEx than INR 200 crores, right?

So the Indian present market is around INR 150,000 crores. And I mean we are talking about this INR 150,000 crores is the customer sales price. And particularly when you're talking about sub-$200 phone, that number is significantly smaller. And I'm talking about that kind of capacity, volume-wise. It's not value-wise.

We have next question from the line of Naval Seth from Emkay Global.

Two questions. First is on working capital, why there is a kind of deterioration on working capital. So if you can share your insights? And has that improved in month of July? Or we are still at the same levels of quarter-ended number?

So Naval, the working capital impact primarily happened because of our television vertical, not in any other vertical. That is because both Samsung and Xiaomi [ timing checks ] got delayed, the custom clearances got delayed and also the deliveries got delayed. So -- but please be rest assured that it's already in the improving [ syndrome ] And by the end of September, by the end of Q2, it will be back to where it was.

So Naval, it's just an aberration this quarter and this is mainly because of the delay on shipments, as Mr. Lall mentioned, which led to delay in production and delay in booking the sales. So this is just an aberration. A lot of that has already corrected in the month of July. And you will see it going back to the similar range of levels of working capital, which we had reported in the last 2 years. So we'll go back to those minus 3 to plus 3 kind of working capital range.

Okay. Second question is on STB business. Although you have stated quite bullish outlook over there, can you share some insights on customer, whether it is for domestic or export market, how things are in terms of the order book would be coming in?

So Naval, this is primarily for domestic market. It is on a prescriptive basis. It is primarily EMS segment. This is mainly from Jio. This is from Dish TV. This is from SITI Cable. And this is from some cable operators on the eastern side of India.

Sir, given the financial challenges what SITI Cable or Dish TV is facing, can we see some risk arising incrementally the way we have seen in case of Reliance digital set-top box business sometime back. So are we protected there this time around?

At least be rest assured, there's no fund deployment by Dixon in this business.

We are well protected, Naval, in that sense.

We have next question from the line of Shreyas Bhukhanwala from Canara Robeco.

Sir, on the STB thing again. So you said, probably we are looking at almost INR 1,000 crores of revenue next year. What kind of profitability can be expected from this segment?

So it's a similar EMS kind of margins, between 2.7% to 3.2%.

Sure. And sir, secondly, on the lighting side. So you mentioned that almost 7 automated lines we are installing. So post this installation, how much of our volumes probably would get catered from that automation side?

So this is going to be almost 1/3 of the volume.

We have next question from the line of from [ Deepak Mehta ] from MetLife Insurance.

So I was comparing the financial statement from last quarter. I was seeing that our cost of goods means raw material has gone down. I believe it was supposed to get -- go up, right, sir?

You should look at both the cost and material consumed and the changes in inventory of finished goods and the work in progress and then come at a COGS percentage kind of ratio. So that has not materially changed from the last quarter. So it is somewhere around 88-odd percent.

Sir, it is on the same line.

It is on the same range, yes.

And what about the labor costs? Are you seeing any pay cuts or salary cuts for labor, compensation cuts? What is the trend in wage there , sir?

So the wage structure remains the same. It was pre-COVID.

Okay. It remains same?

Yes, yes. It's remained the same.

And my last question is that from Reliance Jio, what -- you get the contract manufacturing from mobile phone and set-up box. Apart from this, is there any possibility if they come into 5G, we may get the contract manufacturing for some of the 5G equipment or anything IoT-related things? Is there any talks or possibility in future?

So presently, for Jio, what we are doing is set-top boxes. We have not yet done any -- there's no contract as of now on the smartphone side. So what we are doing is various kinds of set-top boxes. We're doing hybrid set-top box, we're doing cable set-top box. We are now co-designing for them another kind of set-top box. At present, it's this. However, Jio is going to be a strategic customer for us. And we hope that we're going to keep creating more and more opportunities.

We have next question from the line of Bhoomika Nair from IDFC.

Sir, if you could just talk about the new opportunities in terms of what we are looking at in terms of the washing machines in fully automatic and also export for lighting? That was question number one.

So Bhoomika, FATL, fully automatic top loading factory, in spite of pandemic, the factory construction, the equipment preparation, the tooling, the organization buildup is on a schedule. We feel that the factory and the equipment will be ready within Q3. And we are taking an extremely aggressive target of doing our trials by December in this year. All this is ODM business. We are there, right, from 6 kgs to 10 kgs platforms. We are launching almost 40 to 45 models. An anchor customer has already been tied up with. We are in discussions with some large Tier 1 customers. Tier 2, Tier 3, we do not see any challenge at all in acquiring this. So that's on that. On the lighting side, our first consigned of LED were exports for our anchor customer, have already been shipped to U.S. and to Indonesia. We are in discussion with some very large retail chains. But what I can see is that these things take time. They first want to see our performance before scaling it up with you. But we are extremely bullish that we'll have significant breakthroughs in the coming quarters on lighting exports as well.

Okay. So just an extension on lighting. So 1Q was fairly weak because of the lockdown and you spoke about July kind of scaling up quite well to 80%, 90% level. As we move through the rest of the year, do you think that the lighting is a very significant contributor to our base business? Do we mean that we'll be able to make up in the balance 7, 8 months? Or do you think that now that will be a challenge given the loss of 1Q?

So lighting in the month of July, we delivered almost 12.8 million bulbs and 1 million battens. 12.8 is almost 80%, 85% of our normal. Hopefully, by September, we should be back to normal. The order book is healthy. But I feel that to cover up for the loss of first 4 months will be difficult. That's what my sense is.

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

First question is so among the top 3 categories, so TV, lighting and washing machine, you clarified the lighting. So TV and washing machine at this kind of monthly volumes, are we already doing better than the same month last year?

Yes, yes, yes. We are higher than the same month last year.

So July, we would be higher than similar month to last year.

Okay. Okay. Okay. Perfect. Sir, second question is on the PLI scheme, so mobile realization. So the kind of applications, which Indian players are doing, so below $200 phones, so what could be your right number for per-unit realization for us, 5,000 to 6,000 would be a good number or your thoughts on that?

So yes, it's going to be somewhere around, yes, around 5,000 to 6,000 average.

Okay. Okay. Okay. And just last question on the working capital/interest cost front. So this quarter's interest expense would be an aberration or? Do you think this is a sustainable number? Or with increased activity, this can again go back to, say, INR 8, INR 9 crores per quarter kind of run rate and except the new CapEx-related project finance debt?

Yes. So if you exclude the CapEx on the term loan side, which we may take for funding our CapEx for the future months, then this would be the going run rate.

The current run rate?

Yes, yes. This would be the current run rate, which we have shown in quarter 1, would be the going run rate for the future quarters as well.

Ladies and gentlemen, due to time constraint, that was the last question. I'd now like to hand the conference over to the management for closing comments. Over to you, sir.

So thanks very much for attending the call. Really appreciate it. We have shared the insights of our existing business status and the future opportunities lying ahead of us. We feel extremely energized and we strongly feel the industry, and so is the case with Dixon. We are setting on an inflection point. We have to really deliver on this. Opportunities are large. Thank you so much, everyone.

Thank you, everybody.

Thank you.

Thank you very much, sir.