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

Ladies and gentlemen, good day, and welcome to the Dixon Technologies India Limited Q2 FY '21 Earnings Conference Call hosted by AMBIT Capital. [Operator Instructions] Please note that 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. Welcome to the 2Q FY '21 earnings call of Dixon Technologies. From the management today, we have with us Mr. Atul Lall, the Managing Director of the company; and Mr. Saurabh Gupta, the Chief Financial Officer. Over to you, sir, for your opening comments. Thanks.

Thank you so much. Good afternoon, ladies and gentlemen. This is Atul Lall. We also have on the call today, my colleague, Saurabh Gupta, CFO.

Hello, everybody.

I hope that you and your families are safe and healthy. So I'll just share with you an insight into Dixon's numbers of Q2 2021. Our consolidated revenues for the quarter ended September 30, 2020 was INR 1,639 crores against INR 1,405 crores in the same period last year. That's a resilient growth of 17%. Consolidated EBITDA for the quarter ended September 30, 2020 was INR 89.6 crores against INR 65.9 crores in the same period last year. That's a growth of 36%. EBITDA margins have expanded from 4.7% to 5.5% year-on-year. This is mainly on account of operating leverage, improved sales mix, value engineering, productivity improvement and other cost efficiencies. Interestingly, we have seen margin expansion across all our key product categories. Consolidated PBT for the quarter ended September 30, 2020 was INR 71.3 crores against INR 48.3 crores in the same period last year. That's a growth of 49%. This is mainly due to the reduction in our finance costs. Healthy growth momentum was witnessed in all verticals in Q2, and we have an extremely healthy order book across all the verticals. We look forward to regaining faster momentum in the forthcoming quarters and expect revenues and profitability to increase on account of a healthier order book. We are well positioned with robust balance sheet with cash balance of INR 74 crores and net debt of INR 17 crores as on 30th of September. We have adequate working capital lines to ensure that even if things worsen due to pandemic, we are fully protected and continue to build our business in capability through this difficult and uncertain period. We're generating strong cash flows and adequate liquidity and have enough cushion on the balance sheet to raise debt, if required to meet the planned CapEx in the pre-COVID period. We have a strong conviction, as I've been reiterating in all our interactions. The consumer durable and electronic items that will be sold in India are going to be made in India, and Dixon in this space is sitting on a sweet spot. More and more [ banners ] will outsource more manufacturing. And in Dixon, we have been able to build a scale and a skill set and capability to execute that. Further, the momentum of domestic manufacturing is aided by the government schemes. It is beneficial for the company hugely. Our main focus as we have maintained right through our journey is on total backward integration and migrating more and more to our own design solutions, which helps in expanding the margins and further enhance the stickiness with our customers. Our capital allocation will always be prudent and very proven. We are maintaining that we will be generating a return on capital employed of 30% plus and return on equity of 25% plus in the forthcoming quarters and years. Now I'll share with you the performance in the strategy in each of the verticals going forward. In consumer electronics, that's LED televisions mainly, revenues for the quarter under review was INR 957 crores against INR 738 crores in the same period last year, which is a strong growth of 30%. This is in spite of July, we were in the process of recovering only. So we have not hit full July, and there were also certain supply chain issues. Operating profit saw a robust growth of 50% year-on-year. It was INR 26.5 crores in Q2 2021 against INR 17.7 crores in the same period last year. Operating profit margins also expanded from 2.4% to 2.8% year-on-year on account of scale, higher level of backward integration, the expansion of our PCB capacity and also due to the improved sales mix, wherein the share of the large screen sizes, that is 43 inches and above, has significantly increased, which is generating better margins. As I had shared in the last call, we've already completed our capacity expansion of 4.4 million TV sets, including backward integration and LCM. And also, we have doubled the capacity by installing the second line of SMT for PCBs. This capacity is almost 30% of the Indian LED TV market. So we acquired a large scale, and it's a global scale now. In order to meet the strong order book of our anchor customers, Xiaomi. And newly acquired customers like Samsung, Nokia, Hisense, Toshiba, and also in view of the recent notification wherein imports on complete LED televisions has been shifted to prohibited category, to license category, we are witnessing a significant traction in additional volumes. So we are further expanding our capacity from 4.4 million to 5.5 million in this fiscal. We are confident of executing with expansion plan within Q4 of this fiscal. That will take our capacity to almost 5.5 million sets per annum. Putting LED TVs under restricted category will not only boost domestic manufacturing, but will also deepen the level of manufacturing in India and accelerate sourcing of brands of domestically designed solutions for LED TV. So that's the path we are pursuing. We're strengthening our R&D and trying to get a larger share of customers' business through our own design solutions. We are strengthening our R&D. And we have also tied up with some global design houses like sound technology in the U.S. called Premium Sound Solutions. The latest customer addition in our customer portfolio of LED television is Vu, which is a significant domestic player in LED television. The production for Vu is going to start in November. And also, we have acquired OnePlus as a customer. For OnePlus, the production will start in Q4 of this fiscal. Coming to lighting. Revenues for the quarter witnessed growth of 4%. That is INR 296 crores in Q2 against INR 284 crores in the same period last year. Operating profit witnessed a strong growth of 21%. That's INR 27.7 crores in Q2 against INR 23 crores in the same period last year. The margin in the lighting business have expanded from 8.1% in Q2 last year to 9.4% in Q2 this year, primarily due to operating leverage, migration to more ODM. So in last quarter, the share of our ODM business was more than 90% further value engineering and also automation. All the brands in lighting business today who are our customers are on ODM basis. And practically, most of the brands today are our customers. We are in -- the largest ODM in lighting, and we already have a capacity of almost 200 million to 250 million LED bulbs, which is more than 40% of Indian requirement. We have also developed solutions for the smart LED bulbs, battens and downlighters and emergency bulbs and battens for various customers. As shared with you on earlier occasions, we've expanded our capacity of battens from 250,000 in Phase 1 to 1.5 million, and this is a number we'll be executing in our October month, and also 2 million. So this 2 million will start happening per month, hopefully, for the month of December. In the case of downlighters also, we have expanded our capacity from 150,000 per month to 600,000 per month and we'll be going to 1.2 million per month by Q1 next fiscal. We feel the kind of volumes and entire range of product portfolio, we are now globally comparative and among the top companies in the world as far as volume is concerned. We have the cost competitiveness now to explore the local markets. We have already sent our pilot consignments for our anchor customers to U.S. and Indonesia, and we are in discussions with some large chain of stores for exploring the international opportunity. We're also automating a line and 1/3 of our volumes of LED bulbs will get automated within 2, 3 of this fiscal, which will give a significant boost to our productivity. Now we are venturing into outdoor lighting, that is primarily streetlights and 2x2s. We are confident of launching this product portfolio by Q1 of the next fiscal. On home appliances, revenues for the quarter saw growth of 4%, that is INR 139 crores in Q2 versus -- sorry, INR 145 crores in Q2 of this fiscal versus INR 139 crores in last fiscal. The operating profit increased by 5% year-on-year that's INR 17.3 crores versus INR 16.4 crores in last year. The EBITDA margin in this vertical is 11.9%. We've had our highest ever sales of 1.14 lakh and 1.17 lakh machines in August and September, respectively. So to meet the festive peak period demand, we have added one more line in a very short period of time. We presently have 40-odd models and are the largest portfolio ranging from 6 kgs to 10 kgs across any automatic category with an annual capacity of 1.4 million. In Q3, we'll be launching a new 10 kg model and also an electronic panel model, for which there is a significant traction. Our expansion plans for fully automatic top loading, FATL, washing machine is on track in our Tirupati campus, the new factory is getting ready. We are fairly confident of our trials in end of Q3 this fiscal. There are approximately 30 variants in fully automatic category to start with, and we'll have an annual capacity of 6 lakhs. We are targeting to start the commercial production in Q4 of this fiscal. We have already closed an agreement with a very large global MNC. In this vertical, we have a road map of more and more localization, and we feel fairly confident that in the next 18 to 24 months, the imports will come down to barely 30%. Coming to mobile phones and EMS divisions. So from this quarter, friends, we will be reporting mobile and EMS divisions. Presently in the EMS division, we are doing set-top boxes and medical equipment. So we'll be combining the results of them together. Revenues for this division for the quarter was INR 197 crores as against INR 193 crores of mobile revenues in the same period last year. In the current quarter, the revenue of set-top box business and medical equipment business was INR 35 crores and INR 96 lakhs, respectively, out of INR 197 crores. Operating profit witnessed a very strong growth of 294%. It was at INR 16.2 crores against INR 4.1 crores in the same period last year. This is mainly on account of our anchor customers at 2G phones business and also set-top box business. Operating margins have also evolved significantly expanded from 2.1% to 8.2% year-on-year. We, today, have largest capacity of 2G phones in the country. We are the largest manufacturer, and this is happening for our anchor customer, both for domestic and export markets. We are confident that the numbers for Q3 and Q4 will be better than Q2. Our 100% subsidiary company in which we do our mobile and EMS business has started. We have a very strong order book again from -- on a smartphone as well as 2G phones. Recently, we got the approval under government's PLI scheme on mobile phones. The government plans to provide incentives up to INR 41,000 crores over the next 5 years period. [Technical Difficulty]

Ladies and gentlemen, thank you for patiently waiting. The line for the management is reconnected. Thank you and over to you, sir.

Sorry about this interruption. So I was sharing the contours of the scheme. Domestic companies are incentivized for mobile phones of less than $200, that's INR 15,000, which is a special carve-out for domestic companies with a CapEx investment of INR 200 crores over 4 years. Eligibility will be subject to thresholds of incremental sale of manufactured goods. Incremental sales of manufactured goods over base year for financial year '21 is INR 500 crores, financial year '22 is INR 1,000 crores, financial year '23 is INR 2,000 crores, '24 is INR 3,500 crores and '25 is INR 5,000 crores. One positive thing is that the ceiling revenues have been revised upwards in favor of domestic companies. So now the revised ceilings for '21 is INR 2,000 crores, '22 is INR 4,000 crores, '23 is INR 6,000 crores. For financial year '24 is INR 8,000 crores and financial year '25 is INR 10,000 crores. We have already started investing to increase our capacity of the smartphone, and we'll be taking it to 15 million to 16 million level annually in the next couple of years against 3 million today. We have already taken a factory on lease in Noida, approximately 200,000 square feet. We are fairly confident of starting the fresh -- the new capacity by Q4, by early Q4, that's January of this fiscal. We are in deep and final round of discussions with 3 large global brands. This is in addition to our present anchor brands, for tie-up for manufacturing for them, both for domestic and global markets. I'm not in a position to share the names as of now. Hopefully, we'll be sharing these names very shortly. We think it is a big opportunity for the company, and we are confident of generating the cumulative revenues of INR 28,000 crores to INR 30,000 crores revenues over a period of 5 years with a decent EBITDA margin and a very robust ROCE and quick payback on the investment. We're also hopeful that even the first year incentive of incremental sales of INR 500 crores for August '20 to March '21, we will be able to avail the benefit to some extent. Although it's a challenge to start fresh production barely 3 to 4 months, but I'm fairly confident that our team will be able to deliver on it. On set-top box side we have already delivered 5.2 lakh cable and hybrid set-top boxes for Jio dish and SITI Cable, and we have generated revenues of almost INR 35 crores. We have a strong order book of almost 0.3 million per month from October onwards. On medical and electronics also, we dispatched our first set of 40 machines. And now consistently, we're delivering to Maldives and this will be a decent, high-margin business for us. Coming to security surveillance systems, there is a 9% degrowth in our share of 50% revenues. So from INR 43 crores in Q2 of '19/'20, the revenues have come down to INR 40 crores. However, the operating profit witnessed a growth with an expansion in the operating margin from INR 1.06 crores, of 2.4% in Q2 '19/'20 to INR 1.17 crores with an operating margin of 2.9% in Q2 FY 2021, mainly due to the reduction in fixed cost. Now this vertical has also come back to the normal capacity utilization, and we've seen that we have decent numbers in Q3 and Q4. Reverse logistics revenues for the quarter was INR 3.6 crores with an operating profit of INR 37 lakhs at 10.2% operating margin. Our both set-top box refurbishment and LED TV panel repair business is doing fairly well, and we have a strong order book. In fact, we are setting up a small center in Tirupati also for this because it is more of a strategic kind of business. So I would like to stop here now, and me and Saurabh are there to answer your questions. Thank you.

[Operator Instructions] The first question is from the line Aditya Bhartia from Investec.

Thanks for the detailed update that clarifies a lot of things. My first question is on working capital, which appears to have risen a bit in second quarter. What has contributed to the same?

There was a bit of a challenge in supply chain. The transit period in the imports and also custom clearance time expanded a bit by almost 12 to 15 days because of which there has been some pressure on the working capital. But we are extremely confident that it's going to come back to normal. It already has by October end. And this has happened mainly due to LED television business. It will come back to normal by Q3 end.

Yes. Aditya, this is Saurabh. So as Mr. Lall mentioned, it is already partly corrected in October month, and it will significantly get corrected by end of quarter 3, by end of December.

Understood. And from a longer-term perspective, sir, do you see any issue of continuing to import open cell panels? Or do you think government would want that to start getting done in India as well?

Sorry, just come again.

Sir, from a slightly longer-term perspective, do you see a challenge of continuing to import open cell panels? Or would ultimately the government be wanting open cell panels to also start getting manufactured in India?

So I think government intent would always be to create that ecosystem and if open cell fab can be set up in India. But it's not a simple business. It's a huge CapEx. So I think one will have to wait and watch. At present, I feel the open cell will be a significant import item in LED television and all the categories.

And sir, when we say that TVs have been placed under restricted category, there's no restriction on open cell panel purchase, or do you think that even that is getting a bit more difficult to import?

No, open cell is under OGL, and there is no restriction as such. So I don't see any challenge in imports of open cell from the government perspective, yes.

Understood. And sir, my next question is on the PLI scheme. So obviously, you did highlight quite a few things on the scheme. How should we be really looking at it? Would we be looking to operate at maybe the ceiling limits of the scheme and generate a higher EBITDA margin? Or rather could the strategy be to deliver revenues higher than the ceiling limit, maybe at a slightly lower margin?

So we are evaluating both. It's a question of a slightly longer-term perspective. So we have to strike a balance. Possibly, we'll be going even beyond the ceiling.

The next question is from the line of Ravi Swaminathan from Spark Capital.

Congrats on a good set of numbers. My first question is with respect to the margins in the mobile phones, sir. So basically, mobile phones and EMS margins are 8.2%. How much -- I mean, how much of it is for mobiles alone and what is the kind of margin profile of the other 2 products which are there and that is the medical device and other products?

Yes. So as Mr. Lall mentioned that the revenue generation from set-top box is around INR 35-odd crores. The margin profile in that particular business is somewhere around 3%, 3.2%. And set-top box -- the medical electronic have just started. So I think so it will be prudent for us to give you the margin profile only next quarter. Or yes, so it will be slightly higher. So broadly, you can assume a margin of around 20%, 22% as far as medical electronic is concerned, but we had a very small just INR 96 lakhs of revenues. But yes, the quarter 3, the revenue should be higher. And of course, the profitability from that vertical should also be higher.

Okay. No, what I'm trying to ascertain is, has the margins in the mobile business also expanded, is what I'm trying to ...

Yes. So Ravi, basically it expanded on account of the anchor customers that we acquired in November last year for which we are manufacturing the 2G phones. So it was not there in the similar period last year in the comparison period. So that is basically -- there the margin profile is higher. So these 3 would be the reasons why our overall margins have actually gone up.

Okay. And my follow-up question is on the PLI scheme. So basically, you had mentioned 3 large customers with whom we are talking about. Will they feel -- I mean, put together, would they alone individually cross the INR 10,000 crore kind of revenue target that is being set for FY '25? And if that is so, blended, what kind of margins we can make over the -- on a sustained basis over the next 3 years average -- 3, 4 years?

So one, we are fairly confident of achieving the revenue targets that we just shared and you also just mentioned. We feel that the operating margin should be somewhere in the level of around 3% in this business.

Got it, sir. And with respect to the electronic TV, the new customers, Vu, OnePlus, et cetera, if you can share, what kind of potential volumes can be there from them, it'll be great.

So the indicative volumes that we are expecting from the new customers, that's the names that you mentioned, should be somewhere between 0.8 million to 0.9 million TVs per annum.

[Operator Instructions] The next question is from the line of Bhoomika Nair from IDFC.

Hearty congratulations for a very good set of numbers. Sir, my first question is on the TV segment, which has seen a very strong growth led by addition of new clients. As we are adding, as you said, Vu, OnePlus and some others, how quickly do you expect the volumes to kind of scale up? What is the current level of utilization which is what is making you confident to kind of expand capacity to 5.5 million from the current 4.2 million -- sorry, 4.4?

So Bhoomika, we did almost 300,000. In fact 318,000 televisions in the month of September. In the month of October, we're going to prove that 360,000. And the order book looks healthy. And then from the month of January, we are adding some more customers. And also, please appreciate that there is a peak always in TV business around the festive period. So we need that buffer. That's the reason we are expanding the capacity because the forecast being given to us by our existing anchor customers and also the new acquisitions are very healthy.

So what I'm trying to just understand is that what proportion of this will be led by the import restriction ban in the current quarter? Or is that still yet to play out, and this is largely led by a strong festive demand and client addition that we saw during the year?

So my sense of things is that the import restrictions has still to play out. So usually, the dip that we have post-Diwali, we will not see that this time. It's going to be compensated by additional traction from the customers.

Got it. Sir, my second question is on the home appliances and the washing machine space. Again, there a fairly healthy performance. How are we seeing in terms of the fully automatic washing machines to kind of come in and contribute? By when is that expected? And any client additions out here? We spoke about new model additions and 10 kgs, et cetera. But are there any client additions out here that we are targeting?

So as I shared, Bhoomika, that we are fairly confident of starting our commercial production of fully automatic top loading in Q4 of this fiscal and the facility is getting ready. We already have an anchor agreement signed with a large global customer. We are going to be rolling out our samples by November end, early December of this fiscal. And we are already in discussions with all the existing brands who are our customers in semi-automatic category. We are confident that we'll be able to get significant breakthroughs because the solutions that have emerged are extremely good. So we are fairly confident and that the revenues are going to start from Q4. But for the business to acquire the actual mass will take time. It will take a couple of quarters.

And you think these would be of similar margins as our semi-automatic washing machines? Or you think it will take time to scale up?

I think so. Finally, yes.

The next question is from the line of Sonali Salgaonkar from Jefferies.

Congratulations on a great set of numbers. Sir, my first question is, again, on the PLI scheme. I know you mentioned that you are in the final round of discussions with 3 large global brands. But over and above these 3 brands and our anchor customers, potentially, which other clients could we target in terms of attaining our revenue target, say -- that you said of about INR 80 billion to INR 300 billion revenues over the next 5 years? And also, if you could throw some light on the value addition aspect of that.

Thanks, Sonali. So, one, we feel that these 3 customers agreements in itself are more than sufficient for meeting the ceiling numbers under the PLI. In fact, what I can sense is there is a problem of plenty there. However, in every vertical, if you see Dixon's endeavor is to start first level of assembly and deepen the manufacturers through motherboard. If possible, go in and use our skill set in polymer processing and make an attempt for our own design solutions. So please be rest assured that in mobile also, we've already initiated this journey. It's going to take time, but it's going to happen. So that's the path we're going to pursue. We aspire to emerge as an ODM player in the smartphone as well. And also, I would like to share that the infrastructure being set up, is also having the capability to upgoing 5G phones. So that's the path we're going to be pursuing, Sonali.

Sure, sir. And also, you spoke about the capacity in the smartphone being enhanced to about 15 million to 16 million. So currently, we have 40 million capacity in mobile phones. So just wanted to understand, is the capacity for feature and smartphones fungible? Or else, what is the breakup of this 40 million?

So the capacity is fungible. But in mobile or for that matter in any electronics manufacturing, to put it in very layman kind of term, it's ultimately the component count on the motherboard and the test setup. So usually, you can take a ratio of 1:3 on a line on which you do 1 phone -- smartphone, a 4G phone, we can do 3 2G phones. That's the kind of a number.

Understand, sir. Sure. Sir, my second question is...

So infrastructure is fungible not only for smartphones and mobile phones, the line on which we're doing at a smartphone, we're also doing a set-top box in the same line. We're also doing our medical electronics in the same line, so it's fungible right through.

Got it, sir. Sir, my second question is on the customer concentration and utilization. So sir, we understand that probably you don't share numbers of how much our top 5 clients are contributing to in both segment right now. But any broader idea of how concentrated every segment is in terms of our anchor customers? And currently, on an average, what is the capacity utilization that we are working at?

Sonali, I'll share with you the numbers. Our topmost customer contributes around 30%, 32% of our revenue, followed by the second one is around 17%. However, when you look at the profitability profile, the biggest customer contributes around 14%, 14.7% of our operating profit. Now we're very conscious of this. And if you look at our numbers in '17, '18, when we were listed, almost 85% of our profits were coming only from 2 anchor customers. So in spite of the growth, this ratio has rationalized, it has become much, much better. And let me assure you that the growth and diversification that we are having is going to have a much larger sense of balance. On the capacity utilization, I'll just share with you the numbers. So in lighting overall in Q2, we've used 81% of our capacity. In LED television with 78%, in home appliances is 80%, in mobile phones on the 2G side, we've used almost 68%, and on the smartphone side, we have used a smaller one of 35%. In security systems, because Q2 was under pressure, the capacity utilization was around 36%, 37%. However, the capacity, which was -- which was not utilized for phones and set-top box -- and CCTV were used for set-top boxes. So that's the status. So overall, we can say that the capacity utilization is between 75% to 80%.

Understand, sir. Sir, and my last question is our ODM share currently is at about 35%. Any vision as to where we want to get it, say, over the next 5 years?

So the path is like that, but there's a percentage because at present the ODM share is primarily from home appliances, that is 100%. And from lighting, which is around 90%. From consumer electronics, it still is very small. It just 3%. And in other verticals of ours, primarily OEM business, which is on prescriptive mode. Now the humungous growth is going to happen on the mobile side, on the EMS side. So I don't see as a percentage ODM contribution will increase. But in absolute numbers, the ODM contribution will significantly increase. However, as I shared that if we are able to get breakthroughs because that's the path we are pursuing in LED television already, and we're going to trigger that on the smartphone-s also. If they're able to crack it, and hopefully we should, we have the tenacity, that in a couple of years a significant portion on an overall basis would come from ODM. What percentage? I don't know.

The next question is from the line of Renu Baid from IIFL.

Congratulations on the strong performance this quarter. My first question is to understand a bit more as in, since you've highlighted that you would want to -- aspire to emerge as the ODM solution provider smartphone segment. So globally, this trend has picked up in the sub-$150 market. But essentially the companies who are concentrated in this segment are the ones who also have strong capabilities on the semiconductor and the chip side. So, a, today -- even if you're aspiring today, what is the base work -- home work that you're starting in this segment to scale up the R&D capabilities? And also related to the same question is across new segments that we are entering, whether it is refs and mobile phones, they are far more complex products in the current profile. So what is the kind of beef-up that you're doing in the R&D side of the business to improve ODM solutions as well as continue upgradation of the existing portfolio?

So Renu, it's a journey. Now I think the team has done fairly well in the verticals of lighting and appliances as of now. And in appliances also, launch of fully automatic top loading is going to be a significant milestone for us. Now same is the case in LED television. So we are ready with the solutions, and we are ready with the solutions on the smart side also and also on the Android solutions, so the team has been able to execute that. When we come to smartphones, it's a much more complex journey. So it's going to happen, to start with 2 partnerships rules. First, the focus is going to be on sourcing and supply chain and closely working with the chipset people like Qualcomm and MediaTek. And those skill sets have to be built. But we're going to start the journey. On the refrigerator side, we have a leadership team who has executed large DC refs projects. We have confidence. We've inducted some talent already from the industry of meeting this project. So once we take the final call of launching it because we are looking at some other inorganic opportunities, let's see how it pans out. Otherwise, we're going on our own. We already have a technology partner in place. We have selected the product portfolio. Yes, it's going to be a slightly longer gestation product, but it's going to happen. Please be rest assured.

Sure. Have we earmarked or have we targeted x portion of spending on R&D in the next 3 to 4 years? And targeted deal size or it would be decided in due course of time?

So it's going to evolve, and it's going to be decided in due course of time.

Sure. So second question is to understand a bit more on the margin side specifically for the LED lighting segment as well as for washing machines. Should we say most of the margins could also be driven by the strong volume and a bit of -- the 9% cost structures and inventories which were carried from the previous quarter. And cost headwind could moderate a bit of the margin profile going forward? Or what would be your sense that given the mix of new customers coming in these categories and portfolio, 9% margins in lighting and about 11.5% margins in washing machines seems to be more sustainable trend?

So Renu, both in lighting and washing machine, the margins are a derivative of various elements. One is value engineering, which is an extremely important element. Second is continuous automation and reducing the manufacturing costs. So we've already embarked in this journey in lighting. And third is the commodity prices in the currency. So how it balances out, one has to wait and watch. But I feel that in lighting, the margins are going to be hovering between 8% to 9.5-odd-percent. And in the case of washing machine, it's going to be somewhere between 10%, 10.5% to 12% somewhere like that. So I can't predict the exact number, but that's the range in which I feel that an operating margin number will be -- yes, going to be there.

Sure. And my just last question would be a bit of clarification again on the set-top box part of the portfolio. Given that now we have strong order book scaling up from 3Q, we had set aside aggressive target of INR 1,000 crores plus of revenue in the next financial year. So are those targets intact, both with respect to our orders from customers? Or are we seeing a new addition of portfolio in that business?

Yes. So we are fairly confident in next fiscal, that will be the biggest number. The order book looks healthy. So I think they're fairly doable numbers.

So Renu, just to add. So if you look at our quarter 2 numbers, as we mentioned in our earlier remarks, that we did 5.2 lakh units. And we also mentioned that we have an order now of almost 3 lakh units a month. The revenues in H2 will be significantly higher than what we have done in Q2. So even -- within this year only, we will start generating in H2 only around -- somewhere around INR 400 crores, INR 450 crores kind of revenues in set-top boxes. So next year, the revenue is INR 1,000 crores, which we had guided for, looks absolutely intact.

So which means is broadly for the current financial year, set-top boxes could do approximately INR 500 crores or close to INR 500 crores kind of revenue?

Yes, that's right.

And overall, I think the volume margins in STB business will also improve or they should be broadly in similar 3.5% range?

They will be there in the range of 3% to 3.25%. ROCE profile will be very good, because we are -- the incremental investment will be very minimal.

Right. They're using the existing capacities there. Got it.

The next question is from the line of Dhruv Jain from AMBIT Capital.

Sir, one question on the AC PCB revenues that you have mentioned and disclosed, right? While it is small at around INR 18 crores in this quarter. But if you could just throw some light on how it's been in the last couple of quarters and what customers that we're doing? And if we can add some more customers on that front?

So this particular vertical is we're doing with Daikin. And we have a tie-up with Japanese solution provider for inverter controller PCBAs, Rexxam. Rexxam Japan is a global partner of Daikin. And they're into this business for last, almost 3 years. And all the inverter controller PCBAs for Daikin are done at Dixon. Last 2 quarters in this particular verticals have been under pressure because of lockdown and also the AC market was impacted. Yes, whether we are looking at expansion of this particular business, we are. And we're talking to some other brands also for a breakthrough in this. Let's see.

So what was the FY '20 revenue, sir, here?

Dhruv, so basically, in a normal situation, we were doing revenue of somewhere around INR 35 crores, INR 40 crores a quarter. So it should be somewhere around INR 135 crores, INR 140 crores, plus minus something. So I don't remember the exact number, yes, about INR 35 crores was the quarterly run rate.

Okay. And sir, margins around in this vertical?

So margin is also similar, somewhere around 3.5%, 4%.

Okay. And sir, you spoke about a tie-up that you are doing with respect to creating your own ODM solutions in TV. And sir, if you could just talk a little bit about that and when do you expect to sort of breakthrough there in terms of getting your own design?

So on the analog side, our solutions are already going. So even to the brands like Panasonic or Sanyo. Domestic brands like Lloyd or Intex or to Reliance or Reconnect, they are all Dixon's ODM solutions. We are ready with the smart solutions also. In that, one is the open software and the other one is the Android solutions. The market is shifting more and more toward Android solutions. We are working on a possible relationships with Google and getting an Android license, but we are still working upon it. However, as far as the solution is concerned, we are ready with it. We're ready with both the electronics and the mechanicals on the Android side also. So that's the status.

The next question is from the line of [ Ankur ] from HDF Life Insurance.

One, could you please share the volume numbers during the quarter across segments for TVs, washing machines, lighting and cellphones?

Yes. Sure, Ankur. Just give me a minute. So TV, we did around 8.5 lakh units as against 7.5 lakh in the same period last year. So only there is a 14% kind of a volume growth. Overall, in terms of lighting products, which includes LED bulbs and other products like batten power lighters, we did around 571 lakh units as against 508 lakh units, mainly there has been a significant increase in LED bulbs there. In terms of mobile phones, which includes both the 2G and the smartphones and for our an anchor customer as well, we did around 96 lakhs phones and as against 16 lakhs last year. So mainly the growth has been mainly on account of the -- growth in our anchor customer of 2G phones. Then in the case of CCTV and DVR, CCTV, we did around 6.6 lakhs units as against 6 lakhs same period last year, and DVR, we did 2.1 lakhs, which is almost similar as last year as well. And set-top boxes, I mentioned that we did INR 5.2 lakhs. And medical, yes, we did a first dispatch of 40-odd units.

And sir, washing machine, I think that's one....

Yes, I missed washing machine. Washing machine, we did 3.1 lakhs.

To 48 lakhs [indiscernible].

Perfect. I have the previous year numbers. Great. Sir, secondly, just on the TV margins and what we've been hearing is that open cell prices have actually jumped over the past quarter, most of it is sourced from China and I'm guessing also Thailand. So how has that worked for you? Have those price increases been completely passed on to your customers? Because I normally thought that there's a certain lag, right, before those prices get passed on.

Ankur, our LED TV business is an OEM business. And all the cost variations are passed on to the customer. In this business, there's no lag. So you're absolutely right, the prices of open cell globally has really shot up significantly. However, in our case, all the costs are passed on to the customer.

Perfect. Okay. So they have been passed on. Okay. And sir, thirdly, just on the jump in debtors and payables that we see this quarter. So while I understand that maybe because of the restrictions on imports, you may have delayed payments to your vendors. But I'm just trying to figure out what led to this big jump in debtors as well at about INR 1,100-odd crores. And where do you see this and how do you see this normalizing?

Yes, basically, if you look at the TV sales, we did almost INR 950 crores kind of revenues, so mainly that receivables have increased. And even if you breakdown the entire quarter 2 performance, our September month performance is better than August, and similarly August was significantly better than July. So if you look at the numbers, it's mainly increased on account of TV business, where we -- our debtors has increased, corresponding the creditors has also increased. So we don't deploy money in the working capital, since it is a prescriptive business. So both the debtors and creditors have increased.

Okay. And as production normalizes, as you said, you would see the numbers -- these numbers coming back to the previous numbers, I mean previous historical numbers, right? So you wouldn't expect them to remain as elevated going into Q3 and Q4?

So if you look at debtor days actually, you should -- in sort of actual number of debtors, if you look at our debtor days. So our debtor days was around -- is 58 days, and it was similar level at around June of 57 days. What -- and the whole cash conversion cycle, inventory days has actually come down to 28 days as against 45 days. And creditor days is 86 days as it is 93 days in the month of June.

The next question is from the line Akshay Bhor from PremjiInvest

Good set of numbers. First question is on the PLI scheme. And given there'll be government receivables involved in there. What kind of contract structure are you working with the customers? And what kind of delay in receiving those payments is anticipated by the customer? Any clarity there?

So the contracts are in the process of getting finalized in the structure. However, please be rest assured there are adequate prevented mechanisms in the contract that the customer will be reimbursed on the PLI side only once we receive the incentive from the government.

Understood. And what kind of delay do you anticipate in receivables? I mean, is there a -- within the PLI scheme, is there a mention of what kind of delays are anticipated?

Well, the -- as for the contours of the scheme, what it says is that, you have to meet the eligibility criteria, which is 2 elements. One, you have to have a CapEx confirmed of INR 50 crores before filing your application. Second, you have to meet the threshold plus the incremental number of a base line figure. Once you have achieved that threshold with adequate evidences, the application has to be filed with the project agency. And they're going to verify the data and the incentive will be credit to your account. That's what the mechanism says. And the application has to be filed on a quarterly basis. So I mean -- I'm not in a position to say that how it actually works, but the laid down guidelines in the scheme are as I just shared with you.

Understood. Understood. Just a clarification on the lighting side, the volume growth is slightly tepid in the quarter even on the appliance side as well. Just wanted to understand, this has nothing to do with any customer having -- this is just the industry growth being muted.

Sorry?

Akshay, I don't know what number. So if you look at the home appliances numbers, we did 3.1 lakh washing machines, almost equivalent to what capacity we have and as compared to 2.8 lakhs washing machines.

Also Akshay, please appreciate the unit -- the factory opened only in June, and July we were still struggling. July, the execution was still muted. Only from August and September, we've been able to come back to normal. So I think from that perspective, the numbers are healthy.

The growth has been 15-odd-percent.

The next question is from the line of Naval Seth from Emkay Global.

Sir, I have 2 questions on TV. First, if you can give some insight that new customers, what you have won in the quarter. The volume numbers what you stated, 0.8, 0.9 million. So what would be that percentage of their current sales right now, if any insight there?

So Naval, 100% of the business will come to Dixon.

Okay. Second question is a bit long term on TV segment. So we are expanding capacity almost now twice in a year with strong order book. So are we on the same path of lighting where from 30% market share, we can reach 40%, 45% for domestic sales. Is that the visibility you have over the period of next 3 years?

So we are striving towards that. You see, the Indian market is around 15 million, 16 million. Now if we're able to do around 4 million in a couple of years, that's a large number. That will be almost -- it will be a large number, almost 30% -- 27%, 28% of Indian requirements we have.

Naval, to answer your question, that is definitely achievable with this new client addition and strong order book from our existing customers. So we've already -- this year also, we'll do a decent increase in our volumes as the same period last year. And so with the new client additions, the numbers that they're talking about are definitely achievable by next year or maybe a year after.

So Naval, in this fiscal itself, we will have, I think, 30% growth over last fiscal.

The next question is from the line of Nirav Vasa from Anand Rathi.

Sir, would it be possible for you to give me the breakup of CapEx that we intend to do in FY '21 and FY '22? And if possible breakup of that category, I mean, category-wise?

Yes. So Nirav, as part of the PLI, we have to do a CapEx of INR 50 crores every year for the next 4 years, that mobile PLI would be INR 50 crores every year. So that is one. Secondly, in this year, we have -- on our fully automatic, the total CapEx should be somewhere around INR 65 crores to INR 70-odd crores, out of which we have already done a CapEx of INR 18 crores to INR 20-odd crores. So yes, the balance INR 40 crores, INR 45 crores will happen in the balance 6 to 9 months -- 6-odd months. And then we will have in other verticals, the average run rate of CapEx should be somewhere around anywhere between INR 10 crores to INR 20-odd crores. So that specific plans, we will have only later. Yes, but this will be the broad numbers.

Got your point. Sir, my second question pertains again to the ...

Also, I would like to share that a substantial investment in our mobile side, we have now secured a long-term payment plan from the equipment supplier. So the payment plan is of 18 months. So the CapEx will be made, but the payment -- the cash outgo would be less.

So you will be paying it as and when the factory is getting operational. Am I right?

No, it's not linked to that, but there is a payment plan.

There's a deferred payment plan, Nirav. So cash outgo would be significantly lower than the INR 50 crores that I mentioned to you.

Got your point. So another question is again particularly pertaining PLI. Sir, because of this CapEx commitments which are there and other players who have got PLI scheme approvals, especially the Indian manufacturers, their balance sheets are not very strong. So is there any provision in this PLI agreement that we can get some rate, I can say, funding from bank or any of the players, have they approach to you for any kind of a potential JV or something like that to -- because you've got the size and scale and all the customers are empanelled with you, so that it can be mutually beneficial partnership for you as well as the other players?

So on the first question of yours, yes, there is a provision in the PLI scheme. And the government will be sharing the data with us on quarterly or I think bi-quarterly basis wherein they're going to be -- so if some of the other companies are not able to meet the ceiling, then the overflow will be shared with the performing companies. So that's a significant positive. On your point number two, I'm not in a position to comment.

But your observation is right, Nirav, that there are a couple of advantages that Dixon enjoys. One, our balance sheet is much stronger as compared to some of the other players that have got the approvals of PLI. And of course, we don't have our own brand. So that also makes a lot of difference.

Exactly, because this business is all about size and scale and their balance sheets are heavily constrained right now, so...

Ladies and gentlemen, due to time constraint, we will take that as the last question. I would now like to hand the conference over to the management for closing comments.

So thanks very much, AMBIT. Thanks for this call. And thanks to all the stakeholders for supporting Dixon journey. We are on the path that we've seen that it's on an extreme positive. We feel that industry is having a significant tailwind, and we're going to work harder to deliver more and better. So thanks for you support all and thank you so much.

Yes. Thank you, everybody. In case you guys have any follow-up questions, you can always call me. Thank you very much.

Thank you.