Dixon Technologies IPO today; Is it worth subscribing?

Key Highlights: 

• Dixon Technologies to offer 33,93,425 equity shares in IPO
• Price band fixed at Rs 1760 - Rs 1766 per piece for IPO
• Raised nearly Rs 180 crore from anchor investors 

A leading electronic manufacturing services (EMS) company – Dixon Technologies has commenced its nearly Rs 600 crore initial public offering on Wednesday by offering 33,93,425 equity shares for sale.

This issue will close on September 08, 2017.

Price band for this IPO has been fixed at lower end of Rs 1760 per piece and upper end of Rs 1766 per piece.

50% of the total equity shares has been kept for qualified institutional buyers (QIB), while 15% for non-institutional investors (NII) and remaining 35% has been allotted to retail individual investors (RII).

Net proceeds of this issue is expected to be utilized for repayment of debt, setting up a unit for manufacturing of LED TVs at Tirupati facility, enhancement of backward integration capabilities, upgradation of the IT infrastructure and general corporate purposes.

Book running lead managers (BRLM) for this IPO are companies like IDFC Bank, IIFL Holdings, Motilal Oswal Investment Advisors and Yes Securities.

The company raised Rs 179.80 crore on September 05 from anchor investors by allotting 10.18 lakh equity shares at higher end of the IPO price.

Many analysts have mixed feelings towards this issue.

Recomming for subscription, Rahul Gajare and Dhirendra Tiwari analysts at Antique Stock Broking said, “Outlook for Dixon appears bright as the Indian consumer durables market is expected to see strong growth with 17% CAGR between FY16-20 on the back of (1) low penetration levels, (2) easy financing schemes and (3) expansion of delivery models, including ecommerce.”

Similarly, Dhiral Shah analysts at Asit C. Mehta Investment Intermediates said, “ At the upper price band of Rs 1766/-, the company’s stock trades at 38.6x its FY17 EPS of Rs. 45.86/-, which is priced. Hence, we recommend to SUBSCRIBE the issue from a long-term perspective.”

Although there is nothing wrong in Dixon's business model, Alpesh Thacker an Siddhartha Khemka Research analysts at Centrum Wealth Research does not feel comfortable in recommending this IPO to investors due to following reason. 

Low margin Business: EBITDA margins of Dixon since past five fiscal (FY13 - FY17) has been hovering near 4%. In FY17, the margins stood at 3.7% lower compared to 4.2% of FY16.

High valuation: Valuation looks stretched for such kind of low margin business. At the higher price band of Rs 1,766, the stock is valued at 39.7 P/E on FY17 basis (post dilution).

Better investment opportunities in the market: As per Centrum, there are many listed opportunities with better financials available at lower and comfortable valuation.

90% of the issue is Offer for Sale: Even if Dixon raises money at such valuation, 90% of the issue would belong to shareholders. Only 3,39,750 equity shares of the total issue is fresh issue which is less than 10% will only belong to the company. 

Just like Centrum, another analysts at Sptulsian Investment Advisor has also recommended to avoid the IPO. 

Sptulsian Investment Advisor said, "In the absence of any direct listed peers, broad comparison can be made with auto component makers who engage in hard core manufacturing activities with some degree of research, although some own very strong brands.'

Moreover, on May 03 2017, promoter of Dixon had purchased 233 shares from Times Group at Rs 1,350 per share, which as per Sptulsian  is 24% lower than the current IPO price, with just 4 months having passed. 

Also an unwritten rule of IPO market states that 15-20% must be left on the table for prospective investors, which is missing in this issue, added Sptulsian. 

Thus both analysts feel while topline growth looks promising, coupled with sound balance sheet position, wafer-thin margins, high client concentration, intense competitive nature of business and fully priced issue make the IPO less appealing.

Based on fundamentals, Centrum and Sptulsian believe it is better to skip the issue for now and keep it on radar post-listing.