Rationale

 The ratings factor in the robust growth in Dixon Technologies (India) Limited's (DTIL) scale of operations in the recent past (at a five-year CAGR of 34%), which imparts economies of scale benefit. The ratings take into account DTIL's established track record as an electronic manufacturing services (EMS) player with presence in diversified product segments, leading position in its key product segments (like LED television, lighting, etc) and its well-established relationship with reputed clientele. The ratings favourably factor in DTIL's strong return on capital employed (RoCE) and comfortable debt coverage indicators with an interest cover of 7.8 times in FY2022. The ratings also note the healthy ramp-up in the mobile phone segment, which received approval under the Indian Government's Production Linked Incentive (PLI) scheme. Though the revenue is expected to increase over 25% in FY2023, operating margins are expected to sustain at the current levels. The company has achieved the capex and revenue targets for the first year and has applied for the incentives. Further, the ratings positively consider the backwardintegration measures in the company's key business segments, which have supported its growth and profitability over the years. The ratings, however, are constrained by DTIL's leveraged capital structure with net TOL1 /TNW of 3.3 times as of March 2022 and dependence on a few large clients, which exposes its revenues to the business plans and performance of the same. It has sizeable working capital requirements (both fund-based and non-fund based) due to the lead time in imports and receivables realisation period. The same gets funded, to a large extent, by the credit period from suppliers. This results in a relatively high TOL/TNW ratio and dependence on sizeable non-fund based limits (letter of credit or LC). However, ICRA notes that a part of DTIL's creditors remain covered by bank guarantees (BGs) extended by the customers, which reduces the credit risk. Additionally, the company enters into back-to-back payment arrangement with some of its suppliers, which are either a related party to its principals or are identified by the same. This mechanism, while lowering DTIL's working capital requirements as well as credit risks, results in creation of debtor and creditor for it from the same/related parties. In the past, DTIL was able to knock-off both debtors and creditors corresponding to one of the principals when the principal got into financial trouble. Given the strong revenue growth expectations, the creditor as well as TOL are expected to increase over the medium term. In this context, ICRA takes comfort from the company's past track record of managing lean working capital cycle, its healthy liquidity position and financial flexibility