Rationale

 The ratings take into account the robust performance of Dixon Technologies (India) Limited (DTIL) in the recent past. Despite the disruption in operations due to the Covid-19 pandemic-related lockdown, the company has witnessed a strong recovery in business post easing of the restrictions as reflected in the 22% YoY growth in revenues in 9M FY2021 along with stronger operating profitability and debt coverage metrics. The ratings continue to take into account the healthy operating profile of DTIL, characterised by its 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 wellestablished relationship with a reputed clientele. The ratings also consider DTIL's healthy financial profile characterised by moderate leverage, strong return on capital employed and healthy debt coverage indicators. Further, the ratings positively take into account the backward-integration measures in the company's key business segments, which have supported its growth and profitability improvement over the years. The long-term rating, however, is constrained by DTIL's dependence on a few large clients, which renders its revenues susceptible to the business plans and performance of the same. Nonetheless, the revenue concentration has reduced over the years, with business from the top three clients decreasing to 58% in H1 FY2021 from 71% in FY2018. The strong profile of the large principals—Xiaomi [Moody's Baa2 (Stable)] and Samsung [Moody's Aa3 (Stable)]—and DTIL's position as one of the largest and cost-efficient EMS players in India, partially abates the risk of business loss from any large client. The rating also factors in the competitive and dynamic nature of the electronics manufacturing industry, which exposes the players to risk of technological obsolescence, foreign exchange fluctuation and regulatory changes. This in turn necessitates continuous upgrade of processes and products to sustain competitive advantage, requiring regular capital expenditure. DTIL, like other electronics manufacturers, has a high dependence on imported raw materials/components and is susceptible to any significant supplychain disruption. In this context ICRA notes the shortage in global supply chain of semiconductors, which is an important component of electronics products. The profitability impact of the event on DTIL is expected to be low, given the prescriptive nature of the most operations. However, the impact on sales volumes will be a key rating monitorable. DTIL's operations have sizeable working capital requirements (both fund-based and non-fund based) due to lead time in imports and receivables realisation period. The same gets funded to a large extent by the credit period from suppliers, resulting in relatively high TOL/TNW ratio and dependence on sizeable non-fund-based limits (letter of credit or LC). However, ICRA notes that part of DTIL's creditors are covered by bank guarantees (BGs), 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, the company was allowed to knock-off both debtors and creditors related to Gionee transactions when the latter got into financial trouble. Taking the same into cognisance, ICRA has adjusted such creditors as well as netted off lease obligations, cash balances and liquid investments from DTIL's TOL for evaluating the adjusted TOL/TNW ratio, which remains comfortable at 1.8 times as of September 30, 2020. The financial metrics of DTIL, however, remain critically dependant on the prudent management of its working capital requirements. In this context, ICRA takes comfort from the company's past track record, its healthy liquidity position and financial flexibility. The Stable outlook on the rating reflects ICRA's expectation that DTIL will continue to report a healthy growth in its scale of operations, along with diversification in customer profile, product profile and supply chain.