Companies in India release their September quarter earnings around the festival of Diwali, which is the high season for domestic consumption. It’s no surprise that this is when analysts ran a reality check on the nation’s billion-plus buyers: How many of them took a home loan, ordered a new coat of paint, bought a phone? There’s a more pressing question this year: How did Dixon do it?
Even last year, Dixon Technologies (India) Ltd., which manufactures LED TVs for Samsung Electronics Co., or Amber Enterprises India Ltd., an air-conditioner parts supplier for LG Electronics Inc., were relatively unknown entities. But now there is growing enthusiasm among domestic firms that may one day become as big and important as contract manufacturing giant Flex Ltd., formerly Flextronics.
The reason for that optimism is firmly entrenched in geopolitics. The short-term fall in Chinese stocks, which came after President Xi Jinping set a precedent for a third term, came as a wake-up call. As Beijing threatens to break away from the West’s economic and political class under its strong leader, multinational firms need a backup location to make gadgets. And who has a deeper labor pool than India when it comes to implementing the China+1 strategy?
Share Market Taking notice of order flow. After a six-fold jump in two and a half years, Dixon’s market value is now over $3 billion. Taiwanese PC maker Acer Inc last year announced a partnership with the Indian firm. Headquartered in Noida, a suburb of New Delhi, Dixon is already manufacturing monitors for Dell Inc. and will soon start churning out Android-based smart TVs under a sub-license from Alphabet Inc. Sales increased by 38% and profits increased by 23%. year ago in the September quarter.
Analysts are super bullish. Mumbai-based brokerage Nirmal Bang expects annual profit growth of over 52% between 2022 and 2025. Jefferies Financial Group Inc. Earnings have been expanding even more rapidly – 63% annually over three years. “We see Dixon as a structural play on indoctrination,” say the researchers.
India as a risk-mitigation strategy – a hedge against building all widgets in China – is a story that is gathering investor interest and helping to justify higher valuations. Indian stocks’ premium over emerging market stocks is currently three standard deviations higher than the 10-year average. There is a lot of anxiety though. Apart from domestic banks, whose asset quality and margins have improved, some other investment disciplines look weary, at least temporarily.
Yes, the worst inflation surge is probably over, and the Reserve Bank of India may be nearing a pause in its interest rate cycle. But the price pressure is still increasing. During the festive season, quarterly consumption volumes were declining by 1% annually for the past three years. Unilever Plc’s local unit is sitting on its lowest gross margin in several years. The software services industry, for which India is known globally, is witnessing weak demand from European customers, even as it battles high workforce at home.
Meanwhile, Dixon is eligible for Indian government subsidies under five different production-linked incentive programs.
For a resource-constrained economy battered by the pandemic, Prime Minister Narendra Modi’s push for a five-year, $24 billion industrial policy is a costly gamble on manufacturing. That money was urgently needed for education, health and urban infrastructure creaking under inclement weather events. Raising import duties to give a protectionist edge to the “Make in India” project is something New Delhi has tried in its socialist past with disastrous results.
Wouldn’t mind treating Dixon as a kind of national champion. Nor the stock market. However, the real lever that can swing things in favor of the second most populous country rests with the CEOs of Fortune 500 companies. If China+1 is a real theme in India this Diwali, it is more about Xi and his deteriorating relations with the West than Modi and his policies.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia. Prior to this, he worked for Reuters, Straits Times and Bloomberg News.
This story has been published without modification in text from a wire agency feed. Only the title has been changed.
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