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Dixon Technologies: Gaining from industry consolidation

16 Apr 2024 , 11:47 AM

While the electronics eco-system is at the cusp of multi-year growth in India, Dixon is leveraging its local presence, healthy balance sheet and strong government mandate to increase Indian ownership in foreign-owned entities (Chinese in specific) engaged in manufacturing activities in the country. Its proposed acquisition of controlling stake in Ismartu India, the manufacturing arm of Chinese mobile player - Transsion group, at compelling valuations (earnings & RoE accretive) cements it’s positioning in the domestic mobile manufacturing market. With this, financials are a broader reflection of mobile EMS activities driving earnings upgrade of 4- 5% in FY25-26 despite a 7% cut in FY24 EPS on weakness across entire portfolio. Near term valuations are ripe at 53xFY26 EPS. Analysts of IIFL Securities retain Buy with revised 12M TP of Rs8730, at 60x FY26 EPS (15% potential returns).

Transsion is aggressively expanding its presence worldwide:

This Chinese group along with 3 anchor brands – Itel, Infinix and Tecno is aggressively targeting affordable segment and has emerged as #5 Global player in CY23 with 8% shipment share (leadership in in MEA region). India volumes are pegged at ~30m units including feature phones with 3 manufacturing units in Noida housed under Ismartu India. Controlling stake will generate >40% RoE for Dixon with superior margin profile vs its own EMS, acquired at implied valuations of ~5.2x FY24 PAT.

M&A masks weakness near term growth:

Pursuant to cut in growth expectations for Q4FY24 (Mgmt guides for QoQ drop in sales), including softness in Mobile EMS, analysts of IIFL Securities cut FY24 EPS by 7%. Ex-Mobile EMS, revenue is lowered by 4/7% and Ebitda by 8/10%, respectively for FY25/26, given analysts of IIFL Securities cautious view on rebound in consumption. Overall EPS upgrade for FY25/26 is 4/5% with upside from addition of manufacturing mandates from Chinese OEMs.

Valuations restrict upsides:

Post analysts of IIFL Securities Upgrade to BUY on 01 Aug’23, the stock has given 85% absolute returns. They continue to like Dixon, but find valuations less compelling at current levels of 54xFY26 EPS. Analysts of IIFL Securities wait for better entry opportunities.

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