Dixon Technologies: Fortifying presence in Consumer EMS

17 Oct 2023 , 11:39 AM

Recommendation: Buy; Target Price: Rs 6649

 

Analysts of IIFL Capital Services upgrade FY24/25/26 earnings forecast for Dixon by 3/23/28%, respectively, led by: 1) Better visibility on recent customer additions and volume ramp-up in mobiles 2) Inclusion of IT PLI 2.0 w.e.f FY25 and 3) Tapering of FY24 growth expectations in lighting, LED TVs and slower ramp-up likely in refrigerator amidst slow-down in the Durables market. With a diverse presence across Consumer Electronics, Dixon now seems to have fortified its presence in the mobile EMS market (largest pie of the EMS) and is confident of building component capabilities over the medium term, complemented by penetration in the IT hardware segment under PLI 2.0. Robust FCF profile ensures that growth is fully fuelled by internal accrual, thereby generating industry-leading returns. Analysts of IIFL Capital Services reiterate BUY with revised target price of Rs 6,649 (implies 23% upside). 

Mobile PLI finally bearing fruits: 

Dixon is investing ~Rs5bn to set up manufacturing capacities (equivalent to a third of the domestic market) to support growth mandates from the leading OEMs (Xiaomi, Transsion (Itel), Motorola) over FY25-27. Analysts of IIFL Capital Services raise revenue forecasts for FY24/25/26 by 22/59/57% to Rs99/189/220bn, respectively; contributing 55-60% of its revenues and 45-50% of Ebitda over FY25-26. 

Optimistic on IT PLI 2.0: 

Whilst >55 companies have applied for IT PLI 2.0, Dixon is optimistic to generate Rs480bn sales over FY25-30; with Rs2.5bn capex under the Hybrid category. While Acer and Transsion are already onboard, initial learnings with Motorola and other brands in Mobile PLI will facilitate mandates from the market leaders. Analysts of IIFL Capital Services forecast IT hardware to become 10-12% of revenues by FY26, with ~8% share in Ebitda. 

Mobile offsets slower growth in other Durables: 

FY24 upgrade is partially negated by slower-than-expected growth in lighting, LED TVs and ref portfolio, capping the overall revenue/PAT upgrade to 5/3% in FY24. Analysts of IIFL Capital Services think the stock is well-placed to deliver superior returns, once consumption bounces back and will continue to trade at premium to other EMS players, backed by proven execution track record, superior returns and cash-conversion profile.