Dixon Technologies: Visibility on Mobiles addresses concerns

2 Aug 2023 , 11:20 AM

Recommendation: Buy; target price: Rs 4946

 

Analysts of IIFL Capital Services upgrade Dixon to BUY from ADD, on significant increase in the growth visibility of its Mobile EMS portfolio with customers like Motorola, Xiaomi, Itel and Jio-Bharat, and increasing share of ODM solutions in mature durable categories. Various EMS ventures under PLI scheme are now stabilising with leading OEM brands and recently inducted professional & experienced leadership team. Dixon has built an enviable business model in consumer-facing sectors focusing on large volumes, economies of scale and cost competitiveness. Healthy RoCE, cashflows and capital-efficiency differentiate it vs peers. Analysts of IIFL Capital Services raise FY24/25/26 EPS by 2/10/8%, respectively and upgrade to BUY with TP of Rs4,946, implying 20% upside. 

New customers add credibility and confidence in Mobile EMS:

 In addition to Motorola (anchor client) who is ambitious for global share gains (India being a key market to drive volumes), addition of Chinese brands Xiaomi (#3, 15% share) and Itel (in H2FY24) add credibility to the volume growth targeted by Dixon. Management targets Rs80bn+ revenues in FY24 and ~50% growth in FY25. 

Building leadership team to steer next leg of growth: 

Dixon has invested in senior talent from Philips, LG, Samsung, Alcatel, Voltbek, Videocon, M&M, amongst others, to build a professional leadership team across verticals – Mobiles, Telecom, Refrigerators, Washers & Lighting, keeping key-man risks at bay. 

Strong balance-sheet & returns: 

Share of mobiles in Dixon’s revenue will increase from 35% in FY23 to 45% in FY24 to 50% in FY25; while share in Ebitda is about a third. Dixon capex of Rs12bn in FY22-24 for the existing and new verticals (driving >3x sales & PAT over FY21-25) is fully funded by strong OCF generated, refraining from diluting equity for growth capital and keeping the returns profile intact for minority holders. While valuations have seen time correction, analysts of IIFL Capital Services think the stock is well placed to deliver superior returns once consumption bounces back with the option value of entry into emerging EMS applications, like automotive.