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This mobile maker doubled sales in Q4, but analysts project two-way move for the stock

NEW DELHI: Dixon Technologies‘ two-fold jump in March quarter sales was strong, but largely in line with consensus estimates.

The stock also did not react much, ending the day flat on Friday.

Analysts said new opportunities are likely going forward for this one of the biggest beneficiaries of the government’s Atmanirbhar Bharat initiative. They are also projecting a 70-80 per cent growth in earnings for this electronic manufacturer over FY21-23. But after an 8 times surge in the stock price over the last two years, they have a wide target range of Rs 3,850-4,800 for the stock.

Nirmal Bang finds the stock Rs 3,850 worthy. YES Securities sees the scrip at Rs 4,350. Emkay Global has a target of Rs 4,500 on the stock. Sharekhan has a target of Rs 4,800 on the stock, but on FY24 earnings estimates.

Covid 2.0 impact
Like others, Dixon has also been hit by Covid 2.0. The company saw sales impact from the second week of April, which has further deteriorated in May. The management is expecting June to see a gradual revival in demand.

For March quarter, Dixon reported a 60 per cent YoY rise in profit at Rs 44.26 crore on a 126 per cent surge in sales at Rs 2,110.69 crore. Ebitda margin for the quarter came in at 3.8 per cent, down 270 basis points YoY. This was below the consensus estimate of 4.9 per cent. The lower margin was the result of substantial change in segment-mix and delays in passing on the rising input cost in ODM business.

ODM stands for orignal design manufacturer. In ODM model of business, products are finalised or are pre-designed products that are sold by manufacturer (Dixon) under the brand name of the purchasing company. In OEM model, products are sold by the manufacturer based on the client’s specifications.

Data showed consumer electronics accounted for 60 per cent of Dixon’s revenues in FY21. Lightening division accounted for 17 per cent of sales, mobiles 13 per cent, home appliances 7 per cent and securities system 3 per cent. ODM business accounted for 5 per cent of electronics business, 90 per cent of lightening business, and 100 per cent of the home appliances segment.

Capacity expansion
In case of consumer electronics, Dixon has a capacity of 44 lakh TV sets and the company has started production of large TV sets like 75 inches TVs. It is looking to expand this capacity to 55 lakh in the next couple of months and also is adding new automated lines for 65 inches TV sets. PCBA (Printed circuit board assembly) capacity is also expected to increase from 18 lakh to 2.8 lakh units. Analysts noted that the company is further investing in injection molding for backward integration in LED TV sets.

It is getting into a new product SKU -“LED monitor” and it has already tied up with two large global brands Production for the new product is expected to start from December quarter of FY22 with initial capacity of 1o LED monitors and the profitability is expected to be in the range of 2.7-2.9 per cent.

“Continued capacity expansion in business segments indicates strong order book, which in turn provides strong revenue visibility. With the majority of revenues coming from MNC brands, Dixon has already showcased its capabilities on product quality and execution. However, exports starting at a global scale for the first time would require a sharper execution focus as the company has multiple business opportunities to execute at the same time. We have cut FY22 EBITDA by 7 per cent due to ongoing covid related disruptions,” said Emkay Global.

Next big trigger
Sharekhan said Dixon has applied for PLI in IT (laptops, tablets, hardware) for which approval is expected in a month and production is expected in the December quarter. It is also applying for PLIs in lighting and AC components, for which production is expected to start next financial year.

The company, Sharekhan said, will also be applying for PLI in Telecom (modems, routers, IoT devices) through a joint venture where it has 76 per cent stake — the guidelines are awaited.

Even if the company does not get PLI in telecom, it is expected to start production in the December quarter, Sharekhan said.

“We believe Dixon is on a strong growth trajectory led by broadening and deepening its product portfolio along with applications for new PLI schemes in its domain. We introduce the FY2024 earnings estimate in this note. We maintain our Buy rating on the stock with a revised PT of Rs. 4,800 increasing our valuation multiple on account of a strong earnings growth outlook,” Sharekhan said.

What analysts said
YES Securities said it has an ‘add’ rating to the stock as current valuations leave limited upside potential in the near term. It values the stock at 50 times FY23 EPS now against 40 times, incorporating the company’s entry into new verticals and the fact that the company may benefit from 4 other PLI’s apart from Mobile PLI that it has already got.

The brokerage has built in a profit growth of 78 per cent and revenue growth of 67 per cent over FY21-23.

“Led by the strong scale-up opportunities across multiple product categories, we expect 79 per cent earnings CAGR for Dixon over FY20-FY23E. Robust growth prospects, healthy return ratios, lean working capital cycle, and high fixed-asset turnover will continue to support Dixon’s valuation,” Nirmal Bang said.

Sharekhan said the company remains one of the key beneficiaries from government impetus on increasing domestic manufacturing through PLI schemes.

“We believe Dixon is on a strong growth trajectory led by broadening and deepening its product portfolio along with applications for new PLI schemes in its domain. We introduce FY2024 earnings estimate in this note,” it said.

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