Dixon Technologies Ltd - Q2FY21 Result Update - YES Securities

Solid quarter led by TV segment; mobile PLI benefits to start from 4QFY21; reiterate BUY

- Result summary - Overall performance well ahead of estimates with revenue/EBITDA/PBT/PAT growth of 17%/36%/49%/22%, vs expectations of flat topline and 7% earnings growth.

- Topline - Revenue growth of 17% yoy to Rs 3.2bn, well ahead of estimates of a flattish performance (could be led by a much stronger performance across lighting, TVs and washing machines).

 Margins - Gross margins improved sharply by 130bps to 11.8% which could be explained by higher share of ODM vs OEM revenue indicating a better mix. EBITDA margins also improved 100bps to 5.5% despite higher other expenses.

- Earnings - PAT growth of 22% was lower than EBITDA growth of 42% owing to lower tax rate in the base quarter.

- Increase in debtors - On the balance sheet side, a sharp increase in receivables was a noticeable item, rising from Rs 5.2bn to Rs 10.7bn, which should be clarified in the investor call.

- Valuation and view - The earnings beat in the quarter reiterates the multiple growth and margin levers that Dixon enjoys. While lighting and washing machine segment was slow as expected given the disruptions till July, TVs grew a sharp 30% with new client additions further improving growth visibility. Entry into fully automatic washing machines, outdoor lighting, Set top boxes are other key drivers in addition to accelerated work on the mobile PLI license where the company is in final discussions with 3 large global brands. Margins are also set to improve with more backward integration planned in TVs and eventually mobiles. These numbers increase our conviction on Dixon's execution and scalability capabilities across segments. We retain our estimates for now and reiterate BUY with a TP of Rs 11,056 based on 32x FY23E earnings.

Quarter highlights

- Management comments - Margin improvement across key segments led by better mix, operating leverage, cost efficiencies and value engineering; Healthy growth momentum with a strong order book; Dixon to be key beneficiary of outsourcing trends and domestic manufacturing in consumer durables; focused on prudent backward integration and ODM solutions to enhance margins and customer stickiness; target 30% plus and 25% plus ROCE/ROE.

- TVs segment - Revenue up 30% despite a weak July; margins up 40bps to 2.8% due to increasing scale, backward integration and higher screen sizes; capacity increased to 4.4mn TV sets to meet strong order book; further expanding to 5.5mn by FY21-end given prohibition of imports; trying to increase ODM share; added VU, One Plus recently which will begin production in Nov, 4Q.

- Lighting segment - Revenue up 4%, margins up 130bps to 9.4% due to operating leverage and increase in ODM share to 90% from 84%; 215mn LED bulbs capacity (40% of Indian requirement), expanding batons capacity to 2mn per month by November; downlighters to 1.2mn per month by 1QFY22; pilot consignments sent to international markets for Philips; one-third capacity to be automated in 3Q itself; venturing into outdoor lighting by 1QFY22.

- Home Appliances segment - Revenue up 4%, margins up 10bps to 11.9%; added new line to meet festive demand; 1.2mn capacity for semi-automatic; top loading expansion plant to start by 4Q with 30 variants (0.6mn capacity); will increase localization to 70% in 18-24 months.

- Mobile/EMS segment - Revenue up 2% (STB was 35crs (5.2 lac boxes and strong order book) and Medical Equipment 1cr), margins up 610bps to 8.2% given Samsung 2G phone business; strong order book at Padget Electronics.

- Mobile PLI - Base revenue for FY21-25 for getting incentives is 500,1000,2000,3500,5000cr and ceiling revenue is 2000,4000,6000,8000,10000cr; target 15-16mn capacity vs 3mn capacity today; 2 lac sq ft facility leased in Noida; will start in January 2021; final discussions with 3 large global brands in addition to current anchor brands for both domestic and global markets; confident of generating 28-30k cr revenue over 5 years with strong ROCEs; confident of availing incentives in FY21 by meeting base level of revenue.

- Security systems segment - Revenue down 9%, margins up 50bps to 2.9% due to fixed cost reduction.

- Reverse logistics - Revenue down 5%, margins down 860bps to 10.2%.

Shares of Dixon Technologies (India) Ltd was last trading in BSE at Rs.9311 as compared to the previous close of Rs. 9046.4. The total number of shares traded during the day was 2267 in over 1280 trades.

The stock hit an intraday high of Rs. 9428.2 and intraday low of 9025.05. The net turnover during the day was Rs. 20977436.

Source : Equity Bulls

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