Dixon Technologies India - Strong show; medium-term growth priced-in - ICICI Securities

Most positive triggers such as higher revenue growth in TV, PLI-driven revenues in mobiles, traction in 2G phones/set-top boxes, capacity-driven growth in LED lights, washing machines and TV, are already factored into our estimates. Near-term challenges include the possible margin overhang in ODM business (washing machines) with higher commodity prices. Post 38% rally in the stock price since 3rd Dec'20, we downgrade the stock from Buy to HOLD, with a revised target price of Rs14,919 based on 40x FY23 EPS (Sep'22 earlier; no change in earnings or multiple).

- ODM business model can be impacted due to pricing lag amid rising commodity prices as seen before (WM in H1FY19). The current spike in commodity prices therefore provides near-term margin overhang. Mobile margins would also face ramp-up challenges.

- Lighting continues to offer strong growth optionalities. The segment has growth levers in higher capacity (new factory coming up), better mix (increase in volumes of downlighters/batons), new geographies (US/Indonesia) as well as new categories (streetlights/decorative lights). Dixon reported ~Rs666mn segmental revenues in 9MFY21. We factor-in Rs1/1.3bn/2bn EBITDA in FY21E/FY22E/FY23E.

- Consumer electronics (TV) has volume as well as margin levers. Capacity is expected to increase from 4.4mn to 5.5mn with increasing mix of ODM share (6% in Q3FY21 vs average 3% over the last five quarters). Company is also working on new modules such as back lighters and injection molding. Volumes too are incrementally broad-based with Samsung/Xiaomi constituting 75% of the mix. Dixon reported segmental revenues at Rs746mn in 9MFY21. We factor-in Rs1bn / 1.4bn / 1.8bn EBITDA in FY21E / FY22E / FY23E.

- Mobile-plus category (set-top box + 2G phone + medical equipment) will now have to garner the PLI revenues. Dixon reported Rs3bn revenues in Q3FY21 split between Rs800mn in STB/medical equipment and ~Rs2.2bn in 2G sets. Based on this run rate and assuming PLI revenues of Rs1.2bn / 3bn in FY22E / FY23E, we expect total revenues of Rs24bn / 45bn in FY22E / FY23E with EBITDA margins of 3.25% / 3.75%. New clients beyond Nokia/Motorola can give positive surprise.

- Washing machine segment has volume (additional semi-automatic, fully automatic capacity), but near-term high commodity prices and a 100% ODM model can provide near-term headwinds. Dixon has reported Rs295mn segmental EBITDA in 9MFY21. We factor Rs450bn/661bn/794mn EBITDA in FY21E/22E/23E.

- Can Mobile PLI surprise on the upside or downside? Management retains its guidance of total Rs250bn-300bn revenues under mobile PLI scheme over the next five years with an EBITDA close to ~3%. Motorola orderbook itself is expected to be sufficient in catering to the PLI thresholds for Dixon. While Motorola is expected to cater mostly to export markets, Nokia will look towards domestic markets. Dixon remains in advanced talks with other large brands.

Shares of Dixon Technologies (India) Ltd was last trading in BSE at Rs.15716.9 as compared to the previous close of Rs. 15172.25. The total number of shares traded during the day was 6809 in over 2803 trades.

The stock hit an intraday high of Rs. 15883.2 and intraday low of 15322.3. The net turnover during the day was Rs. 106131504.

Source : Equity Bulls

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