ICICI Direct - Stock Tales - Dixon Technologies (India)

Dixon Technologies (DTL) is India's leading electronic manufacturing service (EMS) provider to various multinational/domestic companies in India. The company is one of the biggest beneficiaries of the government's production linked incentive (PLI) scheme for mobile phones and other electronic products. We believe PLI benefits will start flowing in from Q4FY21E onwards while in future DTL's mobile revenue will grow multi-fold (~14x jump) over FY20-23E. DTL has also applied for PLI in the lighting, electronic wearables and other electronic products (laptop/notebooks). This opens up a significant growth opportunity for DTL, going forward (we see 4x jump in revenue FY20-23E). Further, prudent working capital management and future expansion through internal accruals will keep balance sheet light and return ratios elevated (RoE: 39%, RoCE: 44%) for DTL, going forward.

Strong play in emergent domestic EMS industry

The Indian electronic manufacturing services (EMS) industry is likely to grow at a CAGR of 45% over the next five years to become a ~US$152 billion (bn) industry. We believe the China+1 strategy by various MNCs alongside various government measures will help boost domestic EMS industry, going forward. DTL being one of the largest EMS players, is well set to reap the benefits of said growth opportunities. The company's manufacturing capacity in the LED TV, washing machines and LED lighting can serve ~26%, 28% and 45% of total domestic requirements (in volume term), respectively.

Focus to improve ODM for customer retention

DTL's share of original design manufacturer (ODM) revenue has increased from 22% in FY17 to 34% by FY20, which has also helped in ~140 bps expansion in EBITDA margin. DTL plans to increase ODM revenue share in consumer electronics from current 6% to 15% in the next two years, which will help drive segment EBITDA margin higher. However, overall EBITDA margin is expected to remain flat in FY20-23E considering a significant rise in revenue from mobile business (OEM model).

Lean balance sheet supports strong RoEs, RoCEs

DTL has registered healthy RoE, RoCE of 22%, 26%, respectively, in FY20. The future capex will largely be funded through internal accruals. We believe prudent working capital management and higher asset turn in the mobile business will result in higher RoE, RoCE, going forward.

Valuation & Outlook

We believe significant future growth potential in domestic electronic manufacturing coupled with DTL's plan to increase backward integration can bring in more customers and would lead to a revenue & earnings CAGR of 56% & 66%, respectively, in FY20-23E. We believe DTL may continue to command premium valuation due to its significant future growth opportunities, high return ratios and lean working capital days. We assign a BUY rating to the stock with a target price of Rs. 4270/share, valuing the company at 45x FY23E earnings.

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Shares of Dixon Technologies (India) Ltd was last trading in BSE at Rs.3624.65 as compared to the previous close of Rs. 3588.5. The total number of shares traded during the day was 29524 in over 5519 trades.

The stock hit an intraday high of Rs. 3800.4 and intraday low of 3560. The net turnover during the day was Rs. 107709099.

Source : Equity Bulls

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