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Published on 6/07/2020 4:31:19 PM | Source: SPA Securities Ltd

Buy Dixon Technologies Ltd For Target Rs. 5700 - SPA Securities

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On the back of COVID impact, Revenue remained flat YoY at INR 8,574mn. But for COVID impact, revenue would have grown 19%. During Q1FY21, Dixon got approved by ICMR for manufacturing testing devices for 27 diseases including COVID & TB marking its entry into medical electronics segment. However, EBITDA jumped 50% to INR 561mn despite absorbing INR 100mn impact of COVID as well as INR 45mn impact of Forex loss. Gross marginsrose by an impressive 340bps to 15.8%. PAT registered a steep increase of 68% to INR 275mn despite COVID impact of INR 70mn during the quarter.

Revenue remained flat at INR 8,574mn on YoY basis

On the back of COVID impact, Revenue remained flat YoY at INR 8,574mn. But for COVaID impact, revenue would have grown 19%.Revenue from LED Light SBU fell16% to INR 2,548mn and Washing Machine SBU registered 3% drop in revenue to INR 900mn whereas that of LED TV SBU rose22% to INR 3,930mn.

 

Gross Margin rose by an impressive 340 bps YoY to 15.8%

Apart from softer commodity prices, shift to business model of mobile SBU on job work basis contributed to sizeable increase in gross margins to 15.8%, up 340 bps. Elevated gross margins percolated down to higher OPM to the tune of 210bps to 6.5%. EBITDA jumped 50% to INR 561mn despite absorbing INR 100mn impact of COVID as well as INR 45mn impact of Forex loss.Amongst all its SBUs,LED Light SBU registered a whopping 290bps increase in EBITDAM to 10% led by rising proportaion of revenue from ODM platform to as high as 94%. Staff cost as a % of revenue rose 40bps to 3.6%. Similarly, Other Expenses as a % revenue rose to 5.7%, up 80bps. PAT registered a steep increase of 68% to INR 275mn despite COVID impact of INR 70mn during the quarter. Mehul Mehta mehul.mehta@spasec.in Ph. No. 91 22 4289 5600/ Ext. 605

 

Outlook & Valuation

We fine tune our revenue estimates in the light of disruption due to COVID & OPM estimate led by sharp uptick in profitability despite forex impact & lower operating leverage. Revenue & PAT are estimated to compound annually at 18%&48% respectively during FY20- 22. Dixon is a leading player in EMS segment across LED TVs, WMs & LED Lights with dominant market shares. Rising contribution to revenue from ODM segment & richer product mix should enable it to expand profitability. Again, cash surplus BS as well as Free Cash Flow (FCF) generating nature of operations should enable it to grow inorganically by adding new product categories (presently considering refrigerators and fans). At INR 5570 the stock is trading at 23.4x FY22E EPS & we downgrade the stock to HOLD from BUY on the back of steep run up in price with PT of INR 5700(25x FY22E EPS from earlier 22x on the back of significant traction in OEM/ODM activities across its customer segments).

 

Key Risks

* Raw Material/Component supply chain is at risk with recent disruption due to COVID globally

* Volatility in input costs

 

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