New customer wins continue
* Dixon’s revenues were in line with expectations, while EBITDA beat the estimates, driven by gross margin expansion (336bps yoy and 297bps qoq) and full contribution from Samsung feature phones.
* EBITDA beat was supported by Consumer Electronics, Lighting and Mobile segments. The company ended FY20 with strong cash generation, improved working capital cycle and net cash balance sheet.
* Dixon continues to add new customers in key product categories. There is still a lack of clarity on sustenance of consumer demand once the pent-up demand is absorbed. Large order wins under the mobile PLI scheme is the key near-term catalyst.
* We have raised FY22 revenue and EBITDA forecasts by 8%/10% on new order wins in consumer electronics. We maintain Buy, with a revised TP of Rs5,705 (30x FY22E EPS) and an OW stance in EAP.
Gross margin expansion and mobile segment contribution led to EBITDA beat
Consolidated revenue was flat yoy at Rs8.6bn due to the Covid-19-led lockdown. Consumer electronics delivered strong growth of 21.6%, while lighting products/home appliances/mobile phones/security systems registered a decline of 16.4%/2.7%/9.9%/20.5%. EBITDA rose 49% yoy to Rs559mn, with EBITDA margins of 6.5% (+215bps yoy). Gross margins inched up to 15.8% (+336bps yoy), driven by inventory write-back. Employee cost and other expenses increased 13% and 16% yoy to Rs308mn and Rs485mn, respectively. PAT stood at Rs276mn, up 67% yoy on lower ETR and healthy operating performance.
Management is confident of sustaining medium-term growth through increased wallet share of existing customers and new order wins. Continued order wins in consumer electronics, Home appliances and mobile will also reduce dependence on large customers. Management is upbeat on the Mobile business in FY21. It has added new customers in smart phones. Weak demand in washing machine could keep growth in check. Incremental EBITDA from the mobile business will drive growth in FY21, while commodity price movement would also track gross margin performance. PLI scheme could be a game changer if Dixon is able to add large customers. We have not yet factored financial impact of mobile PLI scheme into our estimates. Key risks: Sustained macro slowdown impacting consumer durables demand, prolonged labor availability issues, adverse currency movement and any customer loss.
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