Advantage contract manufacturers: Dixon remains our top Buy
* The government’s increased focus on domestic electronic manufacturing, intent to create an ecosystem for value additions and the potential rise in import duties augur well for contract manufacturers as these measures will increase their scope of business.
* Electronic manufacturing: India’s focus on policy relaxation, favorable corporate tax structure, lower wages and the China ‘plus one’ strategy of global brands should attract investments in electronics manufacturing under the mobile PLI scheme. This should result in increasing India’s share in global mobile manufacturing from 3% now. The government is also targeting to increase the share of value addition to 25% by 2025 from current 10%. This should also increase mobile exports from current 36mn units.
* Air Conditioners: Potential import duty increase on RACs and favorable manufacturing policies/incentives (like Mobile PLI) are key for volume shift from China apart from the China ‘plus one’ strategy adopted by brands. This could be positive for contract manufacturers such as Amber although the visibility on export orders is lacking as of now.
* China enjoys a lion’s share in global RAC exports with 36% share. Its strong component ecosystem with large manufacturing scale will always remain an advantage. China is one of the largest manufacturers of RAC compressors, and this shifting out of China would not happen in the near future, in our view.
* As highlighted in our earlier report (link), Dixon will be one of the biggest beneficiaries of the mobile PLI scheme. Our interaction with management suggests that it has received strong interest from various mobile brands.
* With better visibility, we have incorporated revenues from the mobile PLI scheme (only the upper ceiling prescribed by the government to avail incentives), set-top-boxes and medical equipment, resulting in us raising Dixon’s FY21-23E EBITDA by 14-40%.
* For Amber, the improvement in asset turn and ROE with potential wins in exports and the commercial AC segment are key. The underlying RAC market share gains are already captured in our estimates. We retain Buy on Dixon with a revised TP of Rs8,420 (30x Sept’22E EPS) and Hold on Amber with a revised TP of Rs1,424 (22x Sept’22E EPS).
China ‘plus one’ strategy by global firms: China has the biggest pie of global electronics manufacturing, with ~50% share and mobile phone exports share of 47%, while India’s share is just 1.2%. China is also the largest RAC exporter in the world and the largest compressor manufacturer along with other components ecosystem as well. However, rising labor costs and the global trade war are forcing various global brands to adopt a China ‘plus one’ strategy. India could be one of the beneficiaries from this shift, with a favorable policy structure to develop a manufacturing ecosystem, lower corporate tax rate and lower cost of labor.
Benefit for India: The government’s focus to increase its share in electronics manufacturing through the mobile PLI scheme has received strong interest from both domestic and international players (according to media). Further, this time many companies are also investing in component manufacturing, which should enhance the manufacturing ecosystem and augur well for export opportunities.
Valuations: Valuations are expected to remain high for both Dixon and Amber given the strong earnings visibility and increased focus of brands on outsourcing manufacturing along with opportunity on the exports side. In our view, Amber’s re-rating depends on large export order wins and market share gains in the commercial segment, while a large part of the market share gains in the domestic RAC segment is already baked into our estimates over FY20-23E.
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