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New growth levers building up but valuation remains stretched; maintain ADD

Our view

1Q saw execution challenges on account of the pandemic impacting demand for various product segments. Dixon also had to face supply chain issues which resulted in lower than expected production volumes. Gross margins were impacted as there has been lag in passing on increased commodity prices. Dixon is expected to return to its strong growth momentum as 1) Order book continues to remain healthy; 2) New capacities coming up across key product categories; 3) Revenues from new product categories like wearables and top-load washing machines and; 4) Entry into new product categories like laptops/tablets, Telecom products and Refrigerators.

We believe growth for Dixon should not be a challenge as there is huge domestic market for the products they are into and many global MNC’s are looking to de-risk their production to India where Dixon is coming through as a partner of choice. We build-in FY21-24E Revenue/EBITDA/PAT CAGR of 88%/79%/87% and arrive at a PT of Rs4,725 valuing it at 50x FY24 EPS and maintain our ADD rating as stock has seen a strong run-up in recent past and valuations are quite rich. We will turn more constructive once the near-term demand and supply chain headwinds are behind us and we get more details on multiple PLIs where the company has applied.

Result Highlights

* Growth across segments – Dixon’s strong growth across business segments was aided by a favourable base, resilient demand for television and manufacturing of Mobile phones under PLI Scheme. Consumer Electronics/Lighting products/Home Appliances/ Mobiles Phones/Security systems grew 263%/98%/193%/476%/462% yoy.

* Margins – Gross margins contracted 458bps yoy, and 273bps sequentially. Contraction in gross margin is primarily on the back of lag in passing of increased material costs to customers and change in business mix towards OEM.

* Order book – Dixon continues to have a healthy order book position across existing business verticals which will enable it to accelerate growth momentum from Q2 onwards. Dixon continues to add new customers apart from increasing revenue from its existing customers

* Working capital and operating cashflow – Dixon continues to efficiently manage its working capital which continues to be in range of +3 to -3 days. It is expected to incur capex of Rs2000mn in FY22 as it is looking for opportunities in various PLI schemes apart from expanding capacities in its existing business.

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