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Strong beat led by TVs and lighting; exploring more PLI schemes after mobiles; reiterate ADD

Dixon Technologies delivered a significant beat led by broad‐based growth across verticals (especially TVs and lighting) given improved consumer sentiment and strong festive demand for electronics. Its revenue visibility for FY22 and beyond keeps getting better with addition of new clients and full order books necessitating further capacity expansions in multiple segments. While RM headwinds on account of component shortage can limit revenue growth and impact margins in the near term in the ODM business, the OEM business should keep exhibiting strong growth trends. The management is confident of delivering well above ceiling revenues in the mobile PLI segment and is also looking at benefitting from upcoming PLI in other products like lighting, wearables, laptops and set top boxes. Due to component availability issues, no company including Dixon will be able to meet threshold revenues in FY21 under the mobile PLI scheme, and have therefore requested the government for an extension. The company remains focused on ramping up its execution skills by strengthening its talent base and more backward integration wherever possible. After achieving global cost competitiveness in lighting and washing machine segments, it is exploring global opportunities in these products. We increase our FY22 and FY23 EPS estimates by 16% and 12% respectively to factor in better realizations in TVs and higher growth rates in washing machine and lighting segments. The recent outperformance has made valuations quite rich with further up move now expected once execution of the mobile PLI business starts and details on PLI in other products are announced. We will wait till then before ascribing an even higher multiple to the stock which currently has plenty of growth opportunities and triggers. While we remain structurally positive on the story, would wait for better entry points in the stock and reiterate our ADD rating with a PT of Rs 15,430 based on 40x FY23E earnings.

Management commentary

* Quarter highlights – Margin contraction led by inferior segment mix, higher share of business from LED TVs and input cost pressures while scale benefits helped offset GM contraction; growth broad based led by improved consumer sentiment and festive season; orderbook and revenue visibility remains strong for FY22; while demand remains strong, RM headwinds remain with sharp price inflation and component shortage which can continue in near to medium term impacting ODM business margins, frugal cost structure and increasing scale should help, will be taking calibrated price increases and looking at better inventory planning; will keep entering new verticals with opportunities opening up.

* LED TVs – Revenue +199% led by volume and pricing growth, EBITDA +243% with margins increasing from 2.5% to 2.9% given operating leverage, higher backward integration, large screen size TVs of 42” and above, import restrictions on LED TVs, currently have 4.4mn capacity which is being expanded to 5.5mn by 2QFY22 before festive period (40% of India’s requirement), automated 65” integrated line (40% of India’s requirement), further adding to SMTP and PCBA capacity (2.8mn PCBA), also developed android solutions.

* Lighting – Revenue +26% and EBITDA +39% with margins increasing from 8.6% to 9.5% led by operating leverage, more ODM solutions, value engineering and productivity improvement; large wallet share with all key customers, LED bulbs 300mn (45% of market), battens 2mn per month capacity further expanding to 3mn and 4mn per month in 2 phases(40‐45% of market), downlighters 600k current capacity expanding to 1.2mn per month now; now setting up another factory for lighting which will be operative by 3QFY22, now among top global players in few SKUs, exporting for Philips to US and Indonesia, completed 33% automation to reduce manufacturing cost, looking at street lighting entry by 2QFY22.

* Home appliances – Revenue +68% and EBITDA +28%, margins down due to lag in passing on increase in input prices and freight rates, 4Q margins would also be under pressure; order book strong, expanding at a new site in adjacent plot, semi‐automatic capacity will be increased from 1.2mn to 1.6mn; fully automatic top load almost complete, trials beginning from early March with capacity of 600k pa; will have a combined 2.2mn capacity vs Indian demand of 7‐7.5mn.

* Mobile phones and EMS – Revenue +114%, STB and medical devices contributed 69cr and 11cr respectively, EBITDA +328% with margins improving from 2.3% to 4.6%, closed agreements with Motorola and Nokia for mobile PLI; Nokia production already started, Motorola production should start by end Feb or early March, new factory already set up, trials started, 50cr already spent. 20mn pa smartphone capacity in 2 years, 25‐28k cr revenue in 5 years with 3% EBITDA margin after some ramp‐up challenges, will do revenue much beyond ceiling revenues,  not having own brand big advantage; exploring charges, batteries and camera backward integration; 9lac STB manufactured, 3‐4 lac per month order book; wearables PLI scheme will also be explored.

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