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Strong customer acquisitions across segments

Takeaways from Q2FY22: (1) Dixon reported strong growth across segments. Commencement of mobile contracts, healthy growth in consumer electronics and price hikes were primary reasons for higher growth, (2) Due to unfavorable revenue mix, gross and EBITDA margin declined 290bps and 153bps YoY, respectively. The input price inflation continues to remain high and (3) It continued to add new customers in across segments. To meet capacity requirements, the company plans to invest Rs3.2bn in capex in H2FY22. We model Dixon to report PAT CAGR of 55.9% over FY21-FY24E with improving return ratios. While we remain structurally positive on Dixon due to its competitive advantages and growth opportunity, we believe stock price upside is capped at current valuations. Maintain HOLD with TP of Rs5,200 (50x FY24E).

* Q2FY22 performance: Dixon reported revenue, EBITDA and PAT growth of 71.1%, 23.1% and 19.6%, respectively, YoY. Two-year revenue and PAT CAGR were 41.4% and 20.6%, respectively. We believe (1) strong growth across segments, (2) uptick in mobile business revenues post commencement of Motorola and Nokia orders and (3) mid-high single digit price hikes across products led to the strong revenue growth. Gross margin declined 290bps but EBITDA margin decline was arrested to just 153bps due to cost-saving initiatives and operating leverage.

* Healthy growth across segments: Segment-wise YoY revenue growth rates were as follows: Consumer Electronics 55.3%, Lighting 33.8%, Home appliances 54.1%, Mobile and EMS 203.2% and Security systems 149.4% YoY. EBIT margin declined in all segments except security systems. However, we believe normalization of revenues and operating leverage will likely lead to better margins ahead.

* New customer additions: Dixon has started working with Boat brand for hearables and wearables. It on-boarded a new customer (tier 2 branded) for semi-automatic washing machines and added three customers for fully-automatic machines. The company will also cater to Samsung on consignment basis.

* Strong growth in Mobile and EMS segment: Dixon will continue to benefit with steady increase in mobile production in India. While it already serves Nokia and Motorola, the company also entered into a contract with Samsung (for smartphones) on a consignment basis. With PLI benefits and with competitive advantage of low cost manufacturing, we expect Dixon to be major beneficiary.

* Maintain HOLD: We model Dixon to report PAT CAGR of 55.9% over FY21-FY24E and RoE to be upwards of 30% over FY23-24. We remain positive on the company’s business model due to strong competitive advantage and growth opportunities. Maintain HOLD with a DCF-based target price of Rs5,200 (implied P/E 50x FY24E).

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