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Broadening revenue streams…

About the stock : Dixon Technologies is India’s leading electronic manufacturing (EMS) provider and one of the largest beneficiaries of the government’s PLI scheme.

* Dixon operates in both original equipment manufacturing (OEM) and original design manufacturing (ODM)

* Strong RoE, RoCE at ~20%, ~24%, respectively (three year’s average)

Q1FY22 Results: Adverse product mix and operating leverage impacted the EBITDA margin.

* Revenue grew ~261% YoY to | 1867 crore aided by customer addition and lower base

* EBITDA margin contracted ~70 bps to 2.6% due to a change in product mix with higher contributions from products with lower margins, adverse operating leverage and higher input costs

* PAT increased to | 18 crore (9x growth YoY) favoured by a low base and higher revenues

What should investors do?

Dixon’s share price has grown by ~8x over the past three years (from ~| 566 in July 2018 to ~| 4,380 levels in July 2021).

* We maintain our BUY rating on the stock

Target Price and Valuation: We value Dixon at | 5050 i.e. 52x P/E on FY23E EPS

Key triggers for future price performance:

* Indian EMS industry is valued at ~$23.5 billion and Dixon currently has a market share of ~3-4%, which leaves opportunity to expand and grow

* Domestic mobile production is set to grow 5x under the PLI scheme. Dixon is one of the main beneficiaries

* New segments such as electronics/IT products, telecom products and LED lights & AC component will drive future revenue for Dixon

Alternate Stock Idea: Apart from Dixon, we also like Havells in our coverage

* Trigger for Havells’ future revenue growth would be a revival in Lloyds revenues and improvement in margin

* BUY with a target price of | 1345

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