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Long term growth outlook remains intact

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)

Q2FY22 Results: Strong revenue growth, price hike delay weighs on gross margin

* Revenue grew ~71% YoY to | 2803 crore aided by strong growth in the mobile & EMS segment

* Gross margin declined 290 bps to 3.9% due to a delay in price hikes and higher contributions from products with lower margins. EBITDA margin declined 153 bps YoY to 3.9%

* PAT increased 20% YoY to | 63 crore supported by strong revenue growth

What should investors do? Dixon’s share price has grown by ~9x over the past four years (from ~| 531 in October 2017 to ~| 4,999 levels in October 2021).

* We maintain our BUY rating on the stock

Target Price and Valuation: We introduce FY24E estimates and rollover our valuation on FY24E. We value Dixon at | 5990 i.e. 51x P/E on FY24E EPS

Key triggers for future price performance:

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

* Domestic mobile production is set to grow 5x to | 10.5 lakh crore by FY26 under 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 | 1545

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