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Growth outlook sustained in revenues and margins

Dixon Technologies 4QFY23 results reported beat on our and consensus estimates. Net sales grew by 4% YoY (in line with JMFe), while EBITDA was up 32% YoY (10% above JMFe), led by better gross margins, on higher share of ODM sales and roll out of price hikes. EBITDA margin for the quarter was up by 110bps YoY to 5.1% (JMFe: 4.7%), driven by better margins across segments. Management expects recovery in FY24E on the back of a) mobile segment, where company is in finalisation stage with two customers, which will lead to revenues in excess of INR60bn in FY24, b) volume growth of 12% in TVs and 20% in washing machines, where company is approaching new customers other than Bosch, c) ramp up in PLI revenues and strong growth outlook in new segments (refrigerators, FATL, wearables, IT hardware, telecom), d) recovery in LED TVs with new customer addition and Android TV sub-licensing. We maintain our forecasts as we forecast 44% EPS CAGR over FY23-25E vs 32% CAGR in last 5 years. We maintain BUY with TP of INR 4,000, based on 45x FY25E EPS, implying 1x PEG ratio.

* Revenues largely flat: Net sales were up 4% YoY to INR30.7bn, due to subdued revenue in consumer electronics (-3% YoY) and lighting segment (-11% YoY). However, decent performance in segments like mobile (+9% YoY), security systems (+13% YoY) and home appliances (+20% YoY) supported overall sales growth. Decline in consumer electronics and lighting segment was due to subdued demand. In consumer electronics, revenue dip was due to lower realisations in LED TVs (INR11,500 vs INR16,000 earlier), mainly due to correction in open cell prices.

* Better margins backed by higher ODM business and operating leverage: EBITDA was up by 32% YoY to INR 1.6bn, largely led by better gross margins, operational efficiencies and higher revenue contribution from ODM sales in TVs. Reported EBITDA margin improved by 110bps YoY to 5.1%. Barring security systems (3.2%, -20bps YoY), margins have sustained across other segments, mobile (4.2%, +60bps YoY), lighting products (9.6%, +250bps YoY), home appliances (11.0%, +310bps YoY) and consumer electronics (3.8%, +100bps YoY).

* Anticipating healthy growth across the segment: The company is anticipating strong growth across categories and expects revenues to double in next 4 years to INR220- 230bn. In FY24, growth would be on the back of a) ramp up in mobile business with addition of two new customers, b) healthy order book in consumer electronics (for Android TV platform) and improvement in open cell prices, c) a sharp increase in FATL washing machine volumes, d) exports opportunities in lighting business to UAE and USA and e) ramp up in new segments i.e. IT hardware, wearables and hearables.

* Maintain BUY with TP of INR 4,000: We expect sales/EPS CAGR of 31%/44% over FY23- 25E, as we build in ramp up in new facilities in existing segments (WMs, mobile phones, lighting) and sharp increase in new segments (telecom hardware, laptops, refrigerators). We maintain BUY with TP of INR4,000 valuing the stock at 45x Mar’25E EPS, implying 1x PEG ratio. Key risk: loss in key customer’s market share.

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