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Dixon Technologies 3QFY23 results reported sharp miss on JMFe as well as consensus estimates. Net sales declined significantly by 21.8% YoY (30% miss on JMFe; 33% lower vs consensus), while EBITDA was up 8% YoY, led by better gross margins (11% in 3QFY23 vs 8.4% in 3QFY22), as decline was mainly in OEM segments (TV and mobile). EBITDA margin for the quarter was up by 130bps YoY to 4.6%, which came on the back of better margins across segments sequentially. PAT came in at INR 512mn, up 10.4% YoY. Management reduced annual revenue guidance to ‘INR122-127bn’ vs ‘INR140-150bn’ earlier with sustenance in EBITDA margin at 4%+. However, they expect a recovery in FY24E (INR190- 200bn) on the back of a) ramp up in PLI revenues with strong growth outlook in new segments (refrigerators, FATL, wearables, IT hardware, telecom), b) recovery in LED TVs with new customer addition and Android TV sub-licensing and c) addition of two new customers in mobile segment to elevate revenue and margins. We cut our earnings forecast by 12-16% to factor in demand weakness, resulting in 40% EPS CAGR over FY22-25E vs 43% CAGR in last 3 years. We maintain BUY with revised TP of INR 4,000, as we cut our target PE multiple to 45x Mar’25E (vs 50x earlier) as we are likely to witness near term weakness.

* Subdued performance across segments: Net sales were down 22% YoY to INR24bn; lower revenue growth is largely on the back of slower ramp up in mobile segment (-2.6% YoY) and subdued performance in segments like consumer electronics (-39% YoY), lighting products (-39% YoY). However, decent performance in segments like home appliances (+36% YoY) and security systems (+5% YoY) supported sales to certain extent. De-growth in mobile segment was due to weak export sales (by Motorola) and weak festive 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: EBITDA was up by 8% YoY to INR 1.1bn, largely led by better gross margins, operational efficiencies and higher revenue contribution from ODM business (washing machine and lighting) at 24% of sales in 9M vs 20% last year. Reported EBITDA margin improved by 130bps YoY to 4.6%. Barring security systems (1.7%, -250bps YoY), margins have sustained across other segments, mobile (3.6%, 60bps YoY), lighting products (9.1%, +260bps YoY), home appliances (10.2%, +350bps YoY) and consumer electronics (3%, +90bps YoY). ? Anticipating revenues of INR190-200bn in FY24: The company trimmed its FY23 revenue guidance to INR122-127bn (INR140-150bn earlier), but expects to clock revenue of INR190-200bn in FY24 on the back of a) ramp up in mobile business with addition of two new customers, b) healthy order book in consumer electronics where it anticipate to double FATL volumes, c) exports opportunities in lighting business to UAE and USA d) ramp up in IT hardware business, wearable and hearable business.

* Maintain BUY with revised TP of INR 4,000: We expect sales/EPS CAGR of 28%/40% over FY22-25E, as we cut our earnings forecast by 17%/14%/12% for FY23/24/25E and expect near term weakness to persist. We maintain BUY with TP of INR4,000 valuing the stock at 45x Mar’25E EPS (vs 50x earlier). Key risk: loss in key customer’s market share.

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