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Opportunities galore; execution remains key

* Q4 performance was in line with impact of commodity cost headwinds on ODM businesses (Lighting and Home appliances) and ESOP expense of Rs80mn. The TV business continued to see better product mix with higher demand for large screen sizes.

* Gross margins were impacted by the lag in passing on input costs to customers in ODM businesses and adverse revenue mix. Revenues from TV and Lighting in Q4 were marginally affected by components supply and demand moderation, respectively.

* Supported by a robust order book, the company continues to expand capacity in key segments. Management remains confident of achieving the upper ceiling of revenues under the Mobile PLI in FY22, and exports will also start in a few weeks.

* LED monitor manufacturing and plans to participate in the RAC PLI adds to current growth levers. We incorporate revenues accruing from the PLI schemes and Refrigerator category into our estimates. Retain Buy with a revised TP of Rs4,500 (45x Sep’23E EPS).

In-line revenues; one-time charge impacts profitability: Revenues rose significantly to Rs21.1bn, with all segments, except for reverse logistics, registering strong growth. EBITDA – though in line with our estimate by recording 43% yoy growth – was adversely affected by an Rs80mn expense stemming from ESOPs. Adjusting for this, EBITDA beat our estimates significantly. PAT grew 61% yoy, supported by higher other income. Revenues of the Consumer electronics and Lighting businesses saw 200% and 50% yoy growth, respectively, with the latter beating our estimates by 10%. The performance of the Mobile and EMS divisions was below expectations, with EBITDA impacted by higher fixed overheads.

Outlook: We have now incorporated revenues accruing from various PLI schemes (Telecom, Lighting and IT Hardware), as well as from LED monitor manufacturing and Refrigerator expansion. Increasing focus on exports in key segments augurs well for reducing the dependency on domestic revenues. Diversification, increasing scale and management’s focus on deploying global best practices in the organization in collaboration with renowned consultants should benefit in the long term. Continued capacity expansion in business segments indicates strong order book, which in turn provides strong revenue visibility. With the majority of revenues coming from MNC brands, Dixon has already showcased its capabilities on product quality and execution. However, with exports starting at a global scale for the first-time would require sharper execution focus as company has multiple business opportunities to execute at the same time. We have cut FY22 EBITDA by 7% due to ongoing covid related disruptions. Key risks: adverse currency and continued commodity price inflation; customer loss and execution challenges; and rise in competitive intensity in the contract manufacturing space.

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