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Strong volume recovery drove the beat; margins yet to normalise

Dixon Technologies 2QFY23 results were ahead of JMFe. Net sales grew 38% YoY (8.5% ahead of JMFe), while EBITDA was up 32% YoY (12% above JMFe). EBITDA margin improved sequentially by 30bps to 3.8% (-20bps YoY), largely led by recovery in ODM sales (Lighting and Home Appliances). PAT came in at INR 771mn, up 23% YoY (8% above JMFe). The company saw healthy bounce back in volumes in TVs (+54%), ramp up in fully automatic WMs (+98% QoQ) and step up in mobile phone revenue to Samsung (+53% QoQ). Over last 3 years, sales/EBITDA/PAT grew by 40%/32%/22% CAGR respectively. Management maintained FY23 guidance of 40% sales growth and 3.8-4% EBITDA margin, but added that conversion of a large customer in mobile phone segment may present an upside. Revenue under PLI scheme continues to ramp up and we believe medium term growth outlook remains intact as new segments ramp up (refrigerators, FATL, wearables, IT hardware, telecom hardware, AC PCBs). Also, we expect Dixon to outpace peers due to a) recent grant of Android sub-license to drive ODM product development, b) backward integration across categories to expand margins and c) its scale benefits (2x No.2 and 6x No.3 player) make it top contender for export opportunities. We roll forward by 6 months to arrive at TP of INR 5,000 (50x Mar’25E EPS) as we estimate 46% EPS CAGR during FY22-25E.

* Strong growth in select categories: Net sales were up 40% YoY to INR 38.7bn, led by pick up in Mobile (+166%YoY), Home Appliances (+62% YoY) and Security Systems (+20% YoY), while revenues were weak in Lighting (-27% YoY) and Consumer Electronics (flat YoY due to 36% drop in realisations). Growth in mobile segment was driven by ramp up of production for Motorola (1mn units), Nokia, Samsung and Itel. In Consumer Electronics, revenue dip was due to lower realisations in LED TVs (down to INR12,000 vs INR19,000 earlier), mainly due to correction in open cell prices.

* Margin continues to remain under pressure: EBITDA was up by 32% YoY to INR 1.5bn (12% above JMFe), largely led by revenue growth in mobile segment. Reported EBITDA margin improved by 30bps QoQ to 3.8% (-20bps YoY). Barring Mobile (2.7%, -60bps YoY) and security systems (3.0%, -110bps YoY), margins have sustained across other segments, Lighting products (8.2%, +20bps YoY), Home Appliances (9%, +50bps YoY) and Consumer Electronics (2.9%, +40bps YoY). PAT was up 24% YoY to INR771mn.

* Refrained from increasing guidance: Management maintained its FY23 guidance: revenue at INR150bn (+40%) and margins in 3.8-4% range, as a) open cell price erosion led to muted value growth in LED TVs, despite strong growth in volume recovery, b) ramp up of new businesses was delayed by few months, which would shift revenues to next financial year and c) slowdown in mobile market led to delay in contracts from anchor customers. However, it added that conversion of a large mobile OEM may present an upside.

* Maintain BUY with revised TP of INR 5,000: We expect sales/EPS CAGR of 31%/46% over FY22-25E, as we expect revenue ramp up in new business segments under PLI scheme and recovery in margins from ODM business. We roll forward to Mar’24 TP of INR5,000 valuing the stock at 50x Mar’25E EPS. Key risk: loss in key customer’s market share.

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