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Goldman Sachs estimates that Dixon Technologies will grow its revenue by 5X and its EBITDA by 5.5X over the next decade.


Over the last decade, global electronics manufacturing services (EMS) companies have grown revenue by about 1.5-2X, EBITDA by also 1.5-2X and market cap by about 1.5-2X (with exception of Wingtech where the growth has been multi-fold).

"We estimate Dixon will grow its revenue by 5X and its EBITDA by 5.5X over the next decade. If we assume market cap grows 5X in line with what global peers have seen - although not strictly comparable as most of the EMS companies were already mature - our Blue Sky scenario suggests almost 70 per cent upside from current levels - assuming no multiple compression," Goldman Sachs said.

"As India moves away from import of electronics to domestic manufacturing, we anticipate a paradigm shift in the growth of its home-grown EMS (electronics manufacturing services) companies. Under the 'Make in India' programme, we expect the recent policy boosters for electronics and component manufacturing in India to first support assembly, but long-term success will depend on developing a globally competitive supply chain. The key advantages India brings are a large domestic market and low manpower costs."

Goldman Sachs expects India's two largest EMS players, Dixon Technologies and Amber Enterprises, to be a long term story.

"While the shares are up 314 per cent over the last 12 months and trading at a FY23E P/E of 56.5X (vs global peers at 11.8X), we believe Dixon's strong growth and returns profile (we expect a revenue CAGR of 42 per cent over FY20-26E and ROCE of 30 per cent+) warrants premium multiples to sustain, but we see limited upside from current levels," Goldman Sachs said.

"In our Blue Sky scenario, we compare Dixon with some of the largest global EMS companies. We find that on average Dixon's peers are at least 39X larger than Dixon in revenue terms today, suggesting a significant growth opportunity for Dixon."

With most of these companies already well established by the early 2000s, over the last decade, they have doubled their revenue/EBITDA/market caps, with Hon Hai, the global leader in the EMS segment, gaining the most due to its strong partnership with Apple and market leadership across segments.

"In our base case DCF, we assume that over the next two decades, Dixon will achieve the scale its peers are at today (with the exception of Hon Hai). A like-for-like market cap/sales (P/S) comparison for Dixon vs peers shows that peers are trading at a 29 per cent discount to Dixon," the report said.

"Comparing Amber Enterprises to global majors, we present a Blue Sky scenario to compare Amber with some of the largest global AC companies. Most of the competition globally has shifted from ODM to branded manufacturer, and we find that on average Amber's peers are about 38X larger than Amber in revenue terms today, which suggests a significant growth opportunity," it said.

The other key attribute of these companies is the strong focus on exports. With most peers establishing themselves as global AC majors over the last decade, their market caps have increased by 4X over the last seven years led by Midea as it built its market presence across major product categories.

"While our growth assumptions are bullish, we have confidence in them. We expect that over the next two decades, Amber will achieve the scale some of its peers are at today," Goldman Sachs said.

"In our base case, we assume that by CY2035 Amber would reach the same revenue scale that Hisense has today (in terms of AC business) and by CY2037 the scale Haier has reached today (in terms of AC business)," the report said.

A like-for-like market cap/sales (P/S) comparison for Amber vs Hisense shows that Amber is currently trading at a 117 per cent premium to Hisense on a CY2021 basis given its strong near-term growth profile because of the PLI schemes in the AC sector, it said.

"Over the last 7 years, global AC companies have grown revenue by about 2X on average, EBITDA by about 3X and market cap by about 4X. We estimate that Amber will grow its revenue by 6X and its EBITDA by 7X over the next decade," Goldman Sachs said.

"Under our Blue Sky scenario, we assume market cap would grow 6X, in line with what global peers have seen (adjusting for growth), which would imply almost 100 per cent upside from current levels, assuming no multiple compression," the report said.

(Sanjeev Sharma can be reached at Sanjeev.s@ians.in)