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Add Dixon Technologies (India) Ltd For Target Rs.5,411

Growth outlook keeps getting better despite some margin headwinds; maintain ADD

Our view

Revenue growth has been healthy across various product segments on the back of a growing order book and new customer addition. Q2 has seen a ramp‐up in execution. Dixon is expected to resume its strong growth momentum from Q3 onwards as 1) Order book continues to remain healthy; 2) New capacities have been set up across multiple product categories; 3) Revenues from new product categories like wearables and top‐load washing machines will begin and; 4) Entry into new product categories like laptops/tablets, Telecom products and Refrigerators. Dixon has already got approvals for PLI under Telecom/IT products and has applied for PLI under AC components and Lighting, which the management is confident of getting. Considering huge opportunities on the anvil, we continue with our positive stance despite seemingly rich valuations and maintain ADD. We expect see a decent earnings upgrades once we get more clarity on further PLI approvals and new client signings in those segments.

Result Highlights

* Growth across segments – Dixon delivered strong growth across business segments as volumes saw ramp up across product categories. Consumer Electronics/Lighting products/Home Appliances/ Mobiles Phones/Security systems grew 55%/34%/54%/203%/149% yoy.

* Margins – Gross margins contracted 290bps yoy, while it expanded 154bps sequentially. Contraction in gross margin is primarily on the back of lag in passing of increased material costs to customers and change in business mix towards OEM.  

* Order book – Dixon continues to have a healthy order book position across existing business verticals which will enable it to accelerate growth momentum from Q3 onwards. Dixon new customer additions will incrementally add to the order book  

* Working capital and operating cashflow – Dixon continues to efficiently manage its working capital. It is expected to incur capex of Rs4.2bn in FY22 for opportunities in various PLI schemes apart from expanding capacities in its existing business.

Valuation :

We believe growth for Dixon should not be a challenge as there is huge domestic market for the products they are into and many global MNC’s are moving production to India where Dixon is coming through as a partner of choice. We build‐in FY21‐24E Revenue/EBITDA/PAT CAGR of 88%/82%/90% and arrive at an increased PT of Rs5,411 as we now value the company at 55x FY24 EPS (earlier 50x) and maintain our ADD rating. Higher multiple is on back of company getting approval for various PLI schemes.  

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