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In the golden era of growth

* The 28% revenue beat was primarily driven by a 37% outperformance in Consumer Electronics (TVs). Customer additions, better realizations and sustained order book led to strong revenues across key business segments.

* Better-than-expected margin in the Lighting and strong growth in the TV segment led to a 20% EBITDA beat. EBITDA per TV improved 72% on backward integration and better sales mix. Input cost inflation and change in revenue mix constrained margins.

* Management remains upbeat on medium- to long-term outlook for domestic electronics manufacturing. Rising wallet share of existing customers and new customer additions is leading to further capacity expansion in Lighting, Washing Machines and CCTV cameras.

* The strong Q3 print leads us to raise our ahead of consensus FY21-23E EPS by 4-12%. Our estimates do not factor in potential opportunities from Lighting, IT Hardware PLI and Wearables. We maintain Buy with a revised TP of Rs18,000 (45x FY23E EPS).

Another strong quarter:

Revenue of Rs21.8bn grew 120% yoy, driven by Consumer Electronics (Rs13.6bn; +199% yoy), Home Appliances (Rs1.15bn; +68.4%) and Mobile Phones (Rs2.99bn; +114.4%), while the performance of Lighting Products (Rs3.5bn; +26% yoy), Reverse Logistics (Rs45mn; -3.5% yoy) and Security Systems (Rs555mn; +10.4% yoy) was moderate on a relative basis. EBITDA came in at Rs1bn (+95% yoy). Input cost pressures and revenue mix change led to gross margin contraction of 324bps to 9.6%. EBITDA margins were also contained by rising contribution of TV segment. Employee and other operating expenses increased 39% and 45% yoy, respectively. PAT grew 134% yoy to Rs616mn.

Outlook

Management remains upbeat about medium- to long-term opportunities in domestic electronic manufacturing. With continuously achieving scale across the key segments, the company is also focusing on increasing backward integration to improve margin profile and customer stickiness. In the wake of strong order book visibility and potential visibility in exports (Lighting), the company has announced further capacity expansion in Lighting, Semi-Automatic Washing Machines and CCTV cameras. Dixon’s execution capabilities and scale are leading to higher customer wallet share and customer pull from smaller contract manufacturers. Our estimates are yet to incorporate potential revenue opportunities arising from Lighting and IT Hardware PLI as well as Wearables. In addition, we have now assumed capex for the Refrigerator segment over FY22-23E, while revenues from it would accrue from FY24E. FY23E RoCE of 38%, negative working capital and continued headroom for tapping further revenue opportunities and market share gains make us value the company at 45x FY23E vs. 30x earlier. Key risks: Adverse currency and continued commodity inflation; customer losses and execution challenges; and a rise in competitive intensity in the contract manufacturing space.

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