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Upbeat on growth in H2FY22

* Q2 revenue beat estimates by 7%, led by Consumer Electronics, Lighting and Home Appliances. EBITDA was Rs1.1bn, 11% above estimate, with the major beat coming from Lighting and Home Appliances. Commodity inflation restricted ODM business margins.

* In Consumer Electronics, component shortages constrained volumes, while in Lighting, adequate raw material inventory led to strong growth. RM inflation in Home Appliances has been passed on to the customers, while Lighting faces a lag in inflation pass-through.

* Dixon is expanding Semi-Automatic (SA) washing machine capacity to 2.4mn from existing 1.5mn, due to its strong order book. In Q2, the company added 3 customers in SA and 2 customers in mobile phones (feature phones). Refrigerator capacity expansion is on track.

* We have cut FY22E EBITDA by 6% due to input cost inflation, but kept FY23-24E EBITDA unchanged. The rise in capex intensity has led us to cut FY22-24E EPS by 2-11%. Maintain Hold with a revised Dec’22 TP of Rs4,750 (45x Dec’23E EPS).

Decent quarter: Revenues rose significantly to Rs28bn, with all the segments registering yoy growth, except for Reverse Logistics. Gross margins contracted yoy, as commodity headwinds continued and the Lighting business faced some lag in passing on the inflation to customers. EBITDA grew by 23% yoy, with margins mirroring the GM trend. Other opex grew by 25% yoy but came in 18% below estimate, contributing to the EBITDA beat. PAT grew by 20% yoy to Rs626mn, driven by the robust topline growth, lower finance expenses and a significantly lower ETR of 22%. Consumer Electronics revenues grew by 55% yoy, beating our estimates by 7%. Lighting revenues saw 34% growth yoy. Although revenues of the Mobile and EMS division grew multifold yoy, they were below our projections.

Outlook: Another round of capacity expansion in Semi-Automatic washing machines will take Dixon’s market share to ~31% in washing machine industry (assuming 100% utilization). The company added three new small-sized customers in Q2. It has also received technical approval from Europe, opening the doors for exports. That said, potential revenue numbers from this region are still not known. Due to various PLI schemes, organic capacity expansion for existing categories, and setting up of capacity for refrigerators, capex spending has increased significantly for FY22. The revenue growth outlook remains strong. However, the execution of various PLI schemes and timely expansion in product categories is key to watch out for. Despite ongoing component supply challenges, management continues to be confident about strong H2 revenue delivery. The sustenance of the current hyper-inflationary scenario could pose risk to our EBITDA estimates. Key risks: adverse currency and continued commodity price inflation; customer losses and execution challenges; weak end-consumer demand; and rise in competitive intensity in the contract manufacturing space.

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