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Macro headwinds lead to earnings cut

* Dixon’s Q1FY23 revenue/EBITDA missed our estimates by 7%/15%. The sharp fall in the TV realizations led to 30% yoy revenue decline. Forex loss of Rs120mn dented operating performance. EBITDA margin was 3.5% vs. 4.0% in Q4FY22.

* The washing machine segment continued to deliver strong topline growth, driven by new customer wins and higher wallet share from an anchor customer. Though margin print should improve from Q2, the full benefits of benign commodity prices should reflect in Q3.

* In the wake of the macro weakness, management has lowered FY23 volume guidance for TV to ~3.6mn from 4mn. While the slowdown in the lighting segment has led to a 7% cut in FY23 topline. Management expects revenue normalization in lighting to start from Q4.

* We reduce our FY23-25 revenue estimates by 4-11% with higher cut in TV and non-mobile PLI revenue for FY23. We also lower our EBITDA assumptions for the same period by 3- 11%. Maintain Hold with a revised Jun’23 TP of Rs3,860 (41x Jun’24E EPS).

Weak quarter: Revenues rose by 53% yoy to Rs28.6bn. Revenue growth was seen in all business segments, except for TV. The Mobile+EMS and Home appliances segments remained as the key revenue growth driver. Since Q4FY22, weak demand (flat volumes yoy) and a sharp correction in open cell prices have impacted the TV business. Lighting revenues were down 24% qoq due to muted demand and lower realizations stemming from heightened competitive intensity. Gross margin expanded by 170bps yoy but was stable qoq. EBITDA was up 109% yoy on a low base. EBITDAM were down 50bps qoq as it had the impact of Rs120mn forex loss. PAT increased by 151% yoy but declined 28% qoq to Rs455mn

Outlook: Muted demand trends have led to a moderation in TV and lighting segment revenue guidance. Further, smartphone sales in the domestic market have also been weak. If this trend continues, it could also impact the mobile business growth in ensuing quarters. Amid these negatives, the positives are a strong order book visibility in washing machines and ramp-up in PLI segments. Management expects lighting revenue to recover in Q4FY23. The benefits of benign commodity prices should start to accrue from Q3FY23 as the company still has some high-cost inventory in the ODM segment. Potential large customer addition in the mobile segment, export opportunities in lighting, and realization of the full potential of PLI schemes (other than mobile) should provide confidence about strong earnings growth which is already reflected in our estimates. We continue to note that execution of various PLIenabled business segments, scale-up in lighting exports and margin recovery are key to sustaining Dixon’s premium valuations. Key risks: adverse currency movements and continued commodity price increases; customer losses and execution challenges; weak endconsumer demand; rise in competitive intensity in the contract manufacturing space; and adverse ruling against Xiaomi in the ongoing ED case

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