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Pioneering the future of manufacturing and electronics

Dixon Technologies has emerged as a fast-growing diversified player in the electronics manufacturing services (EMS) industry. DIXON is a key beneficiary of several production-linked incentive (PLI) schemes for mobile phones, IT hardware, white goods, lighting and AC components. It has consistently increased its market share in different segments with either new technology tie-ups or new client additions. Its recent tie-up with HKC Corp for manufacturing of displays for mobile phone, TVs and automotive, Longcheer Group for mobile phones, stake purchase of Ismartu and sublicensing arrangement with Google done last year for TVs will help the company maintain its market leadership position. We expect DIXON to continue to keep focusing on new segments, backward integration, ODM mix improvement and operational efficiencies to boost its margin despite a rising revenue contribution of the low-margin mobile segment. We estimate a CAGR of 44%/51% in revenue/PAT during FY24-27. We believe that an efficient working capital cycle, focus on capital allocation and higher asset turnover ratios should result in RoE/RoCE of 33%/36% by FY27E. We initiate coverage with a BUY rating on the stock with TP of INR15,000 based on DCF. Valuations are on the higher side but strong industry growth drivers, presence in fast growing segments, possibility of adding more segments and best in class RoICs will keep valuations higher.

Best positioned to benefit from industry growth and market share gains

The Indian EMS sector is estimated to grow from INR1.46t in FY22 to INR6t in FY27 at a CAGR of 32%, as per industry estimates. DIXON held a 7.3% market share in the EMS industry in FY22, and we expect it to grow at a faster CAGR of 37% during FY22-FY27, driven by a sharp ramp-up in mobile segment revenues, telecom and IT hardware, new client additions in consumer electronics, export opportunities in lighting and washing machines, growth in emerging categories like wearables and refrigerators, and PLI approvals for other segments. The company is also planning to enter into newer segments and component manufacturing, benefits of which will be seen in the coming years. We thus believe that growth in these key segments will help DIXON increase its market share in the EMS industry to nearly 9% by FY27E.

A key beneficiary of PLI schemes for various segments

DIXON is a key beneficiary of PLI schemes for mobile phones, white goods (including lighting and AC), telecom and networking products, and IT hardware 2.0. It has committed a total investment of INR4.7b in mobile phones and IT hardware 2.0 and INR1b in white goods. DIXON has tied up with Motorola, Xiaomi and Longcheer to scale up its mobile volumes under the PLI scheme and has tied up with Acer and Lenovo to achieve a desired revenue threshold for the IT hardware PLI scheme. It is working on a JV with Rexxam for inverter controller boards for ACs for a total investment of INR510m over five years. It is also adding clients in lighting. DIXON’s JV with Bharti Enterprise is working on telecom hardware PLI. It has also tied up with Nokia to manufacture telecom equipment.

Mobile and IT hardware segments to drive revenue growth

Out of the 150m mobile smartphones sold in India, the outsourcing opportunity is almost 85m to 90m, and DIXON aims to capture 35-40% of this opportunity in a couple of years. The company is already working with Motorola, Xiaomi, Samsung, Realme, Nokia and Itel and plans to add more brands via its majority stake purchase in Ismartu, which operates three brands in India (Itel, Infinix and Techno), and its partnership with Longcheer, which manufactures for Oppo, Vivo, Oneplus and Realme. We expect revenues from mobile phones to increase to INR232b/INR296b in FY25/FY26 from INR92b in FY24. For IT hardware, DIXON is eligible for PLI 2.0 and has already tied up with Acer and Lenovo. We expect IT hardware revenues to grow to INR5b/INR25b in FY25/FY26 from INR1.4b in FY24.

Scale advantage puts DIXON much ahead of other players

DIXON has a scale advantage in most segments, which has resulted in leadership position, and competition is still limited to 2-3 large players in most segments. DIXON has achieved economies of scale in its key segments such as consumer electronics and lighting and aims to replicate the same in the mobile segment. As a result, the company has 50-70% wallet share of clients in segments like lighting, LED TV and mobile and has a strong base of sticky customers. With PLI approvals already in place for other segments, the scale benefits will start accruing in other segments too. This would make it easier for any foreign OEM brand to choose DIXON as an EMS partner.

Focusing on efficient capital allocation and high RoCE

DIXON operates in the high-volume low-margin (HVLM) segment of the EMS industry, which forms 89.5% of the domestic EMS market. Despite the low margin nature of this segment, DIXON has maintained high RoCE. The company emphasizes efficient capital allocation and a targeted payback period of four years. Efficiency in capital allocation is achieved by reducing the cost of capex, adopting a lease model for new facilities, minimizing working capital, and adding segments with a higher asset turnover. Consequently, even in segments with lower margins, the company achieves healthy RoCE and high asset turnover ratios.

Backward integration to yield margin improvement over time

The majority of high-value components for the mobile, TV, and IT hardware segments are currently imported, and transitioning the manufacturing of items like open cell, panel, screen, display, semiconductor, and camera modules entirely to India will require time. For mobiles, DIXON is planning to manufacture display modules (~10% of total cost of smartphone) and has already finalized a technology partner with a planned capex of USD30m (excluding land and building). It is also looking to foray into precision components, mechanicals, die cut, connectors etc. DIXON is also developing capabilities in PCB and battery chargers for mobiles to decrease reliance on imports. Additionally, the company is collaborating with global brands to enhance capabilities in TV and AC control boards, aiming to further reduce dependence on imports in these segments as well.

Continuous investments in R&D for new initiatives

The company has three state-of-the-art R&D facilities and has 49 trained employees in its R&D team. It is continuously working on new initiatives in the following areas: 1) design solutions & technology advancement for various TV components and also procuring a license for android technology in the LED TV vertical to move forward in ODM solutions; 2) new Advance Environmental Testing Chamber and NABL approved lab would be installed in its Dehradun R&D center for washing machines for research validations; 3) a global level R&D infrastructure for product testing and validation in smart lighting; 4) DIXON is also certified as a member for android product development for mobile phones.

Plans to enter into new areas such as industrial EMS, EVs

DIXON is exploring opportunities in the EV sector, mainly focusing on manufacturing components such as electronic modules, PCB assembly. Company is exploring entering into industrial EMS too and is in advanced discussion with large semiconductor brands for serving the requirement of PCB assembly.

Financial outlook

We expect a CAGR of 44%/46%/51% in revenue/EBITDA/PAT over FY24-27. Revenue growth would be mainly driven by EMS (including mobile, IT hardware), consumer electronics and new emerging segments such as refrigerator, wearables and hearables, and telecom networking products. We expect EBITDA margin of 3.9%/4%/4.1% for FY25-27, led by increased backward integration and improving share of high-margin segments. This results in a PAT CAGR of 51% over FY24-27. We expect working capital to remain comfortable at (-1) and expect a capex of INR5b every year over FY25-27. With efficient capital allocation, we expect RoIC to remain strong at 46.8%/56.4%/63.9% for FY25/FY26/FY27 vs. 30% in FY24.

Valuation and recommendation

The stock is currently trading at 75.9x/57.8x P/E on FY25/26E earnings. We initiate coverage on DIXON with a BUY rating and a DCF-based TP of INR15,000 taking into account 20-year revenue CAGR of 17.8% and EBITDA CAGR of 18.6%, asset turnover of 13-14x over the same period. We bake in WACC of 10.7% and terminal growth rate of 6%. Valuations are on the higher side but strong industry growth drivers, presence in fast growing segments, possibility of adding more segments and best in class RoICs will keep valuations higher. Key risks and concerns Key risks to our estimates and recommendation would come from lower than expected growth in the market opportunity, loss of relationship with key clients, increased competition, and limited bargaining power with clients.

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