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Growth drivers beyond PLI

Improved wallet share, new segments, backward integration to support growth We assess Dixon’s growth and margin profile beyond PLI in light of market concerns over its long-term growth and margins. In this note, we try to highlight that 1) despite PLI ending in FY26, the mobile segment will continue to deliver healthy growth, driven by client additions, improved wallet share, and export opportunities; 2) margins will be supported by company’s initiatives for backward integration in the post-PLI period; and 3) scale-up in other segments will also support growth. We thus expect the company to continue to benefit from the scale-up in existing segments, the addition of new segments, backward integration, and ODM mix improvement. We maintain our estimates and TP of INR17,500. Reiterate BUY. Assessing long-term growth of mobile and EMS segment beyond PLI Dixon’s mobile segment is witnessing a sharp ramp-up in revenues, led by improved volumes from existing clients as well as Ismartu integration. We expect the mobile and EMS segment to deliver a revenue CAGR of 63% over FY24-27, primarily driven by smartphones. Out of 150m mobile smartphones sold in India, the outsourcing opportunity is almost 85m-90m, and Dixon aims to capture 35-40% of this opportunity by FY27 which will grow further. . Thus, despite the PLI scheme ending in FY26, we expect a CAGR of 16% in consolidated revenues beyond FY27, which will be driven by 1) incremental client additions in mobile through Longcheer tie-up; 2) scope of improving wallet share with existing clients to even up to 30-40%, with the exception being Motorola, whereDixon is taking care of its 80-90% of volumes; 3) shifting toward premium mobiles such as Compal; 4) potential export opportunities as Dixon would achieve a scale of nearly INR450b in mobile itself by FY27.

We expect ramp up of IT hardware, telecom, refrigerator and other segments to contribute to incremental revenues beyond mobile

Beyond mobile phones, we expect other segments, such as IT hardware, telecom, wearable and hearable, to also gain scale and contribute to incremental revenues. We expect Dixon to gradually scale up IT hardware revenues as it has already on-boarded 4 out of top 5 players in IT hardware segment. For IT hardware, the scale-up is expected in coming quarters, with production for Lenovo to begin in 3QFY25 and Asus in 4QFY25. Dixon’s telecom segment revenues have grown from INR173m in FY22 to INR6.9b in FY24 and will grow further from incremental requirements from Bharti for settop boxes and GPONs. In the telecom segment, Dixon has seen strong growth and plans to double its capacity in Noida. In wearables and hearables, Dixon clocked strong volumes of TWS and has a healthy order book. The majority of TWS production for BOAT is done by Dixon. Further, it will add smartwatches to its portfolio, which will boost revenue growth.

Exploring new areas to further aid growth

Dixon is looking for opportunities in the EV sector, mainly focusing on manufacturing components such as electronic modules and PCB assembly. Further, the company is exploring opportunities to enter the industrial EMS sector and is in advanced discussions with major semiconductor brands to serve their requirements for PCB assembly. Dixon is also in discussion with large global ODMs to expand its product portfolio further to servers and AI-ready data centers, components of which will be a part of the updated government scheme, PLI 2.0, for IT hardware. Once these opportunities are finalized, we expect incremental growth in revenues.

Margins beyond PLI incentives will be supported by backward integration

With a dominant share of revenues coming from the low-margin mobile segment, we expect overall consolidated EBITDA margin of 3.9%/4.0%/4.1% for FY25/26/27. Even after PLI incentives end in FY26, we do not expect a sharp contraction in margins, adverse impact on margins will be offset by incremental contribution from backward integration toward components particularly display manufacturing (see Exhibit 7). Once component manufacturing commences, the company expects to earn double-digit margins on component sales. We expect the company to target a larger share of bill of material of mobile and LED TV after display manufacturing commences; hence, we factor in margin support from backward integration in our long-term assumptions.

Financial outlook

We maintain our estimates and expect a CAGR of 48%/49%/56% in revenue/EBITDA/PAT over FY24-FY27. The revenue growth would be mainly driven by EMS (including mobile and IT hardware), consumer electronics, and new emerging segments such as refrigerators, wearables and hearables, and telecom networking products. We expect an EBITDA margin of 3.9%/4.0%/4.1% for FY25/ FY26/FY27, led by increased backward integration and the improving share of highmargin segments. This will result in a PAT CAGR of 51% over FY24-27. Further, we expect the working capital to remain comfortable at (-1) and a capex of INR5b every year over FY25-27. With efficient capital allocation, we expect RoIC to remain strong going forward.

Valuation and recommendation

The stock is currently trading at 86.5x/66.1x P/E on FY26E/FY27E earnings. We maintain our estimates and reiterate BUY rating on Dixon with a DCF-based TP of INR17,500.

Key risks and concerns

The key risks to our estimates and recommendation would come from the lowerthan-expected growth in the market opportunity, loss of relationship with key clients, increased competition, and limited bargaining power with clients.

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