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Looking to enter the component ecosystem

Dixon Technologies (Dixon) reported better-than-expected revenue and EBITDA, driven by strong performance of the mobile and EMS segment, while PAT stood lower than our estimates on higher depreciation, interest, and minority interest. The company’s revenue/EBITDA jumped 117%/112% YoY for 3QFY25. The mobile and EMS segment continues to benefit from improved volumes from customers, while revenues of consumer electronics, lighting, and home appliances were impacted by weak demand during the quarter. The company is continuously focusing on increasing backward integration and expects display manufacturing to begin from 1Q/2QFY26. We expect incremental margin from the display facility to offset contraction in margins due to the PLI scheme ending by FY26. The company is also exploring entry into display fabs and is awaiting government guidelines from the expected component PLI scheme. We downgrade our earnings estimates for FY25/26 by -8%/-4%, while FY27 earnings estimates are upgraded by 7% to factor in higher mobile segment revenues and lower consumer electronics revenues. We increase our DCF-based TP to INR20,500 on March’27 estimates.. Reiterate BUY.

Revenue and EBITDA beat, while margin remain in-line with our estimates

Dixon’s results were ahead of our estimates on revenue and EBITDA. EBITDA outperformance was driven by growth in revenues, with EBITDA margin coming at 3.7%. Higher interest, depreciation expenses, and lower other income than estimates resulted in a 13% miss in PBT. Consolidated revenue grew 117% YoY to INR104.5b, beating our estimates by 2%. Absolute EBITDA grew 112% YoY to INR3.90b, indicating a beat to our estimates by 3%, while margins contracted 10bp YoY to 3.7% but were in line with our estimate. The company’s PAT missed our estimates by 24% at INR1.7b vs our estimate of INR2.25b. PAT margin was at 1.6%, 60bp lower than our estimates of 2.2%.

Mobile & EMS segment remains the key growth driver

Mobile and EMS will continue to remain the dominant segment for Dixon. The company is continuously benefitting from improved volumes across its key clients in the mobile segment. Feature phone volumes stood at 25m for 9MFY25. Smartphone volumes ex-Samsung stood at 21m for 9MFY25, including Ismartu’s volumes. Within smartphones, Motorola and Xiaomi are witnessing a healthy ramp-up, while Compal’s production commenced in Nov’24. Dixon has already entered into a JV with Vivo and expects to ramp up volumes from Vivo after receiving government clearances on the JV. We expect IT hardware revenue to start improving in the coming quarters. It is in discussions to add another global brand on the ODM side for IT hardware. The company is also expanding its capacity in the telecom segment due to increased volumes and expects to double its revenues in FY26 from the telecom segment. Volumes for consumer electronics and lighting were impacted by lower demand. In home appliances, Dixon is ramping up volumes for the fully automatic washing machine. It is also planning to enter into robotic vacuum cleaners, water purifiers, chimneys, etc in this segment.

Backward integration in displays to offset margin contraction once PLI ends

The company’s display facility will commence manufacturing from 1Q/2QFY26. The company is also exploring entry into precision components, mechanicals, camera modules, battery packs, etc, which will further deepen its backward integration. As highlighted in our earlier update (Report Link), even after PLI incentives end in FY26, we do not expect a sharp contraction in margins as we believe that the adverse impact on margins will be offset by incremental contribution from backward integration towards components, particularly display manufacturing (refer to Exhibits 12 and 13). In 9MFY25, the company booked PLI incentives worth nearly INR2b in total across all segments. Display manufacturing would have a double-digit EBITDA margin, and hence, in the long run, the company would gain nearly 80- 100bp in margin from backward integration towards displays.

Evaluating display fab manufacturing under the component PLI scheme

Dixon is also evaluating entering into display fab manufacturing facility with a global partner and is awaiting government guidelines under the component PLI scheme. Total capex targeted for display fab is expected to be around USD3b, which will be supported to an extent of 50% from the centre and 20% from the state government on a pari-passu basis, while the remaining will have to be invested by the company through a mix of internal accruals/debt/equity. With a larger portion of capex being supported by the government in this case, the company expects a faster payback period, double-digit margins, and similar RoCEs as the core business. We have currently not factored in this investment as the policy is yet awaited from the government

Financial outlook

We raise our estimates to bake in improved performance for the mobile, telecom, and refrigeration segments, while we lower our estimates for consumer electronics, lighting, and home appliances. We expect a CAGR of 55%/56%/60% in revenue/EBITDA/PAT over FY24-FY27. The revenue growth would be mainly driven by EMS (including mobile and IT hardware) and new emerging segments such as refrigerators, wearables and hearables, and telecom networking products. We expect an EBITDA margin of 3.7%/3.8%/4.0% for FY25/FY26/FY27, led by an increased backward integration. This will result in a PAT CAGR of 60% over FY24- FY27.

Valuation and recommendation

The stock is currently trading at 70.1x P/E on FY27E earnings. We tweak by -8%/- 4%%/7% for FY25/FY26/FY27 to factor in higher mobile segment revenues and lower consumer electronics revenues and increase our DCF-based TP to INR20,500 on March’27 estimates. Reiterate BUY.

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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