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Backward integration is key focus along with customer addition

Dixon Technologies’ 4QFY24 Revenue was at INR 46.5bn up 52% YoY and down 3% QoQ below JMFe by 2% and consensus by 8%. EBITDA at INR 1.8bn up 17% YoY and down 1% QoQ. PAT of INR 973mn up 21% YoY and flat QoQ. Revenue growth was driven by the Mobile phones & EMS segment while consumer electronics and lighting segments continue to remain weak. The mobile segment should continue to materially scale up led by incremental volumes coming from Xiaomi and new customer additions along with Ismartu. Dixon also continues to focus on new segment/business addition. We estimate EPS CAGR c.69% over FY24-26E along with strong return ratios (ROE of 24-35%) led by efficient capital/NWC management. Maintain Buy with revised price target of INR 8,620 (50x FY26 EPS).

* Mobile phone business impacted on QoQ:

Dixon Mobile Phones & EMS rev was down by 4% QoQ to INR 30bn (up 119% YoY) mainly due to slowdown in ramping up the Jio Bharat Phones. Management expects volumes ramp for Xiaomi to 0.3mn unit’s p.m starting May,24 and expects overall smartphone mobile phone volumes of c.28-30mn in FY25 (Ex Samsung) and Samsung will be c.10mn units. Dixon already has c.Top 6 brands as its customer and is planning to add another large label in next 3-4 months. Expect new brands to be margin accretive. We expect rev of INR 29/40bn in FY25/FY26 and margin of 3.2%/3.3% respectively vs 3.3% in FY24.

* Consumer Business & Lighting business continue to impact: Consumer electronics rev was down 9% YoY to INR 8.9bn mainly led by softness in demand. Lighting rev was down by 27% YoY to INR 2.7bn due to change in LED technology. However now Dixon is moving towards premium lights like – Ceiling lights, professional liights, street lights ,etc and has planned to exit battens from Q2.Also, in Lighting one large brand has shifted from inhouse to outsourcing and Dixon will be anchor supplier to them.

* Backward Integration is the key focus:

In Mobile Phones, Dixon will do a capex of c.2.4bn in FY25 to manufacturer Display modules (10-11% of Mobile BOM) to create an capacity of 25mn units, technology tieups for the same have already been finalised.Also it is planning to do precision components and In LED TV focusing on developing new technologies like Google,etc along with developing interactive Flat display panels for larger brands for new growth. Expect overall capex below INR 5.5bn in FY25.

* Maintain BUY with TP of INR 8,620:

We expect a revenue/earning CAGR of 67%/69% over FY24-26E mainly led by (1) Dixon focusing on ramping up its mobile phone capacity, (2) new customer addition, (3) Backward integration to increase its wallet share amongst its key customers, (4) Ramping up its capacities in home appliances /laptops and (5) adding new product segment. All the above will help Dixon to generate strong OCF/FCF of INR 17.4bn/7.2bn over FY24-26E along with healthy ROE/ROCE of 35%/38% in FY26. Dixon trades a P/E of 58x/47x on FY25/26 EPS and we value it 50x on FY26 EPS to arrive at a TP of INR 8,620 which is up 6% from CMP hence we maintain BUY

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