Buy Dixon Technologies Ltd for the Target 15,200 by Emkay Global Financial Services Ltd
Dixon intimated the markets (link) that the PN3 approval for its 51:49 JV with Vivo has come through. Dixon had given guidance for flattish smartphone volumes in FY27 vs FY26, and this development should trigger earnings upgrades to reflect the Vivo JV volumes. We build in 6.5mn/18mn smartphone volumes in FY27E/FY28E from Vivo via the JV vs earlier estimates of nil/6.9mn (via a TLA), respectively. This drives a 14%/17% upgrade in FY27E/28E EPS. Beyond the EPS upgrades, we view the development as positive on two counts: 1) this further cements Dixon’s dominant position in the domestic smartphone manufacturing market through the stickier JV route with Vivo (~20% market share in the India smartphone market); and 2) this reflects sustained policy support for electronics manufacturing in India, even in complicated cases. We retain BUY on Dixon while revising up our TP by ~22% to Rs15,200 from Rs12,500, to reflect the impact of the PN3 approval
Dominant position in smartphone manufacturing cemented further
Even prior to the JV approval, Dixon enjoyed the dominant position in the Indian smartphone manufacturing set-up, with 45-50% share of industry capacity and manufacturing presence across major smartphone brands. In our view, this JV with Vivo is a stickier route for securing manufacturing wallet share with a leading Indian smartphone brand (Vivo market share has been in the 18-21% range over the last six quarters). The superior positioning and the strong financial profile (robust cash flows, >25% return ratios, negative workings capital cycle despite tougher macro conditions, and headwinds in FY26) justify the ~50x FY28E target multiple.
Approval reflects strong policy support for Indian electronics manufacturing
Our takeaway is that the ruling dispensation continues to bet on electronics manufacturing, as both the generator of employment (key to electoral fortunes) and India’s pathway to technological advancement (key to legacy). The Vivo JV approval had turned complicated owing to PN3 restrictions and BBK Group’s run-ins with tax authorities. However, not only has approval been received, but the process has also led to tweaks to the PN3 rules. Further, the government has been active in its support, most recently extending customs duty exemptions for key inputs to electronics manufacturing. We expect policy support to continue, with Mobile PLI 2.0 the next catalyst that is likely to lead to further EPS upgrades.
For More Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354
