Buy Dixon Technologies Ltd for the Target Rs 16,400 by Emkay Global Financial Services Ltd
Dixon posted strong topline growth in 2QFY27, led by ~35% yoy rise in ASP while volumes stood at 9.5mn in 2QFY27 (in line with guidance; -7% yoy). EBITDAM at 2.7% was 26bps below our estimate (18bps below consensus’ estimate) on lower gross margin, partially offset by improved operating performance. Dixon guided for 3QFY27E volume of 7-7.5mn (+9% yoy) and maintained full-year guidance of 33-34mn ex-Vivo units (flat yoy). Accordingly, we increase FY27E/28E/29E ASP to Rs14.8k/16k/16.6k, up 18%/21%/21% over prior estimates. We also finetune our estimate of the MPMS PLI incentive and now expect no PLI contribution in FY27; we expect PLI contribution of 3%/12% to EBITDA of the Mobile & EMS segment in FY28/29 vs 15%/6% (prior) in FY28/29. This results in a revised EBITDAM profile of 2.8%/3.9%/4.9% for FY27E/FY28E/FY29E (vs prior 3.3%/4.3%/4.6%); consequently, FY27E EPS is cut by ~21% while FY28E EPS is raised by ~7%. Our DCF-based Dec-27E TP now stands at Rs16,400, lower by ~2% (earlier, Jun-27 TP of Rs16,700), implying FY28E PER of 44x. We believe Dixon is well placed to navigate the AI-capex induced memory cyclicality, with the volumes lost due to weak market demand more than compensated by wallet share gains and new customer additions. Dixon’s scale advantage and customer relationships remain a compelling moat; reiterate BUY.
Earning call highlights
1) Mobile & EMS revenue grew sharply on ~35% yoy ASP increase, as memory took a much larger share of the smartphone BOM.
2) Volume was broadly stable yoy, though India’s smartphone market fell 26% yoy; 3Q guidance stands at 7-7.5mn (post-Diwali) and FY27 guidance at ~33-34mn units (ex-Vivo).
3) The Vivo JV is targeted to start production in 4QFY27.
4) Export contracts with the anchor customer (Motorola) have been finalized, with a meaningful ramp-up from 4Q under MPMS.
5) FY27 export target is 3.5-4mn units; FY28 anchor-customer volume is targeted at ~14mn units, of which >6-7mn forms exports.
6) A new Indian brand customer is expected to add 6-8mn units in FY28.
7) Camera module capacity has expanded, from 80mn to 120mn units/year, and will reach 180-190mn in FY28; FY28 revenue target is Rs25-30bn.
8) Display modules (HKC JV): auto display trials are in 3Q. Mobile display line installation will happen by 4Q (20-25mn capacity), with trials in Mar-27 and commercial production in early FY28.
9) The Gemtek JV for optical transceivers (SFPs/BOSA) is approved under ECMS, with initial investment of only Rs0.5-0.6bn. Dixon is also the anchor in the upcoming Gwalior telecom manufacturing zone.
10) IT hardware revenue was Rs21.6bn in 2Q, with 4 of the top-5 global IT brands being Dixon’s customers. FY27 guidance is 1.3-1.4mn units/Rs60- 65bn, with FY28 target of 1.8-2mn units. The 2-year target is Rs150-200bn.
11) Washing machines (WM) and Lighting took a ~3% EBITDA margin hit in 1H (WM at 8.3-8.6% vs normal 10.5-11%) due to higher polymer, freight, and forex costs.
12) Dixon positions itself as the front-runner for MPMS.
13) 1H working capital rose Rs2.8bn on memory inventory build up and pending PLI receivables; ~80-85% to reverse by Mar-27.
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