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Mobile and EMS continue to drive outperformance

Dixon Technology (Dixon) reported better-than-expected results driven by strong performance of the mobile and EMS segment, as well as Ismartu integration from mid-Aug’24. The company’s revenue/EBITDA jumped 133%/114% YoY for 2QFY25. Dixon is benefitting from strong volumes of existing mobile customers, and it is in active discussion for adding another global brand. We expect Dixon to continue gaining from its market leading position across segments, addition of new segments, backward integration, and improvement in the ODM mix. Dixon’s partnership with HKC Corp. for display manufacturing will help it address a larger share of the bill of material of mobile and LED TV. The company is also exploring collaboration opportunities with global players for getting into open cell manufacturing. We raise our estimates by 13%/5%/5% for FY25/FY26/FY27 and increase our TP to INR17,500. Reiterate BUY.

Revenue and EBITDA far ahead of our and consensus estimates

Dixon’s revenue, EBITDA, and PAT were far ahead of our estimates, fueled by a sharper-than-expected ramp up in the mobile segment. EBITDA outperformed driven by a spike in revenue despite a lower-than-expected EBITDA margin of 3.7% (vs. our estimate of 3.9%) for the quarter. Higher interest and depreciation expenses and negative other income due to notional forex loss resulted in PBT coming largely in line with our estimates. PAT includes one-time exceptional gain of INR2.1b, which was the fair value gains recognized during the quarter on the SSPA transaction of Dixon with Aditya Infotech Limited for sale of 9.5m fully paid-up equity shares of AIL Dixon Technologies Private Limited. Adjusted for this, PAT came in at INR2.14b, in line with our estimates. For 1HFY25, revenue/ EBITDA/PAT grew 120%/104%/197% YoY, and we expect 2HFY25 revenue/ EBITDA/PAT to jump 96%/102%/137% YoY.

Mobile and EMS continue to dominate revenue

Dixon is continuously benefitting from improved volumes across its key clients in the mobile segment. Feature phone volumes stood at 9.1m for 2QFY25 (and 15.7m for 1HFY25). We expect these volumes to remain strong due to its key clients. Smart phone volumes stood at 8.1m for 2QFY25 including Ismartu’s volumes for 47 days during the quarter. Within smartphones, Motorola and Xiaomi are witnessing a healthy ramp up, while Compal’s production is expected from Nov’24 onwards. We expect IT hardware revenue to start witnessing improvement in the coming quarters, and Dixon has already tied up with four of the top-5 brands in India. The company is also planning to expand its capacity in the telecom segment due to increased volumes. We believe that Dixon has already created a pull factor for itself in the mobile and EMS segments, with its large scale of operations, healthy wallet share with key clients, and improving backward integration. It is in discussion to add another global brand in the mobile segment. The consumer electronic division had seen lower volumes for LED TV and Dixon is focusing on improving ODM share via backward integration. Lighting segment realizations appear to have bottomed out, and demand will recover gradually. In home appliances, Dixon is ramping up volumes for the fully-automatic washing machine.

Backward integration efforts to be visible in 2-3 quarters

In Phase 1 of the JV with HKC, Dixon will incur a capex of INR2.5b in setting up a display manufacturing plant in Greater Noida. Once set up, management expects to manufacture 2m units per month of mobile displays in the first year, generating revenue of INR25b. From second year onwards, the target is to double the display units to 4m per month. Dixon, through this JV, plans to expand its product portfolio to auto displays and TV panels in the future. These additional steps will guide Dixon to move the margins up from current levels of 3.8%-4.0%. Precision components, camera modules, and mechanicals are future focus areas for Dixon for entering into component manufacturing. Through the JV with HKC, Dixon is able to capture 8-10% of BoM in the non-semiconductor ecosystem, and, with the company targeting to get into camera modules, precision, and mechanical components, it is set to achieve up to 27% of BoM.

Upcoming areas targeted by the company

Dixon is exploring 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.

Financial outlook

We raise our estimates to bake in improved performance for the mobile, telecom, and refrigeration segments 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-FY27, led by an increased backward integration and the improving share of high-margin segments. This will result in a PAT CAGR of 56% over FY24-FY27.

Valuation and recommendation

The stock is currently trading at 85.0x/64.9x P/E on FY26E/27E earnings. We raise our estimates by 13/5%/5% for FY25/FY26/FY27 and revise our TP to INR17,500. Reiterate BUY.

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