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Positives priced in; downgrade to SELL

Result Synopsis

Dixon has delivered strong performance with 13.2% and 4.9% revenue beat to ours and consensus estimates. Revenue beat was driven by strong performance of Mobile phones and EMS business has seen continued growth of 189% as existing customers have been increasing offtake and ramping up volumes from the new customers. The company’s Smart phone volume in Q3 stood at 8.3mn units excluding Samsung. The company expects JV with Vivo to materialize from 2H of next fiscal as government approval would take 7-8months. Apart from mobile phones all other segments have been subdued, consumer electronics has registered 31.9% decline. Management is confident of strong showing in mobile phones and expect smart phones to register healthy volume growth of ~30mn units in FY25 and momentum is expected to continue in FY26 as well. Management is focusing on backward integration and value addition to drive growth in medium to long term. Dixon is looking to manufacture display fab which enable Dixon to enable significant value addition and move up the value chain. Capex estimates for Fab manufacturing would be USD3bn. Dixon will continue to deliver strong growth in the medium term as it has been 1) able to add new customers on consistent basis; 2) New product category like refrigerator has seen strong performance and management is looking to expand capacity and make further investments in frost-free refrigerators; 3) IT hardware like laptops and tablets will be next growth driver as company has already started trial production of laptops for large global brands. Company is confident of significant revenue from telecom vertical current fiscal as order-book is extremely healthy; and 4) Investing in backward integration to improve efficiency. On the margin front, company is looking to improve its margin by increasing scale, backward integration. Management expects margin improvement of ~100- 125bps in next 24 months. We continue to value the company at 55x FY27 EPS as on strong growth continuing for next couple of years. We however downgrade the stock to SELL with revised PT of Rs 15,138 as risk reward is not favorable.

Dixon is expected to deliver strong revenue performance given the ramp up in its existing customer base and company is expected to on-board new customers in FY25. We now build-in FY24-27E Revenue/EBITDA/PAT CAGR of 53%/53%/64%, we value the stock at 55x FY27 EPS. We downgrade the stock to SELL as CMP captures most of the positives and will wait for correction to enter the stock

Result Highlights

* Quarter summary – Dixon continues to drive strong growth in Mobile phones by 190% Lighting and Home Appliances has seen muted growth of 7% and 9% respectively while consumer electronics segment has registered decline of 32%

* Margin – EBITDA margin have contracted 9bps on yoy basis, as business mix has been more towards on the mobile phones side which has lower margins. Backward integration across product categories is expected to revive the margins

* New Additions–. The company is looking to setup display fabrication and is planning to soon enter camera module, precision components and battery packs which will significantly add value addition

* Investments -Company will continue to invest in adding capacities across products verticals. FY25 capex is expected to be Rs8bn.

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