Dixon Technologies: Healthy improvement in margins, ICICI Securities

While the company has taken the right steps to improve share of ODM, initiated cost-saving measures, we believe weaker demand for white goods and durables is likely to impact revenue growth in near term. While there is strong demand for hearables, wearables and mobiles, there is still muted demand in white goods. While the company is confident of adding new customers in Mobile and Home appliances segments, we believe the ramp up will be gradual in FY24-25.

We raise FY24-25 earnings to factor in higher share of ODM and improvement in margins. At current valuations of (52.8x FY24E), we believe the risk: reward is not favorable to the investors and hence, we maintain REDUCE with a DCF-based TP of Rs3,000 (implied P/E of 35x FY25E EPS).

• Q4FY23 performance: Dixon reported YoY revenue, EBITDA and PAT growth of 3.8%, 32.2% and 25.1%, respectively. Gross and EBITDA margins expanded 107bps and 110bps, respectively due to better revenue mix, higher share of ODM and correction in input prices.
• Segment-wise performance: Segment-wise, YoY revenue growth rates were as follows: Consumer Electronics -2.9%, Lighting -11.3%, Home Appliances +20%, Mobile & EMS 9% and Security Systems 13.2%. EBIT margin expanded in all segments except Security systems segment YoY.
• Scope for margin expansion: With rising share of ODM, correction in input prices, cost saving initiatives and change in revenue mix, there is scope for margin expansion in FY24-25. We believe the company will also likely benefit from PLI benefits and operating leverage.
• Mixed demand trends in White goods and Durables: The demand for products such as mobile, hearables and wearables has remained strong whereas the demand for products like lighting has been volatile. However, we note the demand for durables is still lower than demand observed during covid. Sustained weaker demand for durables may impact revenues of Dixon.
• Maintain REDUCE: We model Dixon to report revenue and PAT CAGRs of 31.7% and 42.1%, respectively, over FY23-FY25E and RoE > Cost of capital over FY24-25. We maintain REDUCE rating with DCF-based target price of Rs3,000 (implied P/E of 35x FY25E EPS). Key risks: Faster than expected economic recovery, steep correction in commodity prices and lower than expected competition.

For report, https://www.communicationstoday.co.in/dixon-technologies-healthy-improvement-in-margins/

CT Bureau