Dixon Technologies-Strong growth momentum, ICICI Securities  

Dixon reported strong growth across segments.

Commencement of mobile contracts, healthy growth in consumer electronics, mid-high single digit price hikes and favorable base were chief reasons for higher growth.

With higher input prices, gross and EBITDA margin declined 460bps and 70bps, respectively.

However, normalization of revenues from Q2FY22, operating leverage and cost saving initiatives will lead to better margins ahead.

Dixon has indicated revenues of ~US$3bn with likely EBITDA margins of 3.5-3.75% by FY24.

We model Dixon to report PAT CAGR of 65.2% over FY21-FY23E with improving return ratios.

While we remain structurally positive on the company due to its competitive advantages and growth opportunity, we believe stock price upside is capped at current valuations.

Maintain HOLD with TP of Rs4,600 (63x FY23E, Earlier TP-Rs2,984).

• Q1FY22 performance:Dixon reported revenue, EBITDA and PAT growth of 261%, 184% and 1,035%, respectively, YoY. Two-year revenue and PAT CAGR were 27.6% and -12.2%, respectively. We believe (1) strong growth across segments, (2) uptick in mobile business revenues post commencement of Motorola and Nokia orders in Q4FY21, (3) mid-high single digit price hikes across products and (4) favorable base helped to report strong revenue growth. Gross margin declined 460bps but EBITDA margin decline was arrested to just 70bps due to cost saving initiatives.
• Healthy growth across segments:Segment-wise revenue growth rates were as follows: Consumer Electronics 262%, Lighting 97.5%, Home appliances 193%, Mobile and EMS 476.3% and Security systems 461.6%. EBIT margin declined in most segments. However, normalization of revenues and operating leverage will likely lead to better margins Q2FY22 onwards.
• Strong outlook:The company has indicated to reach revenues of ~US$3bn (~Rs200bn) by FY24. However, it expects the consolidated EBITDA margin to be 3.5-3.75%. Considering limited capex and investment in working capital, we model the return ratios to move upwards sharply over FY21-24.
• Strong growth in Mobile and EMS segment:Dixon will continue to benefit with steady increase in mobile production in India. Motorola plans to shift 8-10% of global production in India. With PLI benefits and with competitive advantage of low cost manufacturing, we expect Dixon to be key beneficiary.
• Maintain HOLD:We model Dixon to report PAT CAGR of 65.2% over FY21-FY23E and RoE to be upwards of 20% over FY22-23. We remain positive on the company’s business model due to strong competitive advantage and growth opportunities. Maintain HOLD with a DCF-based target price of Rs4,600 (implied P/E 63x FY23E). CT Bureau