Dixon Technologies is an electronic manufacturing service (EMS) provider to various multinational/domestic companies in India. The company is one of the biggest beneficiaries of the government’s production linked incentive (PLI) scheme for mobile phones and other electronic products. ICICI Securities believe PLI benefits will start flowing in from Q4FY21E onwards while in future Dixon Technologies mobile revenue will grow multi-fold (14x jump) over FY20-23E. Dixon Technologies share price today is Rs 3650, up Rs 25 or 0.7%,

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Dixon Technologies has also applied for PLI in the lighting, electronic wearables and other electronic products (laptop/notebooks). This opens up a significant growth opportunity for Dixon Technologies, going forward (we see 4x jump in revenue FY20-23E). Further, prudent working capital management and future expansion through internal accruals will keep balance sheet light and return ratios elevated (RoE: 39%, RoCE: 44%) for Dixon Technologies, going forward.

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Dixon Technologies is a Strong play in emergent domestic EMS industry:

The Indian electronic manufacturing services (EMS) industry is likely to grow at a CAGR of 45% over the next five years to become a US $152 billion (bn) industry. We believe the China+1 strategy by various MNCs alongside various government measures will help boost the domestic EMS industry, going forward. Dixon Technologies being one of the largest EMS players, is well set to reap the benefits of said growth opportunities. Dixon Technologies manufacturing capacity in the LED TV, washing machines and LED lighting can serve 26%, 28% and 45% of total domestic requirements (in volume term), respectively.

Focus to improve ODM for customer retention:

Dixon Technologies share of original design manufacturer (ODM) revenue has increased from 22% in FY17 to 34% by FY20, which has also helped in 140 bps expansion in EBITDA margin. Dixon Technologies plans to increase ODM revenue share in consumer electronics from current 6% to 15% in the next two years, which will help drive segment EBITDA margin higher. However, overall EBITDA margin is expected to remain flat in FY20-23E considering a significant rise in revenue from mobile business (OEM model).

Dixon Technologies Lean balance sheet supports strong RoEs, RoCEs:

Dixon Technologies has registered healthy RoE, RoCE of 22%, 26%, respectively, in FY20. The future capex will largely be funded through internal accruals. ICICI Securities believes prudent working capital management and higher asset turn in the mobile business will result in higher RoE, RoCE, going forward.

Dixon Technologies Valuation & Outlook:

ICICI Securities believe significant future growth potential in domestic electronic manufacturing coupled with Dixon Technologies plan to increase backward integration can bring in more customers and would lead to a revenue & earnings CAGR of 56% & 66%, respectively, in FY20-23E. ICICI Securities believes Dixon Technologies may continue to command premium valuation due to its significant future growth opportunities, high return ratios and lean working capital days. ICICI Securities assigned a BUY rating to the stock with a target price of Rs 4270/share, valuing the company at 45x FY23E earnings.