Dixon Technologies share price: JM Financial maintains buy with price target of Rs 17500

Dixon Technologies Q3 FY21 numbers posted an all round beat. Net sales jumped 120% YoY to Rs 21.8 bn, while EBITDA grew 95% YoY. The surprise was primarily led by consumer electronics (+199% YoY) and mobile and EMS (+114%), while other segments also reported strong growth i.e. lighting (+26%), home appliances (+68%). Margins contracted by 60bps to 4.6% due to adverse sales mix, rising commodity prices and freight costs.

Dixon Technologies management highlighted its focus on:

a) increasing capacity across its segments i.e. LED TVs (from 4.4 to 5.5mn), lighting (including battens, downlights and street lights), washing machines (from 1.2 to 1.8mn) and mobile phones
b) conversion of international OEMs in lighting and washing machine as its factories are becoming global competitive
c) Opportunities arising in areas of IT hardware, wearables and other home appliances.

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LED TVs surprise; other segments see robust growth too for Dixon Technologies:

Net sales jumped 120% YoY to Rs 21.8 bn, 69% above estimates. Consumer electronics led the jump, with a 199% YoY growth, as capacity expansion to 4.4 mn units became fully operational in Q3 21 and government restriction on LED TVs (moved to ‘restricted’ category) which led to strong domestic sourcing. Volumes for TVs increased to 0.9mn units in Q3 21 (up 100% YoY), while realisations were up 50% to INR 14-15k per TV due to increase in screen sizes (43inch vs 32 inch). Lighting products grew 26% YoY, while washing machines clocked 64% YoY growth. Mobiles phones and EMS grew 114% on back of strong sourcing from it’s anchor customer and sharp ramp up in set top box sales.

Dixon Technologies Adverse mix and commodity prices drives margin decline:

EBITDA came in 45% above estimates at Rs 1005 mn, mainly led by strong revenue growth while margins declined by 60bps YoY to 4.6%, as operating leverage benefits were offset by adverse sales mix. Consumer electronics margins stood at 2.9% (+40bps YoY), lighting products at 9.5% (+90bps YoY) and mobile phones at 4.6% (+230bps YoY). Share of ODM improved to 6% (3% in Q320) in consumer electronics and 91% (89% in 3Q20) in lighting products.

Capacity additions to drive competitiveness for Dixon Technologies:

Apart from the existing capacity additions, management has planned new investments in:

a) PCBs for LED TVs (1.8 to 2.8mn units)
b) battens from 3mn p.m to 4mn in a phased manner, down-lighters from 600k to 1.2mn p.m.
c) new plant for LED lights
d) expanding capacity for washing machines from 1.2 to 1.8 mn units.

Capex is likely to double for FY21 to Rs 1.5 bn. JM Financial believes improving global competitiveness, conversion of global brands in LED lighting space and entry in new areas like wearable’s (tie-up with Boat) and IT hardware (for laptops/tablets) are likely to drive further upgrades to consensus estimates.

Maintain BUY on Dixon Technologies with target price of Rs 17500:

JM Financial forecast sales/ EPS CAGR of 53%/55% over FY20-23E and maintained BUY with target price of Rs 17500, valuing the stock at PE of 45x FY23E.