Dixon Technologies' stock has surged 37% in 2 mths; will the rally sustain?

Dixon Technologies' shares hit a fresh 52-week high of Rs 12,538.7 on the BSE, up 3.5 per cent, in the intra-day deals on Friday. At 12:27 pm, the stock was ruling 3 per cent higher at Rs 12,489 on the BSE, as against a 275-point or 0.6 per cent rally in the S&P BSE Sensex. 

The government's Atmanirbhar Bharat, analysts say, is acting as the key trigger in the stock. Besides, it's approval to performance linked incentive (PLI) scheme for 13 sectors supports strong-growth outlook. Since October 1, the stock has surged nearly 37 per cent at the bourses, compared to an 18.7-per cent rally in the Sensex index till Thursday, ACE Equity data show. 

According to Lokesh Garg and Gaurav Birmiwal, analysts at Credit Suisse, opportunities such as growing domestic market; market share gains; new categories (commercial AC, laptops, refrigerators and components); vertical integration/own designs (enable higher margins); and export markets make the eletronics and consumer durables segment attractive. 

"Dixon Technologies has dominant capacity market share across multiple categories (TVs, mobiles, washing machines, LEDs, set top boxes, etc.) with its own design in washing machines and LEDs. Besides, Dixon is also one of the approved domestic manufacturers in the PLI scheme for mobiles," they noted.

The brokerage, in its December 8 report, initiated coverage on the stock with an 'outperform' rating and a target price of Rs 14,000 based on its diversified business across categories and dominating ODM share in LEDs and washing machines. 

The company is a key player in the nascent Indian electronics manufacturing services (EMS) industry, which is likely to grow rapidly over the next few years. The Indian electronics and consumer durable industry is worth nearly Rs 4 trillion and is likely to grow rapidly to Rs 6 trillion by FY25E because of low current penetration levels. 

In order to promote domestic manufacturing in sectors facing high imports or cheaper imports, incentives are provided through a differential duty structure for components and final products, to incentivise domestic value add. The government has already banned import of fully-assembled ACs with refrigerants. A phased manufacturing programme (PMP) scheme for air conditioners in in the works, with BCD (Basic Customs Duty) on compressors proposed to be increased to 20 per cent in five years, from 12.5 per cent currently, and BCD on PCB controller, motor, cross flow fan, evaporator, metal and plastic parts proposed to be raised to 20 per cent, from 10 per cent now.

Coupled with PLI scheme, Credit Suisse pegs the sector to generate $160 billion new sales by FY27, and $70 billion of domestic value-add, leading to a 1/7 per cent contribution towards India's GDP by FY27. 

In this backdrop, analysts at JM Financials believe Dixon Technologies' growth momentum is likely to accelerate over the next 5 years due to entry in smartphones through the PLI scheme (handset sales to jump 15x in 4 years), favourable government policies (PLI in LED/laptops, import restrictions on TVs), and proven track record with top OEMs. Its capacities have currently carved a niche in global volumes while its long-standing relationships with global OEMs could boost export potential, they say.

"Over FY20-23E, we forecast a 48 per cent CAGR in sales. We also believe larger scale, increased backward integration and localisation could drive EPS CAGR of 48 per cent over the same period. High RoIC, a lean working capital cycle (5 days), net cash balance sheet and high fixed asset turns (11x) would keep valuations at a premium," the firm said in a December 9 report. It initiated coverage on Dixon with a 'Buy' rating.

Jefferies, too, has 'Buy' rating on Dixon Tech, valuing the P/E multiple for FY22 and Fy23 at 51.4x and 37.3x, respectively.