Dixon Technologies' flight against valuation gravity: Can it defy the pull?

Meeting lofty expectations amid expensive valuations: The litmus test for electronics manufacturing services

Stocks of electronics manufacturing services companies have been major outperformers, with four of the top eight listed majors by market capitalisation doubling their value over the past 12 months. The biggest gainer in this space has been the market leader, Dixon Technologies (India), which is up nearly threefold.

Although investor interest in the sector and the stock is expected to remain high, sustaining the rally will be crucial given that valuations are in the expensive zone. The extent of further gains for these companies will depend on their ability to meet lofty expectations. While there have been multiple triggers for growth over the past year, the near-term trigger for Dixon is the April-June quarter (Q1) results and the outlook for 2024-25 (FY25).

Dixon is expected to lead the sector in Q1FY25 with revenue growth of 77-78 per cent, while its operating and net profit are likely to rise in the 61-77 per cent range.

Analysts Deepak Agarwal and Nikhil Kandoi of JM Financial Research expect Dixon to outperform in Q1FY25 mainly due to the execution of Xiaomi orders and the ramping up of Motorola sales. They expect this will result in higher mobile phone volumes and positive operating leverage.

While operating profit margins are expected to be flat sequentially, there could be a 10-basis point gain over the year-ago period to 4 per cent.

Given the strong outlook for FY25, led by the mobile segment, operating profit margins are expected to sustain over 4 per cent. The company is eyeing sales of 40 million units in the mobile segment, including 10 million for Samsung in FY25.

Additions of large new customers with better margins, backward integration, and operating leverage are expected to drive segment margins, according to analysts Ashish Poddar and Krisha Zaveri of Systematix Research.

The brokerage believes that new customer additions, strong traction in mobile, and a fast ramp-up in new segments (telecommunications hardware, laptop, refrigerator, washing machine) provide strong growth potential for Dixon in the long run. However, the brokerage has a ‘hold’ rating given the 20 per cent rally in the scrip over the past month.

Key risks for the stock include demand slowdown in key user segments such as mobile and lighting, and loss of market share of key customers.

Over the past decade, the company’s product mix has shifted towards the high-volume mobile phone segment, which currently accounts for 62 per cent of revenues. Previously, the consumer segment (television) accounted for 63 per cent of revenues in 2012-13.

Thus, its ability to ramp up volumes in the mobile segment, which has seen revenues grow by 22 times since 2019-20, is a major monitorable. The company is seeking to double its manufacturing capacity to 28-30 million units in FY25 over 2023-24 (FY24) on the back of improved volumes from existing as well as new customer additions.

With a controlling stake in iSMARTu (makes handsets under the brands iTel, Infinix, and Tecno in India) and a partnership with Longcheer (BBK Group brands: Realme, Oppo, and Vivo), Dixon caters to all the top six brands in the country.

Research analyst Paarth Gala of HDFC Securities says, “With mobile phone revenues likely to contribute 75 per cent plus of incremental revenues over FY24 through 2026-27 (FY27), the ramp-up of volumes remains a key monitorable.”

While the brokerage estimates that the company’s revenues, operating, and net profit will rise in the 45-54 per cent range over FY24-27, it has downgraded the stock.

“With the stock price nearly doubling over the past six months, the valuation at 75 times 2025-26 earnings per share has turned rich, thereby limiting potential upside,” says Gala of HDFC Securities.