Strong growth prospects seen in Dixon Technologies, Amber Enterprises

Two stocks are up 14-21% in the last month; Amber has more upside given the target prices

The advent of summer has led to a focus on air conditioners, as well as other white goods, and consumer electronics components. Contract manufacturers in this space have received the most attention. Two companies -- Dixon Technologies and Amber Enterprises -- have been recommended by various analysts in the recent past. Both have seen strong price gains recently. 

Amber Enterprises (AEL) reported standalone revenue growth of 55 per cent year-on-year (YoY) in the fourth quarter of the 2022-23 financial year (Q4FY23), beating Street expectations. Consolidated revenues rose 65 per cent YoY. The Q4 saw consolidated Ebitda (earnings before interest, tax, depreciation and amortisation) and PAT (profit after tax) growth of 62.4 per cent and 81.7 per cent YoY, respectively.

Although the standalone gross margin contracted 15 basis-points (bps) YoY, consolidated gross margin rose 10 bps and the Ebitda margin was up 31 bps. Other income and interest costs were also up 99 per cent and 102 per cent YoY, respectively. 

The segment-wise YoY revenue growth was as follows: RAC and components: 55 per cent, mobility segment: 37 per cent, electronics: 69 per cent and motor up 31 per cent. RAC stands for room air conditioners. There were market share gains as RAC manufacture expanded from 6.4 million sets in FY22 to 8.4 million sets in FY23.

Amber has been able to expand market share to 29.4 per cent in FY23 from 26.6 per cent in FY22. The management estimates the RAC market is likely to expand by 15 per cent to 9.5 million in FY24. There is also steady growth in HVAC (heating ventilation & AC) solutions.

The guidance is for 25-30 per cent Ebitda growth over the next 2-3 years and further gains in market share in RAC. However, Q1FY24 is likely to be softer due to unseasonal rainfall and there are hints of high inventories. AEL expects to improve RoCE (return on capital employed) to 19-21 per cent over the next 2-3 years due to economies of scale. Cash flow was Rs 320 crore in FY23 while the FY23 capex was Rs 640 crore. Capex spend may have peaked in FY23. The stock is up 14 per cent in the last month and its current market price Rs 2,130 per share, and still has many ‘buy’ recommendations. According to Bloomberg, the average one-year target price is Rs 2,484.

Dixon Technologies is another contract manufacturer in roughly the same spaces. It had strong Q4FY23 results. Net sales were up 4 per cent YoY while Ebitda was up 32 per cent YoY due to better margins, higher share of original design manufacturer sales and price hikes. The Ebitda margin was up by 110 bps YoY to 5.1 per cent, with Ebitda rising to Rs 160 crore. Segments like mobile (up 9 per cent YoY), security systems (up 13 per cent YoY) and home appliances (up 20 per cent YoY) supported growth.

The management expects strong growth in FY24 in the mobile segment, where it is in the finalisation stage of talks with two potential customers. It expects volume growth of 12 per cent in TVs and 20 per cent in washing machines. Management also expects a rise in PLI (product linked incentive) revenues and strong growth in refrigerators, fully automatic top loading washing machines, wearables, IT hardware, and in LED TVs and Android TVs.

Over the next four years, management expects revenues to double to around Rs 22,000 and Rs 23,000 crore. The key risk would really be if big customers lost market share. The stock is up 21 per cent in the last month, to Rs 3,513, and it may be fully valued at these levels with analysts’ target price around Rs 3,559.