Dixon Technologies’ growth levers intact but meeting guidance is crucial

Dixon Technologies (India) Ltd has recently signed an agreement with Google to sub license rights relating to Android and Google TV. This is on expected lines as the company had indicated during the June quarter (Q1FY23) earnings call that the transaction was on the verge of finalization.

The development comes at a time when demand is moderating in the consumer electronics segment with easing covid-19 led lockdowns and the economy opening up. When restrictions were high, demand for LED televisions (TVs) had increased. As such, consumer spend has moved away from this segment. Hence, the upcoming festive season is crucial. Investors will follow whether the company is able to meet its TV volume guidance of 3.6 million units in FY23, which represents 24% year-on-year (y-o-y) growth.

Further, prices of open cell, a key component used in manufacturing TVs, have corrected. This in turn has driven a fall in prices of TV. Lower realizations meant that revenue from the consumer electronics segment fell by 26% y-o-y in Q1FY23.

Against this backdrop, Dixon’s increasing revenue share from the mobile phones segment is likely to be a key driver for growth. Jefferies India expects Dixon’s mobile sales to grow by 10 times over FY21-25 led by upside from production linked incentive schemes. Volumes have ramped up for Motorola (client) and are currently at a monthly run rate of 400,000 units. Also, Dixon is in advanced stages of discussions with two large brands, which have a strong market share in the Indian market.

The company’s expansive product mix and clientele alleviates concentration risk, according to Jefferies. Even so, potential market share loss of Dixon’s key clients is a lingering risk.

To be sure, Dixon’s shares have fallen by 21% in CY22 so far versus the 2% gain in the Nifty500 index. Margin pressures and the company’s inability to pass on higher input costs hurt investor sentiments. Also, elevated inflation levels weighed on the stock as it is a looming threat given the adverse impact on demand for products catered to by the branded companies, said Harshit Kapadia, analyst at Elara Securities (India).

Dixon intends to clock about 60% growth in revenue in FY23. Meeting this target and improving margin performance are crucial for a meaningful rally in the stock, which is about 30% below its 52-week high. Investors would also do well to track the increase in share of original design manufacturer (ODM) in the consumer electronics segment, which stood at 4% in FY22 as this would boost margins. Based on Bloomberg data, the stock trades at nearly 50 times estimated earnings for FY24.