Dixon Technologies needs demand to pick up and soon enough

Dixon Technologies (India) Ltd is staring at a gloomy financial year 2023. At the beginning of the year, the company was expecting revenue of ₹16,500-17,000 crore. But expectations have moderated since then. In the first half of FY23, the guidance was reduced to about ₹15,000 crore. After a miserable December quarter (Q3FY23), Dixon now expects to clock revenue in the range of ₹12,200-12,700 crore. In FY22, Dixon’s revenue stood at around ₹10,700 crore.

A subdued demand environment across its key segments – consumer electronics, lighting products and mobiles remains a sore point. This led to weaker-than-expected Q3 results with revenue down by almost 22% year-on-year (y-o-y) to ₹2,405 crore. The expansion in Ebitda (earnings before interest, tax, depreciation and amortization) margin by 1.27 percentage points y-o-y to 4.6% was positive but this could not soothe investor concerns. Dixon’s shares tumbled as much as 19% on Friday, also hitting a new 52-low of Rs2631. Valuations are not exactly inexpensive. The stock trades at 36 times its FY24 estimated earnings, Bloomberg data show.

Some analysts opine that the share price drop was overdone. Analysts at Nuvama Research expect near-term weakness for the stock as earnings downgrades play through. Various broking firms have cut their FY23-24 earnings estimates for Dixon including Nuvama. But the broking firm points out that growth seems healthy despite these cuts (with 30%+ return on equity). Indeed, Dixon’s healthy return ratios are a bright spot.

However, investor sentiment could revive with volume growth and thus, revenue. Dixon is on the verge of closing two key customer acquisitions in the mobile segment, which can potentially add annual revenue of worth ₹5,000-6,000 crore. This vertical contributed nearly 42% to operating revenue in the nine-month period ended December. On the back of these acquisitions, Dixon aims to double mobile segment revenue in FY24 from an estimated ₹4,000 crore in FY23. Overall, Dixon anticipates revenue of ₹19,000–21,000 crore in FY24. To be sure, the company’s progress towards this aim is a key monitorable. Jefferies India pencils in lower sales at ₹18,700 crore building softer offtake amid global slowdown in mobiles.

Besides, sustaining the Q3 margin level is crucial. The multi-quarter high margin was driven by cost efficiencies and price hikes across original design manufacturer businesses. But given the lower margins in Q1 and Q2, Dixon expects FY23 margin at around 4%. While the company expects to maintain Q3 levels going forward, it could be a stretch if there is no meaningful pick-up in sales volumes.