FY22 to be a game changer – Dixon Technologies

FY22 to be a game changer – Dixon Technologies

Update on the Indian Equity Market:
On Thursday, Indian equity markets snapped a two-day losing streak with the Nifty50 closing 1.5% higher at 11,449. RELIANCE (+7.3%) was the top gainer after reports of potential investments in its retail arm, Reliance Retail. BPCL (+6.0%), and ASIANPAINT (4.2%) were the other lead gainers in the index. INFRATEL (-4.8%), HINDALCO (-2.9%), and TATASTEEL (-2.3%) led the losers. Among the sectoral indices, PSU BANK (+2.5%), MEDIA (+1.3%), and FINANCIAL SERVICES 25/50 (+1.01%) were the top gainers. METAL (-1.1%), and PHARMA (-0.01%) were the only sectoral indices to end in the red.
*Nifty Financial Services 25/50 is a new capped version of the Nifty Financial Services index.

Edited excerpts of an interview with Mr. Atul Lall, MD, Dixon Technologies (India) with CNBC-TV18 on 8th September 2020:
• A government panel has recently cleared $100 bn of mobile export proposals from global manufacturers.
• Dixon has submitted 2 applications under the production-linked incentive scheme (PLI) but has not received an official nod yet. It might take a week to ten days to receive official communication from the government.
• They have large contracts for exports and domestic markets lined up with big global brands. The focus is to accelerate project implementation and production is planned to start by Q4FY21.
• The government is giving a 4-6 percent incentive for manufacturing under the PLI scheme for the next 5 years, which Mr. Lall calls the government handholding in the infancy stage of any industry. There is some disability in manufacturing mobile in India when compared to China, and the scheme is helping reduce that.
• They are seeing significant traction from large global players looking to shift base from China and other countries to India.
• Year 1 is a very short period and they get barely 3 months to generate revenues in this fiscal (FY21). In year 2, in one application, there is a ceiling of about Rs 3000-4000 crore. If they get both the applications, they will be able to generate revenues of Rs 8000 crore through mobile manufacturing, which is a big leap for a company like theirs.
• There will be a small margin expansion with a large volume expansion next year, which is going to be a game-changer.
• In the LED TV segment, the order book is very strong and they are operating at 110% capacity and with the government shifting imports of a certain kind of televisions from OGL (Open General License) to a restricted category, their order book is increasing. They have already expanded their capacity from 3.6 mn to 4.4 mn units, there is a further expansion planned to take it to 5.5 mn units. This increased capacity is almost 33% of the Indian TV requirement. This second round of capacity expansion will be completed by March 2021.
• The capacity expansion is happening across verticals, including mobiles and washing machines.
• There will be significant growth in Q2 on a YoY basis. Plants for LED TV, mobiles, and washing machines are running at almost 110% capacity. Lighting being an extensive manpower-oriented segment, they had to re-engineer the lines because of social distancing is working at 80% capacity. The one vertical that is not performing as well, which is the security surveillance systems, working at 50% capacity. Overall, the business has been good.
• FY21 will be better than FY20 both on the top line as well as the bottom line.

Consensus Estimate: (Source: market screener website)
• The closing price of Dixon Technologies (India) was ₹ 9400/- as of 10-September-2020. It traded at 91.3x/ 50x/ 36.7x the consensus earnings estimate of ₹ 103/ 188 / 256 per share for FY21E/FY22E/FY23E respectively.
• The consensus target price of ₹ 7936/- implies a PE multiple of 31x on FY23E EPS of ₹ 256/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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