PLI boost sends Dixon Technologies, Amber Enterprises stocks soaring

Shares of the two companies have rallied close to 600 per cent and 260 per cent from 2020, raising doubts over further gains

Shares of Dixon Technologies and Amber Enterprises have risen 41 per cent and 24 per cent, respectively in February, and the two stocks touched their all-time highs this past week. With this, they have risen nearly 600 per cent and 260 per cent, respectively, from their 2020 lows as investors continue to bet on their long-term growth.

While the Street sees significant long-term benefits from existing and future production-linked incentive (PLI) schemes and capacity expansio­ns that will help sustain high growth rates, the strong operational performance in the recently concluded Dece­mber quarter (Q3) boosted confidence. However, with share prices running way ahead of consensus one-year target prices, questions remain over the near-term trajectory of the stocks.

Both Dixon and Amber are a play on the government’s move to boost domestic production of consumer durables and electronic products. The Centre has introduced several measures under its Atmanirbhar Bharat and Make in India initiatives to reduce imports and promote local manufacturing, with priority given to electronics and consumer durable goods sector. Electronics is the third most imported category, behind only oil and gems and jewellery, at $57 billion in FY19. 

Moreover, experts forecast that even organised players could witness strong growth over the long term, driven by factors like robust demand and market share gains. 

“Dixon and Amber have taken the lead in contract manufacturing of consumer durables and are poised to leverage this multi-dimensional tide,” said Lokesh Garg, analyst at Credit Suisse, in a report dated December 8.

Dixon is a key player in the Indian electronic manufacturing services (EMS) industry and has a presence in several segments like mobile phones, LED TVs, washing machines, lighting products. It is one of the approved domestic manufacturers in the PLI scheme for mobiles and has already on-boarded two customers, Motorola and Nokia.

Under the scheme, Dixon will produce sub-$200 (Rs 15,000) smartphones in India with a capex outlay of Rs 200 crore over four years. The Centre has set different revenue ceilings for incentives each year, but the company expects to exceed the ceilings over the five-year period. This is likely to bring incremental cumulative revenue of Rs 30,000 crore over FY21-25, according to the management. The margin generated from the PLI-led mobile phone sales is also set to be superior to that of its normal smartphone sales, even though it will be passing through part of the scheme’s benefits to its customers.

Apart from mobile phones, the government may extend the PLI scheme for manufacturing air conditioners (AC) and components. This is expected to benefit Amber Enterprises, which manufactures about 25 per cent of ACs sold in India, and almost all major brands in the country are its customers. About 60 per cent of revenues come from room AC manufacturing; the rest from components and mobile applications. Additionally, Amber foresees huge potential after move to ban import of ACs with refrigerants, and expects the impact to show from FY22.

Meanwhile, in Q3, Dixon reported better-than-expected results. And, though Amber missed the Street’s revenue estimates, it outperformed on the operational front. In Q3, sales more than doubled for Dixon, driven by healthy growth across its product segments, while better operating leverage helped negate commodity cost inflation and boosted bottom line. 

Amber reported a 3 per cent drop in revenue on account of inventory liquidation, but cost optimisation and change in product mix helped report good margin gains. This coupled with reduction in interest costs enabled Amber to report 58 per cent year-on-year growth in net profit.

However, despite supportive government policies and strong demand outlook, experts find it difficult to recommend these stocks at current valuations. “While we remain structurally positive, we would wait for better entry point,” said Himanshu Nayyar, research analyst at YES Securities.