PLI scheme, outsourcing to aid Dixon Technologies' growth trajectory

Brokerages expect mobile volumes to rise multi-fold over the next two years

Dixon Technologies gained 7 per cent on Tuesday on multiple brokerage upgrades after the company’s subsidiary received approval to manufacture mobile phones under the government’s production-linked incentive (PLI) scheme. The scheme offers incentives up to 6 per cent spread over five years for an investment of Rs 200 crore. 

The company is in talks with other firms to achieve volumes under the scheme. Mobile phones account for 12 per cent of its revenues and the scheme is expected to improve volumes manifold over the next couple of years. Analysts at Emkay Research believe the company’s focus will now be on customer wins and achievement of potential revenue scale above the prescribed ceiling, along with margin guidance on a sustainable basis.

In addition to the PLI scheme, the growth potential for the market leader in electronics manufacturing services has been the key factor that has led to the rerating and tripling of stock price over the past year. The sector is expected to see over six-fold jump from $6 billion in FY20 to $40 billion in FY25, registering a growth of 47 per cent annually. 

This, according to Sonali Salgaonkar of Jefferies, will be driven by higher manufacturing costs in other countries, increased outsourcing by companies, government measures like PLI scheme and import restrictions on colour televisions (TVs) announced in August. In fact, import restrictions on LED panels and market share gains are expected to help the company report 8-15 per cent growth in revenues and profit before tax in the September quarter. 

Analysts at IIFL Securities expect the company’s LED TV sales in Q2 to rise 2.8x on a sequential basis and 33 per cent over the year-ago quarter, led by higher volumes from Samsung and continued growth from online sales of Xiaomi. 

Dixon’s revenues are expected to increase over 30 per cent annually in the next couple of years due to the outsourcing opportunity, while margins could see some uptick due to higher share of the design manufacturing segment. However, an increased proportion of the competitive mobile phone segment could offset some margin gains. 

While there is little doubt about growth triggers for Dixon, the stock price factors in near-term upsides. Thus, investors with long-term and moderate return expectations can look at the stock on dips.