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Volume boost, backward integration triggers drive upgrades for Dixon
The approval of Dixon Technologies' Vivo joint venture is expected to lift production volumes, while backward integration and export opportunities could support margins and earnings growth
The JV offers an opportunity to rapidly scale up volumes and its approval has therefore led to sharp revenue and profit upgrades for Dixon.
After a delay of over a year and a half, the government finally approved the joint venture (JV) of Dixon Technologies (Dixon) and Vivo Mobile India (Vivo). The JV, in which Dixon, the country's largest electronic manufacturing services (EMS) player, has a 51 per cent stake and Vivo the remaining 49 per cent, faced an extensive delay because of the regulatory review under Press Note 3, which requires scrutiny of investments from countries such as China that share a land border with India.
The JV offers an opportunity to rapidly scale up volumes and its approval has therefore led to sharp revenue and profit upgrades for Dixon. While the near-term upside may be limited, given that the stock, at Rs 13,420, is up 17 per cent over the past month and 29 per cent over the past three months, the JV offers backward integration opportunities and, therefore, the possibility of higher margins.
The key upside from the JV is the outsized gains on the volume front. Vivo, which has a 23 per cent market share in India, ended CY25 with volumes of 35 million units. The company expects the JV to account for about two-thirds of the total volume, which should translate into an addition of 22 million units annually. Given that it will take about 40 days for production to start after the approval, the full volume and revenue upside from the JV is expected to come through in the December quarter.
The JV, according to the management, could result in a revenue increase of Rs 30,000 crore, with higher selling prices compared with its existing mobile portfolio. JP Morgan Research expects the JV to add 11 million mobile units in FY27 and 22 million units each in FY28 and FY29. The JV drives a 24-39 per cent upgrade to revenue estimates over FY27-29, but a lower 13-18 per cent earnings-per-share upgrade because of the 51:49 JV structure, which results in minority interest. The brokerage has an 'overweight' rating with a target price of Rs 16,700, compared with the earlier Rs 14,300.
The Vivo JV can materially improve Dixon's mobile phone volumes from 32 million to about 55 million units and create a stable revenue stream for the mobile segment. In addition to Vivo, there are other opportunities available to the EMS major, especially on the export front. Manish Choraghe of Keynote Capitals says Dixon is also exploring export opportunities through its Ismartu subsidiary in Africa and a JV with Longcheer, while continued momentum from its existing large US customer further strengthens the export revenue profile. Collectively, Dixon's mobile business remains well anchored, with client stickiness and volume scale being its two most durable competitive advantages, he adds. The brokerage has a 'buy' rating with a target price of Rs 16,608.
In addition to volumes, its efforts at backward integration and venturing into speciality verticals within the EMS space are also expected to reduce cyclicality and improve margins. Motilal Oswal Research points out that the company is already undertaking capital expenditure for the backward integration of displays and camera modules. Teena Virmani and Prerit Jain of the brokerage expect the benefits of this backward integration to start playing out from H2FY27.
They expect that by FY28, backward integration initiatives will more than offset the margin contraction caused by the end of PLI 1.0 this year.
For the June quarter, however, the brokerage expects the operating profit margin to contract 50 basis points year-on-year to 3.3 per cent as mobile PLI incentives cease, although an improved revenue mix across segments should limit the margin contraction. The brokerage has a target price of Rs 16,100.
Among the key growth catalysts for the stock are continued policy support for domestic electronics manufacturing, including the mobile PLI 2.0 scheme. The company should also benefit from the diversification of its revenue streams as it expands into other EMS verticals such as aerospace, automotive, defence, medical and industrial electronics. This should help reduce cyclicality by lowering its dependence on consumer businesses and boost its margin profile.
Emkay Research believes Dixon's strong return ratios, negative working capital cycle and robust cash generation justify its premium valuation. The brokerage has a 'buy' rating with a target price of Rs 15,200. Strong revenue trajectory
 "Volume boost, backward integration triggers drive upgrades for Dixon")
