Dixon Technologies faces near-term margin headwinds as input costs rise

Strong mobile revenue growth and market share gains support Dixon Technologies, but the end of production-linked incentives, higher input costs and delayed Vivo JV production weigh on margins

India’s largest electronic manufacturing services (EMS) company, Dixon Technologies, delivered a beat on topline performance even as the operating performance was sub-par in the September (Q2FY27) quarter. The strong sales growth in the quarter was on account of price hikes given the sharp rise in memory prices. 

 

While the overall smartphone industry has witnessed a decline in sales over the past year, Dixon has been able to gain market share with stable volumes. Going ahead, investors will track the progress on the production of the Vivo joint venture, gains from backward integration and margin trajectory given the higher commodity prices.

 

At the current price (₹11,000), the stock is trading at 43 times its FY28 earnings estimates. While there are margin headwinds and some downgrades after the Q2 result, (stock was down 4.3 per cent on Friday), the correction of over 21 per cent over the last three months means that the downside from the current levels may be capped.  

 

Revenues for the EMS major jumped 47 per cent Y-o-Y given better than expected execution and was ahead of estimates. The gains were led by the mobile segment, which accounted for 92 per cent of sales in the quarter and its sales grew by 50 per cent Y-o-Y. While volumes remained stable, value growth for mobile and IT hardware was a healthy 35-40 per cent. 

 

This was on account of a rapid increase in memory module prices.  The company has been gaining market share in the mobile segment and has delivered mobile volumes of 9.7 million which was stable Y-o-Y and saw a growth of 29 per cent Q-o-Q. 

 

The sector, however, is in the slow lane with volumes in the entry-to-mid level segment falling 26 per cent Y-o-Y while the overall smartphone market volumes fell by 16 per cent Y-o-Y. The company’s gains were aided by a scale-up in IT hardware/telecom segments on the back of product portfolio expansion and higher realisation. 

 

Among the non-mobile segments, consumer electronics, which accounts for 5 per cent of sales, grew 17 per cent Y-o-Y. Refrigerators were under pressure, due to higher polymer prices and freight cost and entry-level LED TV witnessing soft demand. Home appliances (3 per cent of sales) saw a growth of 37 per cent Y-o-Y, led by the pickup in washing machines.

 

Though the industry is reporting lower sales, the company expects to hit volume of 33-34 million in FY27 and this would be aided by Vivo JV commencing production from Q4FY27. Volumes in FY28 are expected to be about 55-60 million. 

 

Motilal Oswal Research expects Dixon’s volumes in FY28 to grow through new domestic client addition, which can add up 6-8 million of incremental volumes, higher exports from anchor client Motorola and Transsion from 3.5 million in FY27 to nearly 5-6 million in FY28, and 18-20 million from Vivo volume addition. The brokerage has a buy rating with a target price of ₹15,900. Analysts led by Teena Virmani of the brokerage expect FY28 to see full benefit of backward integration and improved volumes from Vivo-JV, exports and new client addition.  The brokerage raised its  FY27/FY28 earnings estimates by 7 per cent and 2 per cent respectively to bake in H1FY27 performance and slightly lower minority interest. 

 

The margin performance in Q2 was disappointing as the company reported a 110 basis points drop Y-o- to 2.7 per cent, due to end of mobile production linked-incentive or PLI and lag in passing on raw material cost. While mobile and EMS segment margins fell 100 basis points to 2.5 per cent, consumer electronics saw a profitability fall of 50 basis points to 3.6 per cent and home appliances witnessed a 350 basis points decline to 8.2 per cent. 

 

Elara Securities has downgraded the stock to reduce with a lower target price of ₹11,500. Analysts led by Harshit Kapadia of the brokerage attribute this due to a delay in Vivo JV, persistent pressure on mobile volume, and margin taking a hit due to the end of mobile PLI and scale up of lower-margin IT hardware segment. Further, the pace of earnings growth is slowing down compared to earlier periods (FY23-26 earnings growth of 86 per cent as compared to the 10 per cent estimated growth over the FY26-29 per cent.

 

Dolat Capital has, however, upgraded the stock to buy from an accumulate rating with a target price of ₹14,040. The risk reward, according to Nikhat Koor and Saaranga Shetty of the brokerage, has turned favourable following the recent stock price correction.