HKC JV approval removes overhang, may boost Dixon Technologies' margins

Dixon Technologies shares surged after MeitY approved its joint venture with HKC Overseas to manufacture display modules, with analysts expecting improved margins and value addition

Shares of Dixon Technologies zoomed 12.8 per cent, logging an intraday high of ₹11,062.1 per share on the BSE on Tuesday. The company’s shares closed the day 11.26 per cent higher at ₹11,009 apiece. In comparison, the BSE Sensex was up 0.82 per cent at 78,205.98.

 

The buying on the counter came after the Ministry of Electronics and Information Technology (Meity) approved Dixon Tech's joint venture (JV) with HKC Overseas to manufacture display modules.  

The JV will be set up in a 74:26 (Dixon:HKC) shareholding structure, and will operate through a new entity called Dixon Display Technologies Private (DDTPL). The JV will focus on the development, manufacturing, and distribution of liquid crystal display (LCD) and thin-film transistor LCD (TFT-LCD) modules along with other display technologies.

 

Nomura Research says that the Press Note 3 approval for a JV announced earlier offers meaningful clarity on the planned ramp-up. HKC is a strong display partner that already caters to many of Dixon’s mobile customers globally, and has a presence across information technology (IT) hardware and TV displays.

 

Analysts led by Siddhartha Bera of the brokerage point out that within components, display module assembly (10 per cent of bill of material) has healthy double-digit margins and can potentially add 50 basis points to Dixon's overall margins by financial year 2028 (FY28) (up to 100 basis points later, with full ramp up). This along with camera modules (which are already in the ramp-up stage), will increase value addition by Dixon and remain a longer-term structural margin tailwind. 

 

Nomura has maintained a ‘Buy’ rating on Dixon Tech, with a target price of ₹14,678, valuing the stock at around 45 times FY28 earnings per share or EPS estimates.

 

In the first phase, the JV aims to create a capacity for 24 million smartphones and 2 million notebooks annually. In the second phase it plans to expand smartphone production to 55-60 million units. The company also intends to foray into the manufacturing of LED TV displays and automotive displays with capacity of 2 million units and 1 million units, respectively. With the HKC JV approval now, and Longcheer JV approval earlier, the key regulatory nod still pending under Press Note 3 norms, is the Vivo joint venture. 

 

Nirransh Jain of BNP Paribas Securities expects the HKC nod to allay investors’ concerns on the worst-case scenario of a missing Vivo JV approval. In addition, there remains the prospect of a mobile PLI extension that poses a significant earnings upside, if approved. 

 

Though JP Morgan Research is overweight on the stock, it has cut its target price from ₹13,700 to ₹13,000 per share. With the HKC JV approval finally coming through, the probability of Vivo JV approval has increased, it adds. 

 

While the brokerage has incorporated incremental operating profit from HKC JV into estimates, it has cut mobile volumes due to continued headwinds from increasing memory prices. This has led to a cut in earnings per share by 13-14 per cent over FY27/28.