 "Mobile, EMS growth fuels Dixon Technologies stellar Q3; analysts up targets")
The stock of the country’s largest listed electronics manufacturing service (EMS) company, Dixon (Technologies) India, shed 13.8 per cent at close on Tuesday. While its results for the third quarter of the current financial year (Q3FY25) were a mixed bag, concerns on execution, dilution of returns profile. and demanding valuations weighed on the stock price. About half of the analysts tracking the stock have a “sell” or a “hold” rating.
Even as revenues and operating profits for the company in Q3 were better than estimates, it disappointed on the margins and profit fronts. Revenues and operating profits for the EMS major more than doubled over the year-ago quarter and beat analyst estimates. While revenues rose by 117 per cent, the company reported operating profit growth of 112 per cent.
The growth was led by a threefold jump in the mobile and EMS division revenues on the back of increase in volumes with existing clients and consolidation of the Ismartu acquisition. While its feature phone volumes for the nine months of FY25 stood at 25 million, smartphone volumes were at 21 million for this period. The company is targeting volumes of 30 million for FY25.
The mobile and EMS segment contributed 89 per cent to Dixon Technologies’ total revenue for Q3FY25, up from 67 per cent in the same quarter last year. The share of operating profit from the division also surged, climbing from 57 per cent in Q3FY24 to 83 per cent in Q3FY25.
The gains in the mobile and EMS segment were partly offset by the weak show in the consumer electronics business, which reported a 31.9 per cent fall due to moderation in television sales and was sharply below estimates. Home Appliances saw a 9.4 per cent year-on-year (Y-o-Y) growth due to demand for washing machines during the festive season.
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Even though the top line growth was strong, operating profit margin at 3.7 per cent was slightly lower than Street estimates. Net profit too came in below estimates due to higher depreciation/amortisation and increased minority interest (Q3 was the first full quarter after Ismartu consolidation).
The company has plans to set up its own display fabrication unit in a joint venture with HKC at a total cost of $3 billion, and its progress will be keenly tracked by the Street. Analysts led by Deepak Krishnan of Kotak Institutional Equities say that the ability to execute an asset-heavy venture with a long gestation period and different return on capital employed profile holds the key for Dixon. The brokerage has revised its earnings estimates downwards by 7 per cent for FY25 and 2 per cent each for FY26 and FY27.
Motilal Oswal Research highlights that the incremental margin from the display facility will offset contraction in margins due to the PLI (Production Linked Incentive) scheme ending by FY26. Analysts led by Teena Virmani of the brokerage have downgraded their earnings estimates for FY25 and FY26 by 8 per cent and 4 per cent, respectively. The brokerage, which has a “buy” rating, believes that the key risks would emanate from the lower-than-expected growth in the market opportunity, loss of relationship with important clients, increased competition, and limited bargaining power with clients.
While brokerages like the long-term structural growth story of the company, a sharp rally in the stock amid execution risks has taken valuations beyond comfort levels. Paarth Gala of HDFC Securities says: “Although we continue to appreciate Dixon’s execution capabilities, current valuations at 70 times its FY27 earnings per share leave no room for error.”
The brokerage has maintained its “reduce” rating.
Jefferies Research is also cautious, maintaining an “underperform” rating, with a price target of Rs 12,600. The brokerage cites concerns over Dixon’s valuation, pointing out that the stock is trading at 106 times its estimated FY26 price-to-earnings (P/E) ratio.