Valuation hurdle, competition may cap upside for Dixon Technologies

Company leads India's electronic manufacturing services and has improved revenue by 32% in the last decade

The stock of Dixon Technologies (India), the country’s largest listed electronic manufacturing services (EMS) player, was up 6 per cent in 10 trading sessions, boosting the gains over the last three months to 21 per cent.

The gains came following reports that Dixon will produce laptops in India in partnership with US and Chinese firms under the production-linked investment (PLI) scheme. It recently signed an agreement to make smartphones for Xiaomi India. Dixon has a diversified portfolio of televisions (TV), smartphones, lighting, washing machines, refrigerators, information technology (IT) hardware and wearables. New customers are expected to give it earnings visibility.

Dixon has a 35 per cent share of the LED TV market, 30 per cent in washing machines, 15 per cent in mobile phones, half of the lighting market and a quarter in surveillance systems.

While the company improved its revenue by 32 per cent and operating profit by 37 per cent in the last decade (FY13-23), the street will monitor its ability to maintain growth on the back of new initiatives.

Axis Capital believes Dixon will be able to achieve a revenue growth of 36 per cent over FY 23-26, led by a 59 per cent growth in mobile phones and a 20 per cent growth in home appliances. The brokerage believes Dixon will be a direct beneficiary of the government’s Make in India manufacturing campaign and the country’s evolution as an electronics export hub.

The company has maintained its relationship with marquee customers (Samsung, Phillips, Xiaomi, Panasonic and others), added new global clients, developed product capabilities and scaled up verticals. The brokerage has a target price of Rs 6,200 per share for Dixon.

Government efforts to encourage domestic production of laptops and its restriction on import licences have created positive sentiment for domestic EMS majors such as Dixon. Kotak Institutional Equities, however, said that manufacturing laptops/tablets is complicated in terms of higher levels of software and hardware testing and requirements to customise products. Aditya Mongia and Sai Siddhardha Pasupuleti, analysts with the brokerage, said the difference between manufacturing laptops/tablets and mobile phones would limit Dixon’s pace of scale-up in the laptops/tablets business. There is a weak case for brands to outsource or move manufacturing to India, they said. The brokerage has reiterated its sell rating with a target price of Rs 4,000 per share.

Morgan Stanley Research, too, has an underweight rating on the company. The brokerage believes that Dixon has a heavier exposure to business-to-consumer segments and hence it is vulnerable to competition. Its growth is reliant on PLI schemes continuing. The brokerage has a target price of Rs 4,033 a share as valuations do not factor in risks from potential competitive intensity and lack of intensity in research and development.

At the current price, the stock is trading at 54 times its FY25 earnings estimates.