New client additions to turbocharge growth for Dixon Technologies

The news of Dixon Technologies’ tie-up with HP in addition to its existing Lenovo and Acer partnerships has led to a 5 per cent stock uptick since the start of the week. Dixon can target roughly 60 per cent of India’s addressable IT hardware market with these contracts.

Dixon targets Rs 48,000 crore in revenue from IT hardware under the PLI scheme over the next six years. This implies it hopes to achieve about 17 per cent market share by 2030. Given that the IT PLI regulations need incremental backward integration, this could be return-dilutive over the short term. It will need to continue capex to meet the PLI targets. Even so, on volume increases alone, FY26-27 estimates will be hiked by 3-4 per cent.

The addition of HP as a client was expected since Dixon in its Q1FY25 earnings call indicated signing up two new customers. It will need to add one large customer ideally to move into server manufacturing. The revenue impact of signing HP will largely be visible from FY26 onwards.

Dixon plans to achieve Rs 48,000 crore in revenue over six years, with a cumulative investment of Rs 250 crore and this implies a 50 times asset turnover by the final year.

Dixon’s mobile segment revenue growth remains a key. It is driven by strong Q1FY25 execution for anchor customer Motorola and ramp-up for sign-ups like Realme and Xiaomi. The outlook for H2FY25 continues to be strong driven by the ramp-up of smartphone volumes from the Ismartu acquisition. Dixon is also seeking one more customer in smartphones.

The Electronic Manufacturing Services (EMS) industry has strong growth visibility and sustained order flows. However, this inherently low margin and revenue growth in Q1FY25 went side-by-side with margin contraction. If margins recover, earnings growth momentum may accelerate, given large order books and new opportunities.

Dixon’s revenue will be driven by strong growth in mobiles & EMS, consumer electronics, and other emerging segments (refrigerator, wearables & hearables, and telecom networking products). However, there was an operating profit margin contraction of 30 basis points Y-o-Y each in FY24 and Q1FY25 to 3.9 per cent and 3.8 per cent, respectively, due to higher input costs. Going ahead, the operating profit margin is expected to expand to 4 per cent by FY26, led by backward integration and better product mix.

The laptop (portable computer) segment saw imports of 9 million units in 2023, dropping from a high of 13.3 million units in 2022. Around 75-77 per cent of imports are from China. In total, the IT hardware market was at around 16 million units in 2023, with HP (32 per cent share), Lenovo (17 per cent), and Acer (12 per cent) holding around 60-61 per cent share.

Dixon reported Rs 17,691 crore in FY24 revenues versus Rs 12,192 crore in FY23 – a growth rate of 45 per cent. The HP deal may push revenues to around Rs 33,990 crore in FY25 which would mean Y-o-Y growth of 92 per cent. The two largest contributors to FY24 revenues were consumer electronics which contributed Rs 4,148 crore and mobiles & EMS which accounted for Rs 10,919 crore.

In FY25, the consumer electronics segment is projected to grow to Rs 5,461 crore, and mobiles & EMS may rocket to Rs 26,200 crore. The consumer electronics had a borderline negative profit before tax margin in FY24, and that is expected to turn around in FY25. The stock, however, is very highly valued at around 175 times price-to-earnings for the trailing 12 months.