New products, exports to drive Dixon’s growth

Focus on backward integration and value addition to help on margin front

At a time when the benchmark indices and broader markets have been flat, stocks of the country’s largest electronic manufacturing services player, Dixon Technologies, have jumped 19 per cent over the past three months.

And this rally may continue as its presence in high-growth segments, expansion into new categories, tapping export markets, and the production linked incentive (PLI) scheme are expected to aid revenue and profit growth.

Though the manufacture of consumer electronic products dominate its revenues, the company has expanded into other areas (lighting products, home appliances, mobiles, security systems) that have helped its revenues grow 36 per cent on average between financial year 2015-16 (FY16)-21. In the first half (H1) of FY22, 59 per cent of sales and 42 per cent of operating profit at the consolidated level came from the consumer electronics segment.

Among the key medium-term triggers are export opportunities, especially the global light emitting diode or LED bulbs market, which is pegged at $8-9 billion annually. The company, which is the largest LED bulbs maker in the country, is eyeing the European and American markets.

Anand Rathi Research’s Nirav Vasa and Surbhi Lodha believe the outlook for this segment is bright, while margins were dented by the increase in input costs and the lag in passing them on to customers. The company has also applied for PLI for the manufacture of LED components and will invest ~100 crore over the next five years on this.

Highlighting the growth opportunities after the initial scale and capacity ramp up in the domestic market, analysts at Edelweiss Research believe that the entry in the global supply chain with a judicious strategy (restricted to LED lights, mobile at this stage) offers a much larger total addressable market of $170 billion than a relatively pale $15 billion domestic opportunity.

However, the bulk of the near-term growth will come from its existing product line, which coupled with new client additions would enhance overall revenues. Tarun Bhatnagar and Someel Shah of BOBCAPS Research say the company operates in high-growth segments with levers in the form of low ownership (washing machines), short replacement cycles (mobiles: Two years), frequent upgrades (from feature to smartphones, regular to smart Tvs/larger screens) and high usage (more than one TV per household).

The company has been adding customers such as Motorola and Nokia (mobiles), Bosch in appliances, and Nokia in TVS. Further, new product categories such as refrigerators and telecom equipment as well as value addition (focus on design, backward integration) could help improve the top line and profitability.

In addition to lighting, its participation in multiple PLI segments would be a trigger. As part of the PLI scheme, the company has a joint venture with Bharti Enterprises for telecom equipment; it also has an agreement with a global major for the manufacture of IT hardware. When operational, the plants are expected to add significantly to revenues over the next few years.

While brokerages expect its net profit to grow 50-70 per cent over the next two years, valuations at 70 times factor in most of the near-term positives.

New product categories such as refrigerators and telecom equipment as well as value addition could help improve the top line and profitability