Betting on a healthy orderbook – Dixon Tech

Update on the Indian Equity Market:

On Monday, NIFTY ended flat at 17,054 (-0.01%) as it closed near the opening level of 17,056. Among the sectoral indices, IT (+0.8%), CONSUMER DURABLES (+0.2%), and FINANCIAL SERVICES (+0.1%) ended higher, whereas MEDIA (-2.2%), PSU BANK (-2.0%) and REALTY (-1.7%) led the losers. Among the stocks, KOTAKBANK (+2.4%), HCLTECH (+2.2%), and HDFCLIFE (+1.7%) led the gainers while BPCL (-2.6%), SUNPHARMA (-2.3%), and ADANIPORTS (-2.1%) led the losers.

Excerpts of an interview with Mr. Atul Lall, MD of Dixon Tech India (DIXON) with CNBC TV18 on 26^th November 2021:

• DIXON is a beneficiary of PLI scheme for IT hardware and it has tied up with Acer, a Taiwanese IT hardware firm for manufacturing laptops. The company has already started manufacturing laptops in its in-house facility for Acer.
• From the laptop segment, the company expects to achieve a minimum targeted revenue of Rs 500 mn in the 1^st year of manufacturing. From 2^nd year onward, the company expects to achieve a PLI scheme upward revenue ceiling of Rs 6bn, Rs 16bn, and Rs 24bn respectively.
• DIXON’s laptop segment being a prescriptive business (DIXON work based on Acer’s laptop designs), the operating margins will be in around of 4%.
• The company’s capex for FY22 is expected to be Rs 4,500 mn, out of which the capex for laptop segment will be Rs 200 mn. In FY23, the capex is expected to increase to Rs 2500 mn.
• Speaking of its segments, the company has a healthy order book for mobiles. It is also planning to enter in a JV with Bharti Airtel to provide telecom related products, IoT (Internet of Things) devices. The company is also launching LED monitors in the 4QFY22. The company’s revenue target for FY23E is around Rs 170 – Rs 175 bn.
• Company’s ODM (old design machines) business is facing commodity price increase pressure and there’s a lag in passing on the price increase to its customers. The company is seeing some softening in prices. It expects margin pressures to remain in the short term, but later it will be able to pass it on to the customers.
• 90% of the company’s own design revenues come from the lighting segment. Due to its large scale in this segment, the company is able to benefit from operating leverage. The margin pressure easing is happening in the segment.

Asset Multiplier Comments

• The laptop segment revenue estimates seem to increase exponentially. As it’s a prescriptive business, with low operating margins, it may take several quarters for the company to meaningfully benefit for the segment.
• The markets for laptops, mobiles, and IoT devices are quite competitive. Therefore, we may have to see how company’s plans for its new segments pan out.
• As the world is concerned with fear of Omicron Covid-19 variant spread, it may lead to stricter sanitation rules within the country, and may also result in lockdowns if the conditions worsen. This may affect the manufacturing and planned executions of new product launches of DIXON.

Consensus Estimate: (Source: market screener website)

• The closing price of DIXON was ₹ 5,005/- as on 29-Nov-2021. It traded at 114x/65x/47x the consensus earnings estimate of ₹ 45/78/108 for FY22E/FY23E/FY24E respectively.
• The consensus target price of ₹ 4986/- implies a PE multiple of 46x on FY24E EPS of ₹ 108/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”