Dixon Technologies: Q4FY24 performance disappoints, valuation rich

Dixon Technologies’ January-March quarter (Q4) results came in well below expectations, but the potential for signing up a new mobile client, and plans for backward integration into display manufacturing kept investors happy.

Dixon’s Q4FY24 revenue grew 52 per cent year-on-year (Y-o-Y) to Rs 4,660 crore, below Street consensus, due to weakness in consumer electronics (Rs 890 crore) and home appliances (Rs 294 crore) segments.

The key mobile segment saw a 4 per cent quarter-on-quarter (Q-o-Q) decline in revenue in Q4.

The Ebitda margin at 3.9 per cent was also lower than expectation.

The Ebitda at Rs 180 crore was up 17 per cent Y-o-Y and down 1 per cent Q-o-Q, and profit after tax (PAT) of Rs 97 crore was up 21 per cent Y-o-Y but flat Q-o-Q and much lower than consensus.

Mobile volumes should scale up due to incremental volumes coming from Xiaomi but the other disappointment was the scaling down of Jio Bharat volumes.

Management expects overall smartphone mobile phone volumes of 28-30 million in FY25 (excluding Samsung) and Samsung may contribute 10 million units.

Dixon has 6 top brands as customers and expects to add another large mobile brand in the next 3-4 months.

Dixon achieved a significant milestone by producing 15 million smartphones and 38 million feature phones in FY24.

It expects monthly output of 300,000 units of Xiaomi, starting May 2024.

It has partnered with Longcheer for displays while Realme production volume hit 400,000 units in May.

Production of Airtel's 5G fixed wireless devices has also begun, and it also has a deal with Nokia for 5G fixed wireless devices.

The Consumer Business & Lighting business was down with consumer electronics down 9 per cent Y-o-Y due to softness in demand.

Lighting revenue was down by 27 per cent Y-o-Y to Rs 270 crore.

Dixon is moving towards premium lights and plans to exit batten lights from Q2 of FY25.

Also, one large lighting brand has shifted to outsourcing with Dixon as anchor supplier.

Backward integration in mobiles will take a capex of Rs 240 crore in FY25 to manufacture display modules (usually around 10-11 per cent of Mobile Bill of Materials value) to create a capacity of 25 million units.

Technology tie-ups are already finalised.

In LED TV, it’s focussing on new technologies along with developing interactive flat display panels.

Overall capex will not exceed Rs 550 crore in FY25.

The revenue growth in FY25 over FY24 should be around 65 per cent with earnings per share (EPS) growth of around the same.

The positives are scaling mobile phone capacity, new customer additions, backward integration to drive margins.

The 5G rollout is opening demand for new devices.

The scaling up in home appliances and laptops should also drive revenues.

Dixon should have good free cash flow of Rs 720 crore during FY24-26 along with a healthy return on equity of 35 per cent in FY26.

The price-to-earnings (P/E) ratio is fairly high, given that manufacturing electronics is inherently a low-margin segment and Ebitda is usually single-digits.

Most analysts have ‘buy’ recommendations.

According to Bloomberg, 12 out of 21 analysts polled post results are bullish, five are bearish and four are neutral.

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Their average one-year target price is Rs 8,244.