Following an over 50 percent surge over the past two months, global brokerage house Jefferies has downgraded Dixon Technologies to ‘hold’ from ‘buy’. The company's risk-reward appears stretched post the sharp rally, said the brokerage.
As per Jefferies, after the recent rally, Dixon Technologies' valuation has reached an estimated FY24 price-to-earnings (PE) ratio of approximately 59x, which is around 30 percent higher than its historical average and a sharp premium to Taiwanese EMS (electronic manufacturing services) players.
It added that the current weak demand that poses a risk to the existing high-growth forecast is the key reason behind the downgrade. Jefferies also trimmed its EPS by 2-4 percent and estimates a 47 percent EPS CAGR in FY23-26e.
However, the brokerage has raised the price target of the stock to ₹4,550 from ₹4,350, indicating a potential upside of 8 percent.
Dixon is a non-branded EMS player with a 75 percent low-margin OEM (original equipment manufacturer) mix. Post the rally, it now trades higher than branded B2C companies such as Crompton Greaves, V-Guard Industries, Polycab India, and Whirlpool, said Jefferies.
Taiwanese EMS peers such as Hon Hai, Wistron and Pegatron trade at 13x-29x forward earnings. "While we acknowledge that their business models and target markets may be different, even so, Dixon is trading at a sharp premium to these players," Jefferies said.
The brokerage further added that Dixon's FY23-26e EPS CAGR at the 47 percent forecast is also higher than most coverage companies, driven by upside from 5 PLI schemes - mobiles is the largest. But most positives appear priced in after the sharp rally, noted the brokerage.
It also pointed out that the EMS order book is influenced by sales budgeting by brand owners, noted the brokerage.
In this context, the present weakness in domestic demand could warrant caution, as most of Dixon's end-user categories are B2C/discretionary (eg: Mobiles, LED TVs, Appliances). Also, global smartphone offtake has been weak since last year. “Over FY23-26e, we forecast Dixon's sales CAGR at +29 percent, pivoted by Mobile sales (+27 percent CAGR),” said Jefferies.
"We stay bullish on India's indigenization opportunity. But, the present softness in demand warrants caution, as most of Dixon's product categories are B2C/discretionary in nature. 3/4th of Dixon's sales mix is OEM which is prescriptive with lower OPM (3.5-4 percent). Over FY23-26e, we forecast sales/PAT CAGR at 29 percent/47 percent respectively, factoring PLI ramp-ups, customer and category adds," stated the brokerage.
Key risks are demand slowdown, market share loss for key customers, and supply chain issues.
In the March quarter, Dixon Technologies posted a 28 percent year-on-year (YoY) jump in consolidated net profit at ₹80.6 crore from ₹63.1 crore in the year-ago period. Meanwhile, its revenue stood at ₹3,065.5 crore during the period under review, up 3.8 percent against ₹2,953 crore in the corresponding period of the preceding fiscal.
Stock Price Trend
Dixon Tech has advanced 19 percent in the last 1 year and 9 percent in 2023 YTD. However, the stock fell around 3.5 percent in the previous session after the release of the Jefferies report. In July so far, the stock has lost over 3 percent.
Meanwhile, it surged 50 percent in May and June combined.
In the last 3 years, the stock has given multibagger returns, rising 268 percent since June 2020.