In its latest equity report, domestic brokerage firm Sharekhan has maintained its bullish stance on Dixon Technologies (India) despite the stock being an underperformer this year. So far in the current year, the stock has corrected by almost 28.40 percent, falling from ₹5,509 apiece to the current level of ₹3,944.
Dixon is a leading manufacturer of products for key consumer durable brands in India. The company is a leader in the outsourcing EMS industry with a 35 percent share in LED TV and a 50 percent share in the lighting market in India based on capacity.
Besides a strong manufacturing base, the company is building capabilities in design and aims to capture a bigger share of the market through backward integration and capacity expansion.
"In our interaction with Dixon, management highlighted near-term headwinds in terms of lower volume offtake post-festival season in TVs and mobiles. Further, COVID lockdowns in China may disrupt the supply chain, although for a brief period," said Sharekhan.
As per the company, after Diwali, demand in certain categories such as mobile, IT products, and TVs has been muted as customer wallet share is going more to the hospitality industry than to consumer electronics. Therefore, the company expects soft volumes in Q3 FY2023, according to the brokerage.
However, the company is confident of a demand recovery in Q4FY2023 on the back of a strong order book, especially in the washing machines, telecom and lighting, it added.
Meanwhile, Dixon is well poised to be a key beneficiary of several PLI schemes. Recently, it received a second disbursement of ₹60 crore under PLI for mobile manufacturing through its subsidiary, Padget Electronics.
In addition to mobile, Dixon has approval for lighting, IT hardware, air conditioners, wearables, and hearables, Sharekhan stated.
In lieu of muted demand in mobile in the near term, the company has revised its revenue guidance downwards from earlier ₹4,500-5,000 crore to ₹4,000-4,500 crore. However, the company is about to finalise manufacturing contracts with two major mobile players in the near future.
The brokerage noted that discussions with Apple may lead to some fruitful opportunities as Apple already has Foxconn, Pegatron, and Wistron as its suppliers for the iPhone in India.
Apple, however, plans to manufacture one out of every four iPhones in India by 2026, and in that case, it may seek additional suppliers in the future, the brokerage pointed out.
Further, apart from phones, Dixon is also eying the opportunity to manufacture some other Apple products, the brokerage highlighted.
Currently, India’s contribution to global phone exports is very low. However, many companies are de-risking their global supply chain and looking at India as an alternative.
The rising COVID cases in China may lead to stricter lockdowns, which could lead to supply-side challenges in the short term. However, this may reinforce the China+1 strategy in the long run, which could benefit Indian suppliers, according to the report.
The company has been continuously expanding capacities in its existing verticals and is now backward integrating and expanding into other verticals such as refrigerators, LED monitors, AC components, and other hardware products.
The brokerage anticipates that the company's margins will improve as a result of backward integration, cost optimization, and operating leverage. “We envisage revenue/PAT CAGR of 31%/47% over FY2022-2025E,” it said.
The recent correction in the stock price following a cautious management commentary for the current quarter provides long-term investors with a buying opportunity.
"We have fine-tuned our estimates for FY2023–24E following a cut in mobile revenue guidance for FY2023–24E and robust guidance for FY2024–24E and thereafter," Sharekhan added.
The brokerage has a ‘buy’ call on the stock with a target price of ₹4,960 apiece, which represents a potential upside of 25.76 percent from the stock's previous closing price.
However, the brokerage outlined some of the key downside risks for the stock including a possible instability in the supply chain following lockdowns in China due to a surge in covid cases and a slowdown in consumer discretionary spending and discontinuation of business from key customers.
21 analysts polled by MintGenie on average have a 'buy' call on the stock.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.