Multibagger stock Dixon Technologies have given robust returns to its investors, rising over 600 percent in the past 3 years. However, since hitting its all-time high of ₹6,243.60 on October 19, 2021, the stock has lost 42 percent of its value to currently trade around ₹3,630 per share (as of June 29, 2022).
The decline in the stock, which is a direct beneficiary of govt's Make in India push, comes on the back of its expensive valuations amid rising inflation. Further, it was also affected since consumer spending on electronics like TV and mobile phones, which Dixon manufactures, took a hit.
The stock also lost 18 percent in the last 1 year and 34 percent in 2022 so far.
Now that the stock has witnessed a massive correction, is it the right time to invest in it? Brokerages are still not very bullish on the stock and see further correction in the stock going ahead.
Global brokerage Morgan Stanley recently downgraded the stock to underweight and has a target price of ₹2,634 (cut from ₹2,879 earlier), indicating a downside of 28 percent.
Morgan Stanley believes multiple risks are being ignored including competition, margins, and ROE contraction. Dixon has a strong management team, but given the multiple businesses it intends to build up in 4-5 years, its bandwidth faces ongoing challenges, it added.
"Beyond the PLI period (i.e., once the incentive scheme is discontinued), the cost competitiveness of EMS (electronic manufacturing services)players will be tested, and sufficient local component ecosystem development will play an important part of a sustained manufacturing thrust in the country. Rising commodity prices pose a risk to ODM (original design manufacture) business margins," it said in the note.
It also noted that the consumer electronics volumes (TVs are the company's largest segment) have been sluggish, despite new customer wins, while the domestic lighting volumes also continue to disappoint. Semi-automatic washing machines and mobile volumes have somewhat offset weakness but commodity prices remain high and ODM margins will need to be monitored, Morgan Stanley stated.
It also lowered its earnings estimates by 2-5 percent over F23-26E. "Our EPS is now 7-11 percent below consensus estimates, where we see downside risks," added MS.
Meanwhile, another broekrage IIFL Securities also has a 'sell' call on the stock with a target of ₹3,470.
ICICI Securities said that Dixon has a market share of 3-4 percent in the Indian EMS industry which is valued at $23.5 billion which means there is an opportunity to expand and grow. Further, the domestic mobile production is set to grow 5x to ₹10.5 lakh crore by FY26 under the PLI scheme and Dixon will be one of the main beneficiaries, added ICICI.
New segments such as electronics/IT products, telecom products and LED lights & AC components will also drive future revenue growth for Dixon, noted the brokerage. It has a 'hold' rating on the stock with a target price of ₹4,500.
Another key reason behind the underperformance has been the sell-off by foreign investors. As per market data, FPIs have decreased holdings in Dixon from 18.51 percent to 16.39 percent in the March quarter.
In the March quarter, the company's consolidated net profit jumped 43 percent YoY to ₹63.13 crore while its revenue rose 40 percent YoY to ₹2,952.75 crore.
Dixon Technologies (India) is the largest home-grown design-focused and solutions company engaged in contract manufacturing products in the consumer durables, lighting and mobile phones markets in India.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.