This stock is up 2,700% since its IPO. Here's why it's ripe for a split

A stock split is a corporate action where a company divides its existing shares into multiple new shares, increasing the total number of shares outstanding while maintaining the overall value for shareholders. This does not alter the total value of an investor's holdings, as the share price decreases proportionally.

Read this | Dixon Technologies: A flurry of acquisitions, collaborations, and capacity expansions

For instance, in a 2-for-1 stock split, each shareholder receives two shares for every one they own, but the price of each share is halved. Companies usually perform stock splits when their stock prices rise significantly, making them less accessible to smaller investors, or to boost liquidity and attract a broader investor base. Stock splits often signal a company’s confidence in future growth, typically occurring after a substantial increase in share price.

This article will explore a high-growth company, Dixon Technologies Ltd, which has delivered an astounding 2,700% return since its initial public offering (IPO) in 2017 and could be an ideal candidate for a stock split.

About Dixon Technologies

Incorporated in 1993, Dixon Technologies (India) Ltd is a leading electronic manufacturing services (EMS) company operating across various product verticals, including consumer electronics, lighting, home appliances, CCTV cameras, mobile phones, security surveillance equipment, wearables and audibles, AC-PCBs.

The company also provides reverse logistics services and recently entered a joint venture with Imagine Marketing Private Ltd to design and manufacture wireless audio solutions in India.

Dixon Technologies is one of the largest LED TV manufacturers in India, servicing over 35% of the country’s requirements. The company’s revenue mix demonstrates its diversified operations, with 60% coming from mobile EMS, 25% from consumer electronics, 12% from lighting products, 7% from home appliances, and the remaining 3% from security systems.

Headquartered in Noida, Dixon operates 22 manufacturing facilities across Noida, Dehradun, Ludhiana, and Chittoor. Its production capacity includes 30 million smartphones and 50 million feature phones annually, distributed across four plants in Noida. In February, Dixon launched a new factory in Dehradun for manufacturing washing machines, boasting an annual capacity of 2.4 million units.

The company’s financial performance has been exceptional, with revenue growing at a compounded annual growth rate (CAGR) of 42% over the last four years. 

Ebitda and profit after tax have also grown at a CAGR of 33%, and margins have improved from 3.6% in FY22 to 4% in FY24. In the first half of FY25, Dixon achieved revenue growth of 120.5% compared to the same period in FY24, though Ebitda margin declined slightly to 3.7% from 4%. Net profit, however, tripled from ₹1.8 billion in H1FY24 to nearly ₹5.4 billion in H1FY25, driven by robust sales and a one-time exceptional item.

Dixon’s strong operational performance can be attributed to growth in the Indian electronic manufacturing system ecosystem and government initiatives like the production-linked incentive (PLI) schemes. The company’s order book remains strong, with key clients including Motorola, Xiaomi, and Oppo. Production for a major global brand is expected to commence by the end of November 2024.

The company is also making strides toward backward integration, with plans to enter the display fabrication business through a capital outlay of ₹260 billion over time. Management has identified the mobile and EMS segments as key growth drivers, aiming to scale mobile manufacturing capacity from 25–30 million units to 40–45 million by 2026.

Additionally, the IT hardware business is poised for significant growth. Dixon has already begun manufacturing laptops for Acer and is collaborating with four global brands. To meet rising demand, the company has established a new plant in Chennai with a production capacity of 1.5 million units. The onboarding of major clients in this segment underscores Dixon’s potential for exponential growth in the coming years, supported by a robust order book and an industry-leading client base.

The electronic manufacturing services sector is expected to grow at a CAGR of 35% from FY24 to FY30, propelled by macroeconomic trends and government support. Dixon’s stock has mirrored its operational success, delivering a staggering return of 2,700% since its September 2017 IPO, rising from ₹550 to nearly ₹17,000 by January 2025.

The company has already executed a stock split once in its history. In February 2021, it announced a 1:5 split, which was implemented in March 2021, reducing the face value of each share from ₹10 to ₹2.

PG Electroplast Ltd, a peer, announced a 10:1 stock split in May, reducing the face value of its shares from ₹10 to ₹1. Dixon, with its current face value of ₹2, has the potential for another stock split, though no official announcement has been made. Over the last 12 months, the stock has risen by 156%. It has recorded negative annual returns only twice since its listing: in 2018, when it halved, and in 2022, when it fell by 30%.

Also read | Dixon, Kaynes Tech, Syrma SGS are poised for growth but beware rich valuations

Despite its impressive growth, the stock trades at a high valuation of 144 times trailing twelve-month earnings, making it susceptible to corrections if growth slows or competition pressures margins further. Additionally, the sector’s reliance on government support, particularly through PLI incentives, means that changes in regulations could adversely impact Dixon’s growth trajectory.

Investors should exercise caution, thoroughly assessing the risks inherent in the business model and market environment before committing to an investment in Dixon Technologies.

Happy Investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com