Dixon Tech shares jump 10% to new high after Morgan Stanley upgrades stock

Shares of Dixon Technologies (India) surged almost 10 percent in intra-day deals on Friday to their record high of ₹9,064 apiece, after global brokerage firm Morgan Stanley upgraded the stock to 'equal-weight' from an earlier 'underweight’ rating post its March quarter results (Q4FY24). However, the brokerage has a target price of ₹8,696 for the stock, implying a 4 percent downside from today's record high.

Morgan Stanley expects an earnings CAGR (compound annual growth rate) of 42 percent for the firm during FY24 to FY28, which led to this upgrade.

The brokerage also noted that Dixon Technologies has on-boarded large mobile customers in the last six months and the company is looking to invest $30 million in manufacturing display modules for mobiles, which are some key positives. However, Morgan Stanley highlighted that concerns about delivering guidance and sustaining low working capital remain.

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Following today's surge, the stock has now soared almost 206 percent from its 52-week low of ₹2,965.85, hit on May 18, 2023. It has already rallied over 178 percent in the last one year and 38 percent in 2024 YTD, giving positive returns in 4 of the 5 months so far. The stock has risen 7.6 percent in May so far, extending gains for the 4th straight month. It also rose 11.5 percent in April, 11.9 percent in March and 11.5 percent in February. However, the scrip fell 8.8 percent in January 2024.

Dixon Technologies missed the Street's estimates for the January-March quarter, mainly due to a 110 basis points year-on-year contraction in margins. This contraction was caused by the proportion of low-margin mobile and electronics manufacturing services (EMS) businesses rising to 66 percent from 46 percent earlier in the quarter, pointed out the brokerage.

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For the March Quarter, the company reported a 25 percent year-on-year (YoY) increase in net profit at ₹98.5 crore. Meanwhile, the electronics manufacturing major posted a 52 percent YoY increase in revenue from operations to ₹4,658 crore as against ₹3,065 crore in the corresponding period of the preceding fiscal.

On the operating front, the company's operating EBITDA increased by 17.3 percent YoY to ₹183 crore compared to ₹156 crore in the same period last year. However, its margin experienced a slight decline to 4 percent.

The board of directors of the company also recommended a final dividend of ₹5 per share of the face value of ₹2 each, for FY24.

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While Morgan Stanley has upgraded the stock, most brokerages maintained their cautious view.

Jefferies has maintained an 'underperform' rating on Dixon Technologies but raised its target price to ₹6,350, indicating a significant 30 percent downside. The fourth-quarter performance met expectations, driven primarily by mobile segment sales. However, excluding mobiles, most other product segments were subdued throughout FY24, with a notable 13 percent year-on-year decline in LED TV volumes.

Meanwhile, Kotak Institutional Equities recommended a 'Sell' with a target price of ₹6,000 (34 percent downside), citing expensive valuations that already account for the company's electronics manufacturing services (EMS) segment, components, and exports. The firm has lowered its FY24 earnings estimate by 8%, while raising its FY25 and FY26 estimates by 9% and 6%, respectively, due to the anticipated ramp-up in the mobile segment driven by the Ismartu acquisition.

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However, ICICI Securities recommended an 'Add' rating for Dixon with a target price of ₹8,600.

As per the brokerage, Dixon's prudence in adapting to changing demand conditions and adjusting its business mix accordingly. While growth rates in Consumer Electronics and Lighting have slowed, the company has swiftly increased its presence in the mobile segment, now serving major brands like Nokia, Samsung, Xiaomi, Motorola, Itel, and Oppo. Dixon has also established a strong position in IT hardware with Production-Linked Incentive (PLI) benefits, securing clients like Acer and another global customer, along with increased orders from existing customers such as Motorola and Samsung. ICICI Securities anticipates a cyclical recovery in Consumer Electronics, Lighting, and Home Appliances by FY26. Additionally, Dixon's investments in multiple backward-integrated initiatives are expected to enhance margins and strengthen customer relationships, it explained.

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Moreover, the firm announced today that it has signed a Memorandum of Association (MoU) with Acerpure Indian CE to manufacture a range of consumer appliance products. Acerpure is involved in the trade, import, and export of consumer durables and home appliances. Dixon will begin manufacturing Acerpure products, starting with advanced TVs, pending the signing of definitive agreements.

Sunil Vachani, Dixon's executive chairman, emphasised that this partnership marks a significant step toward enhancing India's self-sufficiency and global competitiveness in electronics. Aligned with the 'Make in India' initiative, the goal is to produce premium consumer products for both domestic and international markets, promoting economic growth and innovation while supporting local talent.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.(