Dixon Technologies, Whirlpool: Jefferies downgrades to underperform on stretched valuations, subdued performance

Dixon Technologies (India) and Whirlpool of India have been downgraded by Jefferies India to ‘Underperform’ ratings in the small and mid cap stocks space (SMID) post December quarter performance.

During the October- December 23 quarter, companies under coverage of Jefferies while have posted a strong profit before tax growth of 24% year-on-year, which as per Jefferies was driven by capex and housing. Also in this backdrop even though Jefferies remains  bullish on backward integration in Electronics Manufacturing Services (EMS). Nevertheless , in view of softer B2C demand and stretched risk-reward they have downgrade Dixon Technologies and Whirlpool to Underperform.

Analysts at Jefferies in their result review report said that post more than 150% rally in a year,  Dixon's valuations are stretched as it trades at 73 times FY25 estimated price to earnings.  

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Whirlpool on the other hand has been downgraded on subdued performance. Whirlpools operating margins has now declined to 5% in first nine months FY24 versus 9-12% in FY15-21, said analysts at Jefferies. Durables is a hyper-competitive market, with higher price elasticity they added.

For Whirlpool Jefferies had cut FY25 and FY26 estimated operating margin estimates by 60-70bps to 6.2% and 6.7% respectively. (100 bps make 1%). The cut in operating margin estimates has driven 8-10%  cut in earning per share estimates. Jefferies FY25 EPS is now 4% lower compared to consensus estimates . Jefferies target Price to earnings at 32 times is at a discount to historical average of  33x times. The revised target price by Jefferies for Whirlpool now stands at Rs1,125 for stock that is trading at ₹1230 levels .  In February' 2024, promoter and New York stock exchange listed Whirlpool Corporation has sold 24% stake of Whirlpool India.

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With regards to Dixon Technologies, Risk-reward as per Jefferies analysts looks stretched in view of Dixon's order book susceptibility being a B2B EMS player. Also 80% of OEM sales mix is with low margins (3.0-3.5%). Further the  capex outlay can be higher and the competition is also emerging. Over FY23-26 , Jefferies analysts estimate mobile segment (60% of 9MFY24 sales mix) to remain the key driver for Dixon, with  more than 36% sales CAGR (compound annual growth rate). But, this growth trajectory could be a key monitorable post expiration of PLI tenure (in next 3-4 yrs), they added. Also, softer demand warrants caution, as most of Dixon's end-user categories are B2C/discretionary like Mobiles, LED TVs, Appliances. Thus,  Jefferies has cut FY25-26 earnings per share estimates for Dixon by 2-3%. Notably FY25 EPS estimates by Jefferies are 7% lower than consensus estimates.

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