Dixon Tech shares rise 25% in 3 months. Jefferies sees further upside

Dixon Technologies share price has risen 25% in three months on improving margin outlook and global brokerage Jefferies said it stays bullish on Dixon and expects it to post the highest EPS growth in its coverage, at 67% compound annual growth rate (CAGR) in FY22-25 - led by 5 PLI upsides, new categories & clients. 

“With 40% sales CAGR, Dixon Technologies could outpace industry as well. FY22 AR highlights its expansive client base,” the note stated. Jefferies has maintained its Buy rating on the stock with a target price of ₹5,305 apiece. Though, it sees market share loss for key customers, supply chain issues, demand slowdown, lag in pass-on of costs, as key risks.

"Indian EMS industry is forecast to reach $135 bn by FY26, +30% CAGR over $36 bn in FY21. India is fast emerging as a low-cost manufacturing hub (labour, energy), with rising export opportunities. Dixon is the market leader with 5 PLI approvals. We expect Dixon to outpace industry growth with +40%/+67% CAGR over FY22-25, driven by PLI upside, new categories and client adds," it added.

In view of growth prospects, Dixon Tech's capex is front ended at ₹3.0-3.2 bn in FY23 ( ₹4.2 bn in FY22) - mainly for backward integration / new projects, wherein Dixon expects EBITDA payback of 2 yrs / 4 yrs respectively. The company targets pretax RoCE of 30%+, post-tax RoE of 25% and dividend payout ratio at 20%, the brokerage house highlighted.

The company expects healthy volume growth at +24% YoY to 3.6mn units in FY23. Higher focus on ODM (~5% now) could help OPM expansion to 2.6%-3.0% (~2% now). In September 2022, Dixon signed an agreement with Google to sub-license rights relating to Android & Google TV, which could strengthen its position in LED TV category.

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