This super high growth stock is up 1,400% in 5 years | Mint

This super high growth stock is up 1,400% in 5 years

In the past five years, the Dixon stock has gone up by a massive 1,400%. (Image source: Pixabay)
In the past five years, the Dixon stock has gone up by a massive 1,400%. (Image source: Pixabay)

Summary

  • The recent PLI success and emerging EMS megatrend suggest this stock’s future could be even more exciting.

The PLI scheme for the electronics manufacturing services (EMS) sector, first introduced back in 2020, seems to have accelerated the process of local manufacturing.

This has led to increased sourcing from domestic EMS players and translated to a higher addressable market.

Currently, about 80% of printed circuit board assembly and box-build products are imported from China. However, there is a growing trend towards import substitution.

This comes on the back of global electronics manufacturers contemplating the China plus one strategy and looking for alternate manufacturing locations for export business.

The shift is creating tremendous investment potential for emerging countries like India. With continued policy reforms such as the ongoing PLI schemes, the country seems well-poised to bite off a sizeable chunk of this opportunity.

Encouraged by the resounding success of the PLI scheme for mobile phones, the government introduced the PLI 2.0. The scheme was announced in May 2023 to boost domestic manufacturing and attract large investments in the IT hardware and electronics sector.

In all, 27 companies applied for the PLI 2 scheme, of which the government picked a total of 23 in November 2023.

Dixon Technologies was one of the primary beneficiaries. The EMS giant had applied under the new hybrid model, whereby domestic manufacturers have to commit over 2.5 bn in capital expenditure.

Dixon Technologies is the country's largest home-grown EMS player. It is the biggest manufacturer of LED TVs in India, producing for the likes of Samsung, Panasonic, Xiaomi, TCL, OnePlus and many more.

The company manufactures lighting products for Philips, Havells, Syska, Bajaj, Wipro, and Orient; and semi-automatic washing machines for clients like Godrej, Samsung, Lloyd, and Panasonic.

Apart from this, it also dabbles in manufacturing mobile phones and other hardware catering to the needs of Acer, Motorola, Nokia and the recently added Xioami.

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The company has been doing well, expanding its business substantially over the last 5 years. Between 2019-2023, the revenues have surged 6 times, while the net profits have grown 4 times.

This outstanding performance has trickled down to the returns. The 5-year average return on equity is at an admirable 23%, considering the company's predominant role as a contract manufacturer.

Despite the robust performance, the company has maintained a well-capitalised balance sheet. This is a big plus, considering it will enable the company to fund its next leg of growth.

Dixon’s Next Frontier

The company aims to grow its mobile phone business further, at a rapid pace.

Dixon Technologies has been manufacturing mobile phones and their parts since 2016. However, the business didn’t pick up until the push from the government in the form of PLI incentives.

These incentives have played a pivotal role in the company securing contracts and establishing collaborations with leading global mobile phone manufacturers.

It has aggressively pursued these opportunities, propelling its revenue share in mobile manufacturing from a modest 12% in fiscal 2020 to over 40% in fiscal 2023 and 50% in H1FY24.

The company is now committed to expanding this further, aiming to double its exports from 12 bn in fiscal 2023 to 20 bn in fiscal 2024.

Recently, the EMS major announced it added Xiomi to its roster of impressive clients. It will begin manufacturing smartphones for Xiaomi's Indian subsidiary at its new (fourth mobile phone manufacturing plant) production plant in Noida, Uttar Pradesh.

As part of its strategic plan, the company aims to export 30% of the total production capacity over the next two to three years.

PLI 2.0 Fuels Dixon’s Growth Prospects

Encouraged by the resounding success of the PLI 2 scheme incentive, Dixon Technologies plans to multiply its IT hardware business.

Dixon Technologies already has a foot in the door in the IT hardware segment. The revenue from this segment was around 1.4 bn in the first half of fiscal 2024. The company aspires to take this to 480 bn cumulatively over the subsequent six years!

While ambitious, Dixon Technologies has been working towards this diligently. It has been building its efficiency and competitiveness by ensuring its manufacturing charges for prospective customers are comparable to global rates.

These earnest endeavours seem to be paying off. Dixon is confident of advancing steadily in this segment. The company has initiated the process of backward integration.

As part of its strategic roadmap, the company intends to prioritize the localization of its operations, achieving this goal either through internal initiatives or by forging strategic partnerships with other entities.

It is already working with ACER for its IT hardware business and is in the final stages of negotiations with another prominent global brand, ensuring prolonged visibility.

Dixon Technologies has outlined a capex of 5 bn for fiscal 2024. It has indicated lower spending in the next year, considering a large portion of the capex spending has been front-ended.

The incredible growth, in tandem with the bright prospects, accounts for the stock's skyrocketing performance and valuations.

The stock has surged by over 50% since the beginning of the year, moving up from 3,897 in January 2023 to 6,011 at present.

In the past five years, the stock has gone up by a massive 1,400%!

 

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The current price implies a price-to-earnings ratio of 117 times, a 14% premium to its 5-year median PE of 102.

In Conclusion

Dixon's expansive plans to grow its business, along with its strong financial performance and wise capital allocation, inspire confidence in the business.

Even though the stock price has shot up, raising concerns over its valuations, Dixon's focus on new ideas and strategies makes it likely to succeed in the ever-changing market.

That’s it for today.

We’ll be back discussing another high growth stock next week.

Until then, stay tuned and 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

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