Dixon Technologies (India) Ltd shares fell 6% to ₹15,540 on Wednesday after its March quarter results amid stiff valuations. Sure, net profit after minority interest quadrupled year-on-year to ₹401 crore, but this includes a fair value gain on investments worth ₹250 crore.
Still, revenue and Ebitda both more than doubled year-on-year to ₹10,293 crore and ₹443 crore, respectively. The Ebitda margin increased 40 basis points.
The mobile and EMS (electronics manufacturing services) division was the key growth driver, with its revenue almost tripling. The segment contributed almost 90% of Dixon’s revenue and 80% of Ebitda.
The market shift from 4G to 5G is boosting the segment’s growth, company executives said. As 5G smartphones are costlier, unit realisation and thus revenue grows faster. The company is yet to get the benefits of production-linked incentives (PLI) for Q4 of FY25.
Dixon manufactured 28.3 million smartphones in FY25. It expects to produce 43-45 million units in FY26 and 60-65 million in FY27.
Since mobile phones form almost all of the mobile and EMS division’s sales, it is safe to assume revenue growth of at least 40-45% in FY26 and FY27 if the company meets its production targets.
Capital expenditure for FY26 is set at ₹900 crore to expand capacity.
While revenue growth is likely to be strong over the next two years, how margin behaves remains to be seen in the absence of PLI for mobile phone manufacturing from FY27. Current profitability has a net booster effect of 0.6-0.7% from the total incentive of 4-5% as the remaining benefit is passed on to customers.
Though Dixon has developed a strategic relationship with clients over the years, the contract manufacturing industry has become extremely competitive. Thus, increasing prices to offset the discontinuation of PLI benefits might be difficult.
Automation, cost efficiency
The management tried to address the concern on margin impact on an earnings conference call. It was of the view that automation and increasing cost efficiency on a large scale of operations should be able to mitigate the impact of the lack of PLI.
Nomura Research noted that Dixon offers a strong 65% CAGR in EPS over the next two years to FY27. It used a price-to-earnings (P/E) multiple of 65 to arrive at a target price of ₹21,202, based on FY27 estimates.
The PEG ratio, or P/E divided by growth, at 1 is fair, provided the growth rate continues unabated beyond FY27. However, the Street is sharply divided in terms of valuation, with Jefferies’ target price of ₹13,300 substantially lower than the Nomura estimate.
