We recently interacted with Sunil Vachani, Executive Chairman at Dixon. Highlights: (i) Penetration and imports substitution in categories wherein Dixon has presence offer huge growth potential, and Dixon aspires to be a top five global player in EMS by revenue and capability. (ii) Mgmt remains confident of attracting global/local partners that prioritise players with solid execution track record, cost edge, etc.
Dixon’s sustainable returns-centric scale ambition reinforces confidence with regard to opportunity basket. Automation, migration to ODM (especially mobile phone), and a downstream component ecosystem are critical to its long-term revenue and competitive edge. Retain ‘Buy’.
Local-Global scale ambition: Mgmt highlighted a few growth drivers: significant penetration-led growth in domestic market and import substitution in key segments targeted by Dixon such as LED lights (25% imported) and monitors (largely imported). Dixon is well on track to comply with mobile PLI ceiling, and also to achieve revenue of Rs 70 bn (FY23E). The company is in talks with more customers for feature/smart phones. Global majors are looking for domestic players with faster ability to scale up manufacturing, low-cost structure and execution track record, all of which lend Dixon an edge.
Balanced approach to growth: Expanding into scalable and new categories, Dixon has a clear long-run returns threshold, which is a clear filter. In our view, while global business would pose challenges to overall returns as it offers high scale, Dixon’s ability to generate returns above the expected rate would remain key for stakeholders. Refrigerator, washing machine and LED lights have a high ODM share, whereas mobile phones have multiple aspects and call for greater clarity on multiple components. Skill upgradation and automation are consistent focus areas for management, and they expect commodity volatility to settle by FY23E.
Outlook and valuation: ‘Growth by design: In our recent initiation report, we highlighted the growth/returns super-cycle for Dixon, which distinguishes it from large global peers. Revenue mix (OEM versus ODM) and share of global revenues would remain key to overall returns, and remains a key monitorable. Dixon’s ongoing expansion will be key to its quantum scale in revenues over FY21–24e (45% CAGR) and seems to be on track.
In the long run, returns would depend on strategic choices regarding domestic and exports segments, R&D and other investments, etc. Retain ‘BUY/SO’ with a TP of Rs 5,700. Dixon is among our top sector picks.