Expansion May Boost Prospects, But Incentive Reliance And Competition Could Hamper Progress

Key Takeaways

• Expansion in manufacturing capacity and partnerships in mobile and IT hardware aim to boost revenue and diversify income streams.
  
• Backward integration and incentives are projected to enhance margins and drive substantial earnings growth.
  
• High reliance on PLI incentives and key segments, along with increased competition and expansion risks, may strain margins and affect revenue growth.

Catalysts

Engages in the provision of electronic manufacturing services in India and internationally.

• Dixon Technologies is expanding its manufacturing capacity in mobile phones and IT hardware, with a new facility in Noida and plans for significant production increases. This is expected to drive revenue growth.
  
• The acquisition of Ismartu and a healthy order book from brands like Motorola, Xiaomi, and Oppo are projected to bolster Dixon's earnings and revenue streams in the mobile segment.
  
• Backward integration initiatives, including manufacturing displays with HKC and exploring precision components, are likely to improve net margins through higher value addition and cost efficiencies.
  
• The Production Linked Incentive (PLI) scheme for IT hardware is expected to provide significant revenue growth, with Dixon targeting ₹4,500 crores to ₹5,000 crores annually, positively impacting earnings.
  
• New partnerships and product expansions in consumer electronics, telecom, and networking products, such as 5G production and launching IPTV boxes, are anticipated to contribute to revenue diversification and growth.

Dixon Technologies (India) Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Dixon Technologies (India)'s revenue will grow by 36.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 2.6% today to 2.3% in 3 years time.
• Analysts expect earnings to reach ₹16.1 billion (and earnings per share of ₹267.74) by about December 2027, up from ₹7.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹19.7 billion in earnings, and the most bearish expecting ₹11.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 83.5x on those 2027 earnings, down from 146.7x today. This future PE is greater than the current PE for the IN Consumer Durables industry at 11.8x.
• Analysts expect the number of shares outstanding to grow by 0.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.17%, as per the Simply Wall St company report.

Dixon Technologies (India) Future Earnings Per Share Growth

Risks

• The dependency on the PLI (Production Linked Incentive) scheme for IT hardware and other segments may present risks if the incentives are phased out or not renewed, potentially affecting future margins and revenue stability.
  
• With the current high reliance on mobile and EMS businesses, a slowdown or decline in smartphone demand due to market saturation or decreased consumer spending could lead to reduced revenue growth.
  
• The company is planning significant CapEx for backward integration and component manufacturing, which might not yield immediate returns, risking potential strain on cash flows and margins in the near term.
  
• Increased competition in the LED TV and consumer electronics markets may place pressure on pricing and margins, impacting revenue growth and profitability.
  
• The aggressive international expansion and reliance on large export orders carry execution risks, which could affect earnings and net margins if not managed efficiently.

Valuation

• The analysts have a consensus price target of ₹14650.74 for Dixon Technologies (India) based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹18800.0, and the most bearish reporting a price target of just ₹8430.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹696.5 billion, earnings will come to ₹16.1 billion, and it would be trading on a PE ratio of 83.5x, assuming you use a discount rate of 15.2%.
• Given the current share price of ₹17528.55, the analyst's price target of ₹14650.74 is 19.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.