Kotak initiates coverage on Dixon Tech stock with 'Sell' rating, sees 21% potential downside
Dixon, an EMS player, is transitioning away from slow-growing segments and where it has a large 30 per cent-plus market share to new EMS segments, exports and component manufacturing.
- Sep 7, 2023,
- Updated Sep 7, 2023 10:59 AM IST
Kotak Institutional Equities has initiated coverage on Dixon Technologies Ltd with a 'Sell' rating and a target of Rs 4,000, suggesting 21 per cent potential downside for the stock over Thursday's intraday price of Rs 5,063.05. Kotak said the recent rally in Dixon’s share price has made conditions stiff. The requirement to make money is revenue getting compounded at 19 per cent over the next 20 years, assuming that margin and asset turnovers would move from hereon to ensure that Dixon maintains its healthy high 30s return on invested capital, Kotak said.
Dixon, an electronic manufacturing services (EMS) player, is transitioning away from slow-growing segments and where it has a large 30 per cent-plus market share to new EMS segments, exports and component manufacturing. Kotak said Dixon has the right credentials for the first two, thanks to free cash flow to invest, customer references and PLI scheme. In the component manufacturing, Kotak said Dixon depends on external support -- the government’s ability to incentivise collaboration with global majors for Indian companies.
Kotak said its share price target is based on 35 times December 2025 earnings per share, which factors in a reasonable upside from the transition. It said its target multiple implies a revenue CAGR of 16 per cent over FY2025-45, relying heavily on the success of the transition.
"With most markets that Dixon operates in likely to grow volumes at 1X GDP over the medium term, the revenue growth yields stiff conditions for its market share. This implies a 40-45 per cent market share in the mobile and laptop/tablet segments by 2036 and 70-80 per cent market share by 2046. We place the burden of additional growth on the market share of these two segments, as the case for brands outsourcing more to EMS players is largely limited to these segments, in our view," it said.
Kotak said the EMS business requires a combination of things to grow beyond CAGR of 15 per cent. It noted that every third TV and semi-automatic washing machine are manufactured/assembled in India by Dixon and imports have become negligible over time. The largest brand that is yet to outsource manufacturing has limitations in giving business to Dixon, given its customer profile, Kotak noted.
Kotak said in most categories, market growth has stopped being supportive for Dixon.
"TV volumes sold are lower than those during the time of CRT TVs, partly impacted by high GST. Washing machine market sales are stagnating in the semi-automatic market; growth in other segments where the starting point for EMS is low may take time. Lighting volumes are flat to declining over the past few years and the impact of the longer replacement cycle of LED lamps on market growth is in its initial stages. India’s smartphone market operates at 50 per cent of levels where the Chinese market is now starting to stagnate," it noted.
The case for a healthy double-digit business CAGR, thus, relies on a combination of exports, sharp share gains in
mobile and entry into new EMS revenues. "Dixon would find it difficult to grow its business in mid-double digits without such support," it said.
Disclaimer: Recommendations provided in this article and/ or any reports attached or relied on herein are authored by an external party. The views expressed herein are those of the respective authors/ entities, and do not represent the views of Business Today (BT). BT does not guarantee, vouch for, endorse any of its contents and hereby disclaims all warranties, express or implied, relating to the same. BT further urges you to consult your financial adviser and seek independent advice regarding the contents herein, including stock investments, mutual funds, general market risks etc.)
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Kotak Institutional Equities has initiated coverage on Dixon Technologies Ltd with a 'Sell' rating and a target of Rs 4,000, suggesting 21 per cent potential downside for the stock over Thursday's intraday price of Rs 5,063.05. Kotak said the recent rally in Dixon’s share price has made conditions stiff. The requirement to make money is revenue getting compounded at 19 per cent over the next 20 years, assuming that margin and asset turnovers would move from hereon to ensure that Dixon maintains its healthy high 30s return on invested capital, Kotak said.
Dixon, an electronic manufacturing services (EMS) player, is transitioning away from slow-growing segments and where it has a large 30 per cent-plus market share to new EMS segments, exports and component manufacturing. Kotak said Dixon has the right credentials for the first two, thanks to free cash flow to invest, customer references and PLI scheme. In the component manufacturing, Kotak said Dixon depends on external support -- the government’s ability to incentivise collaboration with global majors for Indian companies.
Kotak said its share price target is based on 35 times December 2025 earnings per share, which factors in a reasonable upside from the transition. It said its target multiple implies a revenue CAGR of 16 per cent over FY2025-45, relying heavily on the success of the transition.
"With most markets that Dixon operates in likely to grow volumes at 1X GDP over the medium term, the revenue growth yields stiff conditions for its market share. This implies a 40-45 per cent market share in the mobile and laptop/tablet segments by 2036 and 70-80 per cent market share by 2046. We place the burden of additional growth on the market share of these two segments, as the case for brands outsourcing more to EMS players is largely limited to these segments, in our view," it said.
Kotak said the EMS business requires a combination of things to grow beyond CAGR of 15 per cent. It noted that every third TV and semi-automatic washing machine are manufactured/assembled in India by Dixon and imports have become negligible over time. The largest brand that is yet to outsource manufacturing has limitations in giving business to Dixon, given its customer profile, Kotak noted.
Kotak said in most categories, market growth has stopped being supportive for Dixon.
"TV volumes sold are lower than those during the time of CRT TVs, partly impacted by high GST. Washing machine market sales are stagnating in the semi-automatic market; growth in other segments where the starting point for EMS is low may take time. Lighting volumes are flat to declining over the past few years and the impact of the longer replacement cycle of LED lamps on market growth is in its initial stages. India’s smartphone market operates at 50 per cent of levels where the Chinese market is now starting to stagnate," it noted.
The case for a healthy double-digit business CAGR, thus, relies on a combination of exports, sharp share gains in
mobile and entry into new EMS revenues. "Dixon would find it difficult to grow its business in mid-double digits without such support," it said.
Disclaimer: Recommendations provided in this article and/ or any reports attached or relied on herein are authored by an external party. The views expressed herein are those of the respective authors/ entities, and do not represent the views of Business Today (BT). BT does not guarantee, vouch for, endorse any of its contents and hereby disclaims all warranties, express or implied, relating to the same. BT further urges you to consult your financial adviser and seek independent advice regarding the contents herein, including stock investments, mutual funds, general market risks etc.)
Also read: TCS shares in focus as Tata group firm bags $1 billion deal from Tata Motors arm JLR
Also read: Bharti Airtel, Indian Hotels, ITI: Trading strategy for these buzzing stocks