After 66% rally in 5 months, this mobile maker sees rating cut by Jefferies

From a 52-week low of Rs 2,554.95, shares of electronic contract manufacturer Dixon Technologies Ltd have rallied 66 per cent in a matter of five months, making risk-reward unfavourable on the counter. Foreign brokerage Jefferies has downgraded the stock to 'Hold', as the stock now trades at 59 times estimated FY24 earnings per share, which is at 30 per cent premium over its historical average, and a sharp premium to Taiwanese EMS players.  EMS stands for electronic manufacturing services.

"While we acknowledge that their business models and target markets may be different, even so, Dixon is trading at a sharp premium to these players. Thus, high valuations pose the risk of normalization, once the high-growth phase is behind," Jefferies said on Dixon Technologies.

The present weakness in domestic demand could warrant caution, as most of Dixon's end-user categories are B2C and discretionary such as mobiles, LED TVs and appliances. Also, global smartphone offtake has been weak since last year, Jefferies said.

Jefferies said Dixon Technologies also trades at higher valuations than branded B2C companies such as Crompton Greaves, Vanguard, Polycab and Whirlpool of India. Jefferies' base target for the stock at Rs 4,550 suggests limited upside on the counter while its downside scenario suggest a steep 40 per cent-plus downside.

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Dixon Technologies is a non-branded B2B EMS player, with 75 per cent sales mix as OEM (lower-margin prescriptive business). Its EMS order book is influenced by sales budgeting by brand owners. The brokerage has trimmed its EPS estimates by 2-4 per cent and estimates 47 per cent EPS CAGR in FY23-26. Over this period, the brokerage forecast Dixon's sales CAGR at 29 per cent, pivoted by mobile sales growth of 27 per cent annually.

"Dixon's FY23-26e EPS CAGR at 47 per cent is forecast to be higher than most coverage companies, driven by upside from 5 PLI schemes - Mobiles is the largest. But most positives appear priced in post sharp rally,' it said while justifying its downgrade.

Jefferies said it stays bullish on India's indigenisation opportunity. But, the present softness in demand warrants caution, as 3/4th of Dixon's sales mix is OEM, which is prescriptive with lower operating margin of 3.5-4.0 per cent.

It forecast PAT CAGR at 47 per cent over FY23-26, factoring in PLI ramp-ups, customer and category adds.

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