Dixon Technologies Tries To Allay Morgan Stanley's Concerns, Stock Trims Losses

Shares of Dixon Technologies Ltd. fell as much as 6%, the most in over two weeks , after Morgan Stanley flagged "ignored" risks even as other top brokerages had a positive view on the contract manufacturer of mobile phones to televisions.

While Dixon is likely a key beneficiary of the electronic manufacturing scheme in India, Morgan Stanley cautions that multiple risks are being ignored, according to its June 21 note. These include competition, possible of contraction in return on equity, rising commodity costs and impact on cost competitiveness once the performance-linked incentives end.

Jefferies, however, expects Dixon Technologies to be a key beneficiary of the indigenisation opportunity, citing incentives for local manufacturing of mobiles as the biggest upside trigger among performance-linked incentive segments it is participating in.

While Morgan Stanley flagged sluggish volumes in consumer electronics and domestic lighting segments, Jefferies sees the business on a firm footing.

Morgan Stanley is underweight on the stock with the target price reduced to Rs 2,634 -- an implied downside of 21%. Jefferies retained 'buy' and target at Rs 5,300, a potential upside of of 59.35%. Credit Suisse maintained 'buy' and 'outperform'.

Saurabh Gupta, chief financial officer at Dixon Technologies, however, tried to allay some of the concerns raised in Morgan Stanley's note.

While commodity costs continue to have an impact, there's a shift in momentum as prices of some of raw materials moderated over the last month, Gupta told BQ Prime's Niraj Shah in an interview.

Also, the volume of consumer electronics, Gupta said, remained "healthy", while revenue growth fell due to a rise in price of displays during Covid. Volume of consumer electronics, predominantly LED TVs, increased from 3 million last year to 4.4 million, a growth of slightly less than 50%.

Gupta reiterated the company's revenue forecast of Rs 17,000-17,500 crore for the ongoing fiscal. The company, he said, will have a relook at the guidance after Q2.

Watch the full interview here:

Of the 21 analysts tracking the company, 14 retain a 'buy', three suggest a 'hold' and four recommend a 'sell'. The overall consensus target price of analysts tracked by Bloomberg suggests a return potential of 29.2%.

Shares of the company pared some of the early losses to close nearly 3% lower compared with a 1.4% decline in the Nifty 50. The trading volume was nearly twice the 30-day average at the markets close.

Here's what analysts have to say about Dixon Technologies.

Morgan Stanley

• Remains 'underweight', with the price target reduced to Rs 2,634 from Rs 2,879, an implied downside of 21%

• Earnings estimates are 7-11% below consensus as growth concerns remain.

• Consumer electronics, domestic lighting volumes remain sluggish and are offset by automatic washing machines and mobile phone volumes.

• High commodity prices remain a major concern.

• Lowers earnings estimates by 2-5% over FY23-26E.

• Expects growth in mobile business due to PLI revenues and washing machines (driven by semi-automatic).

• Predicts weakness in LED TV, lighting, refrigerator business

• Key Risks: Competition, possibility of RoE contraction, the cost competitiveness beyond PLI period, rising commodity prices

Jefferies

• Retains 'buy' and maintains target price unchanged at Rs 5,300, an implied return of 59.35%.

• Believes that consumer electronics is on a firm footing

• Dixon has expanded its LED TV capacity to 6 million units, the largest in India.

• Expects FY22-25 sales CAGR at 37% in consumer electronics segment

• Expects FY22-25 sales CAGR at 23% in lighting business, led by PLI.

• Believes that mobile PLI holds the largest upside for Dixon out of the four PLIs it received.

• Estimates mobile sales to grow 9x over FY21-25 with Motorola as the anchor customer with a Q2 order book of 1.5 million units.

• Growth in Samsung order book and production of feature phones for Nokia augur well for the company.

• Remains bullish on the indigenisation opportunity in India and expects Dixon to be a key beneficiary.