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Mobile revenue is key for Dixon Tech to stay the course

Dixon Technologies (India) Ltd has signed an agreement with Google to sublicense the rights to Android and Google TV. This is in line with expectations, given that the company had indicated during the June quarter earnings call (Q1FY23) that the transaction was close to closing.

The development comes at a time when demand is moderating in the consumer electronics segment with the easing of lockdowns imposed in the wake of the coronavirus outbreak and the opening up of the economy. When the restrictions were high, the demand for LED TVs increased. As such, consumer spending has moved away from the segment now. Therefore, the upcoming holiday season is crucial. Investors will see if the company is able to meet its FY23 TV volume forecast of 3.6 million units, representing 24% year-on-year (yoy) growth.

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Additionally, prices for open cells, a key component used in television manufacturing, have corrected. This has led to a drop in the prices of LED TVs. Weaker realizations caused consumer electronics segment revenue to decline 26% year-over-year in Q1FY23.

Against this backdrop, Dixon’s growing revenue share in the mobile phone segment is likely to be a key driver of growth. Jefferies India expects Dixon’s mobile sales to increase 10-fold in FY21-25 thanks to the benefits of production-related incentive programs. Volumes increased for Motorola, a customer, and are at a monthly rate of 400,000 units. Additionally, Dixon is at an advanced stage of discussions with two brands that hold a strong share of the Indian market.

The company’s broad product line and customer base mitigate concentration risks, according to Jefferies. Even so, the potential loss of market share from Dixon’s major customers is a lingering risk.

Shares of Dixon have so far fallen 21% in 2022, while the Nifty500 index has gained 2%. Margin pressures and its inability to pass on rising input costs hurt investor confidence. High levels of inflation also weighed on the stock as it is an imminent threat given the negative impact on demand for products supported by branded companies, said Harshit Kapadia, analyst at Elara Securities (India).

Dixon is looking to post 60% revenue growth in FY23. Meeting the target and improving the margin will be crucial for a meaningful rally in the stock, which is around 30% below its high of 52. weeks. Investors would also do well to track the increase in the share of original design manufacturer (ODM) products in the consumer electronics segment, which was 4% in FY22, as this will increase margins. Based on Bloomberg data, Dixon Technologies stock is trading at nearly 50 times estimated earnings for FY24.

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