Dixon Technologies: Preparing to ride a second growth wave

Announced in May, PIL 2 incentivises manufacturers of IT hardware such as laptops, personal computers, tablet devices, and servers. Recently, the government announced a list of 23 beneficiaries under the scheme, with Dixon Technologies being among the primary ones.

Dixon had applied under the new hybrid model in PLI 2, under which domestic manufacturers are to invest over Rs250 crore. 

Dixon Technologies serves as a contract manufacturer for a wide range of products–including LED TVs, lighting products, semi-automatic washing machines, and mobile phones–for leading brands.

Ambitious targets

The company has a history of effectively capitalising on PLI initiatives, as seen in the mobile phone manufacturing sector. The incentives–the first edition was introduced in 2020–drove Dixon to secure contracts and collaborate with leading global mobile phone manufacturers, propelling its revenue share from a modest 12% in FY2020 to over 40% in FY2023 and 50% in H1FY2024.

Among its major customers in the mobile phone segment are industry giants including Samsung, Motorola, Nokia and Xiaomi, a recent addition.

Now, driven by the substantial boost from the PLI scheme, the company is set on expanding its IT hardware business. 

Revenue from this segment during the first half of FY2024 was Rs138 crore, constituting a measly 1.6% of Dixon’s total revenue. The company aspires to propel this figure to Rs48,000 crore cumulatively over the subsequent six years. 

Towards this, Dixon has been conducting extensive groundwork to ensure its manufacturing charges for prospective customers are comparable with global rates. The electronics major is optimistic about securing contracts. 

Dixon’s monthly order book in the IT and hardware segment has been advancing swiftly. The company is already working with Acer for its IT hardware and is in the final stages of negotiations with another prominent global brand. 

Skyrocketing valuations

Dixon is optimistic about its growth prospects. Over the previous five years, its revenue has surged sixfold from Rs2,984 crore in FY2019 to Rs12,192 crore in FY2023. The first half of FY2024 has already surpassed its full-year revenue for FY2023, reaching Rs13,685 crore. Net profit has grown fourfold over five years, from Rs63 crore in FY2019 to Rs255 crore in FY2023. The first half profits stand at ₹180 crore, implying a growth of over 47% from the same period last year. The 5-year average return on equity for Dixon was at 23%. 

This consistent performance has helped the company keep debt at bay, paving the way for a well-capitalised balance sheet to enable it to fund its next leg of growth. 

All these have contributed to the stock’s skyrocketing valuations.  

Shares of Dixon have appreciated by as much as 1,400% over the past five years. On Friday, the stock hit a 52-high of Rs6,034.95 apiece during market hours, and closed 8% higher than the previous day. The stock now trades at 60 times estimated earnings for FY25, showed Bloomberg data. 

The strong outlook from Dixon’s existing business and its expansion into the new markets instil confidence in the company’s ability to maintain its growth trajectory over the long-term. Nevertheless, the lofty valuations beg the question: can investors generate long-term returns at the current price? 

Striking a balance between the optimism fueled by Dixon’s growth potential and exercising caution in light of the current valuation is crucial for making a well-informed investment decision.