Dixon Technologies' Q1FY19 results (Outperformer) - Weak quarter; focus on scale up & backward integration

Q1FY19 standalone result highlights

• Adj PAT +17.7% yoy to Rs128mn: led by margin expansion.
• Revenues fell 13.4% yoy to Rs5.9bn: led by sharp fall of 75% yoy in mobiles (lower sales to Gionee). Revenues were strong in home appliances (washing machine; +118% yoy; scale up of Samsung), lighting (+9% yoy; growth in LED offsetting decline in conventional lighting) & consumer electronics (TV; +35% yoy; scale up of new clients) while reverse logistics remained muted, growing barely 2% yoy in 1Q19.
• Margins expand 131bp yoy: to 4.4% led by expansion in lighting products (+365bps yoy; positive operating leverage) as also mobiles (+60bps yoy; cost efficiency steps). On the other hand, margins fell in consumer electronics (-150bps yoy; on extra cost for two facilities - Dehradun & Tirupathi), home appliances (-119bps yoy to 10.7%; rise in input prices and currency depreciation which are typically passed on with a lag) as also reverse logistics (loss of Rs7mn due to Rs6.5mn write off related to discontinued customer). Security systems posted a loss of Rs5mn on low scale. Hence, EBITDA +23.5% yoy to Rs260mn.

Conf call highlights: (1) TV margins to rebound to ~2.8% led by scale up of volumes led by new customer addition, Dehradun plant shutdown (Aug-18 end) and backward integration (PCB & LCM mfg) by Sept-18 at Tirupati; (2) WM margin to improve partially in 2Q19 on cost pass thru; (3) Mobile to see traction on volume scale up on feature phones and likely scale up in Gionee, while PCB mfg by mid Sep-18 will boost margins (4) Lighting continues to see client addition & scale up of new products, while margin upmove to sustain; (5) Reverse logistics to see production for Airtel STB to commence by Q4FY19 & would revive growth (6) Interest cost jumped in 1Q19 due to bill discounting; (7) FY19E guidance: ~20-25% revenue growth and 70-80bps margin expansion 

Impact on financials: FY19/FY20 EPS cut by 6% to Rs74.5/99.8

Valuations & view

Dixon is well placed to capitalise on growth in domestic EMS industry, spurred by its wide product portfolio and cost leadership. The company’s deep client relationships, flexible manufacturing and design capabilities give it a competitive edge over peers. We expect Dixon’s focus on client addition and backward integration to drive 17% revenue and 36% earnings CAGR over FY18-20E. We expect Dixon’s rich valuations (29x FY20E earnings) to sustain led by its sustainable asset-light business, expected strong growth and superior return ratios. Outperformer.