Dixon Technologies' Q4FY19 results (Outperformer) - In line; growth on track

Q4FY19 standalone result highlights

• PAT +21% yoy to Rs165mn: led by strong revenue growth.
• Revenues +44% yoy to Rs8.6bn: led by 51% yoy growth in consumer electronics on ramp up of Xiaomi, which also has higher realisations on larger TV (43”). Lighting remains strong at 43% yoy growth (ex-CFL +65% yoy) while WM saw 14% yoy growth on scale up of Samsung. However, mobiles and reverse logistics remained weak (-13/-79% yoy) on lack of client adds and exit of STB repair business.
• Margins largely stable at 4.4% (-22bps yoy): despite favourable revenue mix on Rs25mn ESOP and Rs10mn one-time costs. Further, TV margins contracted (11bps yoy, -83bps qoq to 1.3%) on higher share of large size (44”) TVs where margins are lower. WM margins too fell 336bps yoy to 10.2% on higher RM cost & rupee depreciation. Lighting margins +77bps yoy to 7.1% on higher share of high wattage bulbs and backward integration, while mobile saw +134bps to 2.5% on backward integration. Hence, EBITDA grew 37% yoy to Rs375m.

Conf call highlights: (1) TV volume run rate from Xiaomi to be ~100-125K/month; higher inch TV sales to Xiaomi; 1^st line of SMT of 1mn PCBs capacity to be increased to 3mn (2) WM to see strong volume growth on sustained scale up of Samsung & customer add; top-load fully automatic WM of 6/7kg variants to be launched in 4Q20 (3) Lighting segment continues to see scale up with wide customer base, improving mix towards high margin products like battens & high wattage bulbs (increased SKUs till 50W from 12W earlier); Focus on scaling up exports and ODM share (89% vs 40% earlier) (4) Mobile to see 25-30% revenue traction in FY20 on customer adds, backward integration and 100% ownership of Padget; Expanding capacity in Noida; (5) ~Rs6650m capex in FY20 (excl. Rs300m for top load WM)

Impact on financials: FY20 EPS cut 2% to Rs75.5. FY21E at Rs92.5 (no chg)

Valuations & view

Dixon has faced stress in FY19 earnings on back of volatility in input costs, rupee depreciation and ramp up costs, which is being passed on gradually to clients. However, volume growth and client additions across key segments has been on track spurred by its wide product portfolio and cost leadership. Dixon’ 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 34% earnings CAGR over FY19-21E. We expect Dixon’s rich valuations (26x FY21E earnings) to sustain led by its strong earnings growth and superior return ratios. Outperformer.