Dixon's Q1FY20 results (Outperformer) - Strong traction across segments

Q1FY20 consolidated result highlights

• PAT +85% yoy to Rs236mn: led by strong revenue growth.
• Revenues +94% yoy to Rs11.5bn: led by 129% yoy growth in consumer electronics on ramp up of Xiaomi, which also has higher realisations on larger TV (43”). Lighting remains strong at 18% yoy growth (ex-CFL +86% yoy) while washing machines (WM) saw 15% yoy growth on scale up of Samsung. Moreover, mobiles revenue growth rebounded at 96% yoy (scale up in feature phones) while reverse logistics continued to decline (-83% yoy).
• Margins stable at 4.6% (+25bps yoy): led by margin expansion in TV (112bps yoy, +96bps qoq to 2.2%; positive operating leverage). Lighting margins improved by 22bps yoy to 7.8% led by improving mix towards high wattage bulbs, battens and down lighters. WM margins were broadly stable at 10.8% (+11bps yoy). Margins were further aided by 114bps yoy improvement in mobiles to 2.2% on positive operating leverage (higher utilisation led by feature phones) and backward integration. Hence, EBITDA grew 104% yoy to Rs526m.

Conf call highlights: (1) TV volume current run rate from Xiaomi ~150-160K/month; expected to go up to 200-220K/month in 2Q/3Q; increased capacity from 2.4mn to 3.6mn/year (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 FY21 (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 (83% vs 34% earlier) (4) Mobile to see strong growth on sign up of 2^nd largest player in India; Factory in Noida to start commercial production in Oct-19 (5) ~Rs650m FY20 capex (Rs135mn in 1Q20) (6) Working capital turned negative in 1Q20 driving ~Rs300mn free cash generation.

Impact on financials: FY20/21 EPS upgraded by 3.3%/6.1% to Rs75.9/98.1.

Valuations & view

Dixon’s 1QFY20 performance has been extremely strong led by both robust volume growth and margin expansion apart from free cash generation. This has been led by its consistent focus on new client additions, deepening and engaging client relationships, backward integration, new products as also scale. We believe the trend is likely to sustain (Jul-19 has seen strong growth; Rs4.4bn revenues) and drive 38% earnings CAGR over FY19-21E. Accordingly, we believe valuations at 20x FY21E earnings are attractive led by its strong earnings growth and superior return ratios. Outperformer.