Dixon's Q2FY19 results (Outperformer) - Input cost pressure impacts profit

Q2FY19 standalone result highlights

• PAT fell 21% yoy to Rs164mn: led by higher input cost & INR depreciation.
• Revenues fell 15.9% yoy to Rs7.4bn: led by 23%yoy fall in consumer electronics due to shift of Diwali sales to 3Q19 (6% volume growth, price decline on lower input costs passed on). Further, mobiles and reverse logistics remained weak (55%/59% fall in revenues) on lack of client additions and clients losing market share. Home appliances saw strong 79% yoy growth on scale up of Samsung, while lighting was muted at 1% yoy (ex-CFL, growth is 15% yoy).
• Margins +50bp yoy on improved mix: to 4.5% led by expansion in TV (+120bps yoy to 3.6%; shut down of Dehradun unit). Margin fell for mobiles on low utilisations (-60bps yoy to 0.9%), while lighting (-110bps yoy to 5.8%) and WM (-360 bps yoy to 8.1%) fell on rise in input costs & INR depreciation. Hence, EBITDA fell 6.5% yoy to Rs330m.

Conf call highlights: (1) TV margin rebounded to 3.6% led by closure of Dehradun unit, backward integration (PCB & LCM mfg) and higher share of ODM (+500bps); Acquisition of Xiaomi account will drive significant scale in volumes over the next year (2) WM to see strong 30-35% growth in volumes on scale up of Samsung & addition of Lloyd, margins to improve gradually; (3) Lighting focus is on scaling up LED and improving product mix with higher share of high margin products like battens and high wattage bulbs; (4) Demand in festive season appears to be weak in TV and WM; (5) Dixon has implemented some internal mechanisms and is renegotiating certain contracts to dilute the impact of high input prices and rupee depreciation going forward. 

Impact on financials: FY19/FY20 EPS cut by 16% to Rs62/83

Valuations & view

Dixon has faced stress in earnings on back of higher input costs and sharp rupee depreciation, which will be 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 24% earnings CAGR over FY18-20E. We expect Dixon’s rich valuations (25x FY20E earnings) to sustain led by its sustainable asset-light business, expected strong growth and superior return ratios. Outperformer.