Event update: Dixon Technologies (Outperformer) - Acquires balance 50% stake in mobile; customer add critical

Event

Dixon Technologies (Dixon) has announced the acquisition of the balance 50% stake in its JV, Padget Electronics Private Ltd. (Padget), for Rs270m on 12 April 2019, making Padget a 100% subsidiary.

Details

Padget – a leading mobile phone manufacturer: Padget started as a 50-50 JV between Dixon & Karbonn in FY16, is primarily involved in manufacturing of mobile phones. The company is also into allied activities and manufacturing of home appliances, electric appliances, industrial appliances, digital equipment, etc.

Attractive valuations; all cash deal: The acquisition, at 3x FY20E EV/EBITDA, is valued at Rs540m (no debt, Rs160mn cash), implying a net cash outflow of Rs110m for Dixon.

Client addition critical: The acquisition will enable Dixon to integrate operations seamlessly across other verticals and achieve growth in its business over the next few years. Revenues in the mobile business have declined from Rs16.6bn in FY17 to Rs7.1bn in FY19 (provisional numbers), due to loss of market share of existing customers (Gionee, Karbon, etc) and lack of customer additions. However, backward integration (PCB assembly) and improved utilisation (entered feature phone business) helped improve operating margins over FY17-19 (+130bps to 1.9%). Management expects new customer addition (soon) to enable fast-paced growth in the business over the next few years.

Valuations & view

We believe the acquisition of the balance 50% stake in the mobile business is at an attractive valuation of 3x FY20E EV/EBITDA. However, client addition would be critical for growth going forward, given that the scale up in the business has been elusive, especially due to lack of client additions in the past. Management is confident of adding customers and diversifying its customer base to achieve meaningful business growth over the medium to long term. Dixon’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 19% earnings CAGR over FY18-21E. We expect Dixon’s rich valuations (30.5x FY20E and 25.5x FY21E earnings) to sustain, led by its sustainable asset-light business, strong earnings growth and superior return ratios. We reiterate our Outperformer rating on the stock.