Dixon Technologies' Q3FY20 results (Outperformer) - Strong beat; growth to sustain

Q3FY20 consolidated result highlights

• PAT +46.6% yoy to Rs269mn: led by strong operational performance.
• Revenues +25% yoy to Rs9.94bn: led by consumer electronics (TV; +58% yoy) on ramp up of Xiaomi, which also has higher realisations on larger TV (43”) and lighting (+18% yoy, strong growth in battens & downlighters). This was partially offset by 26% yoy decline in washing machines (WM) due to weak demand post festive season and liquidation of inventory by one of the anchor customers as also 8% yoy decline in mobiles (decline in smart phones). Strong growth in security systems (+98% yoy) & reverse logistics (+46% yoy) on low base supported revs.
• Margins expand 27bps yoy to 5.2% on improved mix, scale: across TV (+43bps yoy; +13bps qoq; 2.5%; larger TVs) and lighting (8.6%; +56bp yoy; +52bps qoq). Further, WM margins +263bps yoy (+157bps qoq) to 13.4% on cost control and stable currency & commodity prices. This was partially offset by 59bps yoy contraction in mobiles due to adverse mix towards feature phones. Hence, overall EBITDA +32% yoy to Rs515m.

Conf call highlights: (1) TV: signed Samsung for manufacturing TVs with more focus on high value larger size sets and expected to begin in Feb-20. (2) WM: volumes to rebound as inventory levels have normalized and demand is picking up. Moreover, growth will be driven by manufacturing semi-automatic WMs for Volt-Bek (new customer) and fully automatic WMs. Fully automatic WM to be launched in 2HFY21, with capacity at Tirupathi (0.6mn/year) with anchor client signed up (3) Lighting margins strong on improving mix towards high value products, growth to sustain on  scale up in smart bulbs, battens & down lighters, etc., apart from exports; Havells and HPL Electric added as key clients (4) Signed contract with Reliance Jio to manufacture set-top box by utilising spare capacity at mobile plant - to begin from Mar-20; (5) Working capital at 4 days at 9M20 vs 7 days in FY19 largely led by improved cash flows with Xiaomi; Rs656mn gross debt reduction in 3Q20 resulting in net cash of Rs238mn. 

Impact on financials: FY20/21 EPS upgraded by 12%/24% to Rs108.5/146

Valuations & view

Dixon’s 9MFY20 performance has been extremely strong led by robust volume growth, margin expansion and free cash generation (now debt free). This has been led by its consistent focus on new client additions & products, deepening client relationships (Samsung relationship extended from WM to mobiles and TVs) as also scale. We believe the trend is likely to sustain with likely growth in exports. Accordingly, we believe valuations at 30x FY21E earnings are attractive led by its strong earnings growth (69% earnings CAGR over FY19-21E) & superior return ratios. Outperformer.