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Dixon's Q2FY20 reults (Outperformer) - Strong beat; growth to sustain

Q2FY20 consolidated result highlights

• PAT +162% yoy to Rs430mn: led by strong operational beat and lower taxes.
• Revenues +90% yoy to Rs14bn: led by 105% yoy growth in consumer electronics on ramp up of Xiaomi, which also has higher realisations on larger TV (43”). Lighting growth sustained at 49% yoy (ex-CFL higher) while washing machines (WM) saw 34% yoy growth on sustained scale up of Samsung. Moreover, mobiles revenues rebounded with 204% yoy (scale up in feature phones), security systems +292% yoy (low base) while reverse logistics continued to decline (-62% yoy).
• Margins stable at 4.5% (flat yoy): as margin contraction in TV (-110bps yoy, +17bps qoq to 2.4%; high base) was offset by margin expansion across all other segments. Lighting +230bps yoy to 8.1% led by improving mix towards high value products and cost efficiencies on scale. WM margins +370bps yoy to 11.8% (low base). Margins were further aided by 120bps yoy expansion in mobiles to 2.1% on positive operating leverage (higher utilisation) and backward integration. Hence, EBITDA grew 91.3% yoy to Rs631m.

Conf call highlights: (1) TV in final stages of signing up a large global player and it is expected to drive volumes form Jan-20. This will be augmented by scaling up of Xiaomi volumes (2) WM seeing strong volumes on sustained scale up of Samsung, albeit seeing weakness in Nov-19; sign-up of large brand (volumes to begin in Dec-19) and capacity expansion of semi-automatic from 800k/year to 1.2mn to drive volumes over the medium term; Fully automatic WM to be launched in FY21, with capacity at Tirupathi (0.6mn/year) (3) Lighting margins strong on improving mix towards high value products like smart bulbs etc., R&D on new products & cost savings, capacity expansion in battens & down lighters and exports to drive sustained growth (4) Mobile strong growth momentum to continue as Samsung to begin feature phone production in 3QFY20; (5) Working capital at 0 days at 1HFY20 end vs 7 days in FY19; Rs450mn debt reduction.

Impact on financials: FY20/21 EPS upgraded by 25%/20% to Rs97/118

Valuations & view

Dixon’s 1HFY20 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, new products, deepening client relationships (Samsung relationship extended from WM to mobiles), backward integration as also scale. We believe the trend is likely to sustain with likely growth in exports. Accordingly, we believe valuations at 25.5x FY21E earnings are attractive led by its strong earnings growth (51% earnings CAGR over FY19-21E) & superior return ratios. Outperformer.