Dixon Technologies (India) Ltd has signed an agreement with Google to sub-license rights relating to Android and Google TV. This is along expected lines, considering that the company had indicated during the June quarter (Q1FY23) earnings call that the transaction was on the verge of being finalized.
The development comes at a time when demand is moderating in the consumer electronics segment with the easing of lockdowns imposed following the coronavirus outbreak and the economy opening up. When restrictions were high, demand for LED televisions increased. As such, consumer spending has moved away from the segment now. Hence, the upcoming festive season is crucial. Investors will see whether the company is able to meet its TV volume guidance of 3.6 million units for FY23, representing 24% year-on-year (yoy) growth.
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Furthermore, prices of open cell, a key component used in manufacturing TVs, have corrected. This in turn has driven a fall in the prices of LED TVs. Lower realizations meant revenue from the consumer electronics segment fell by 26% yoy in Q1FY23.
Against this backdrop, Dixon’s increasing revenue share from the mobile phones segment is likely to be a key driver for growth. Jefferies India expects Dixon’s mobile sales to grow 10 times over FY21-25 led by upsides from production-linked incentive schemes. Volumes have ramped up for Motorola, a client, and are at a monthly run rate of 400,000 units. Also, Dixon is in advanced stages of discussions with two brands that have a strong share in the Indian market.
The company’s expansive product mix and clientele alleviates concentration risks, according to Jefferies. Even so, potential market share loss of Dixon’s key clients is a lingering risk.
Dixon’s shares have fallen by 21% in 2022 so far, while the Nifty500 index has gained 2%. Margin pressures and its inability to pass on higher input costs hurt investor sentiments. High inflation levels also weighed on the stock as it is a looming threat given the adverse impact on demand for products catered to by the branded companies, said Harshit Kapadia, analyst, Elara Securities (India).
Dixon seeks to clock 60% revenue growth in FY23. Meeting the target and improving the margin will be crucial for a meaningful rally in the stock, which is about 30% below its 52-week high. Investors would also do well to track the rise in share of original design manufacturer (ODM) products in the consumer electronics segment, which was 4% in FY22, as it will boost margins. Based on Bloomberg data, the Dixon Technologies stock trades at nearly 50 times estimated earnings for FY24.
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