Dixon’s ramping up its mobile and IT hardware biz, but that may dilute margins


Dixon Technologies (India) Ltd has big plans. Over the next six years, the electronics manufacturing services (EMS) company intends to achieve cumulative revenue of Rs48,000 crore from the government’s IT hardware production-linked incentive (PLI) scheme. 

In this backdrop, Dixon’s latest announcement should help. The company’s wholly owned subsidiary Padget Electronics Pvt. Ltd has been awarded a manufacturing contract by Lenovo for products such as laptops and notebooks under the PLI 2.0 scheme.

“Dixon’s addition of Lenovo as a key anchor customer for manufacturing IT hardware products, along with its existing relationship with Acer, helps it now target nearly 25% of the Indian IT hardware market,” Kotak Institutional Equities said in a report dated 12 December.

Revenue from Dixon’s mobile and EMS division, which includes its IT hardware business, grew by 59% year-on-year to Rs4,614 crore in H1FY24. Its contribution to the overall revenue pie increased sharply to 56% in H1 from 43% a year earlier. 

In the September quarter (Q2FY24) earnings call, the management said it expects the mobile and EMS business to grow to 60-70% in FY25, outpacing peers. 

Dixon is expected to benefit from the PLI scheme across five segments–mobile phones, lighting, telecom and networking products, inverter controller boards for air conditioners, and IT hardware. Of these, Dixon is looking to invest Rs250 crore under PLI 2.0 for IT hardware. 

But analysts have raised concerns on potential dilution in margin because of the rising share of the mobile and EMS division. That is because margins in the mobile and IT hardware businesses are lower compared to that in segments such as home appliances, lighting products, and consumer electronics.  

Perhaps this could explain why Dixon’s shares closed flat on Tuesday, after surging 6% intraday to a 52-week high of Rs6,765 apiece.

Although margins in the mobile and EMS segment are low, increasing its business share in the overall pie will boost volumes, explained Akshay Mokashe, an analyst at Axis Securities. The rising share is also expected to enhance the company’s operational efficiency.

As such, Dixon’s shares have risen 63% so far in 2023, suggesting investors are largely capturing a good part of the brighter picture. The stock trades at 64 times estimated earnings for FY25, which looks pricey. 

Moving forward, investors should keep an eye on clientele addition and volume ramp up in the mobile and EMS segment, said Mokashe.

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