Dixon Technologies may gain on a robust Q2. Should you buy, hold or sell?

Dixon Technologies shares are likely to open higher on October 27 after the electronic manufacturing services (EMS) firm posted higher-than-expected numbers for the September quarter.

Its net profit jumped 46 percent and revenue 27 percent on-year (YoY), driven by the mobile & EMS segment. Analysts are positive on the stock, given Dixon’s mobile-led high-growth roadmap and the accompanying return profile.

For the September quarter, Dixon Technologies reported a 37 percent growth in earnings before interest, tax, depreciation and amortisation (EBITDA) at Rs 199 crore. The EBITDA margin also increased 4 percent.

According to analysts at CLSA, the company’s growth levers are intact. The strength in Q2 is attributed to a sharp uptick in mobile phones and a ramp-up of new contracts like Xiaomi and Itel.

Also Read | Dixon Technologies Q2: Net profit up 47% to Rs 113.36 crore, revenue up 27.83%

Outlook

The uptick in mobile phones should continue to be a key growth driver for Dixon Technologies. Segments like refrigerators, hearables and wearables also provide strong growth visibility, the foreign brokerage said.

The company is also exploring entry into high-margin industrial electronics segments such as auto and defence.

CLSA has an “outperform” rating on Dixon Technologies with a target price of Rs 5,675, implying a 6 percent upside from the closing price of October 26.

Nuvama Institutional Equities said Dixon’s large client-wins in the mobile segments have paved the path to propel its Rs 4,200-crore mobile revenue to close to even Rs 20,000 by FY26E. This could lift the company’s top line to Rs 33,000 crore-plus by FY26E from Rs 12,000 crore in FY23. However, this would dilute the overall margins, as the mobile division has lower margins, the brokerage said.

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Valuations expensive

Dixon’s business model is highly scalable yet profitable, thanks to its frugal cost structure, capital-light intensity and, above all, high manufacturing fungibility, Nuvama analysts wrote.

However, the stock has nearly doubled since March and the valuation of 50x PE on FY26E may cap the upside, making this an unfavourable entry point, it said.

“The valuations of 50x+, a lot of growth runway is captured in the current stock price,” said Nuvama in its report, as it assigned a “hold” rating to the stock with a target price of Rs 5,150.

Share performance

Dixon Technologies ended a percent lower at Rs  5,356 on the National Stock Exchange (NSE) on October 26. In the last six months, the stock has jumped more than 86 percent.

Also Read | JP Morgan upgrades India to ‘overweight’, includes 3 stocks in EM portfolio

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