Dixon Tech Shares Fall After Jefferies Downgrades To 'Hold' Citing High Valuation

Shares of Dixon Technologies Ltd. fell the most in over five months on Wednesday after Jefferies downgraded the stock to a 'hold' rating citing a high valuation.

The brokerage expects limited upside for Dixon Technologies, as the stock experienced a 55% rally in the past two months, it said in a July 4 note.

However, the brokerage increased the price target to Rs 4,550 from Rs 4,350 previously. The new price target implies a potential upside of 4%.

Sharp price rally

The brokerage lowered its earnings-per-share estimates by 2–4% and expects a 47% compound annual growth rate in FY23–26.

The company's EPS CAGR is forecast to be higher than its peers, drawing benefits from five production-linked incentive schemes, with mobiles being the largest, according to Jefferies.

Dixon Technologies recently partnered with Xiaomi's Indian arm to make and export phones for the Chinese firm.

However, the brokerage said these benefits are already priced in after a sharp rally.

Weakening global demand

The present weakness in domestic demand could also potentially be a risk factor for the company, the note said.

Dixon Technologies is a B2B contract manufacturer, with most of its end-user categories being B2C.

The order book of electronics manufacturing services brands is largely influenced by sales budgeting by branded companies, highlighting that global smartphone offtake has been weak since last year, the note said.

Jefferies estimates Dixon's sales CAGR at 29%, led by mobile sales with a 27% CAGR.

Global peers trading at a discount

The company's Taiwanese peers Hon Hai, Wistron and Pegatron currently trade at 13 to 29 times their FY24 price-to-earnings estimate.

Dixon is currently trading at 59 times its FY24 PE estimate, which is 30% higher than its historical average, according to the note.

The current high valuations could pose the risk of normalisation post a high growth phase that its currently experiencing, according to the brokerage.

Increased capex leading to lower RoCE

Dixon reported a capital expenditure of Rs 850 crore in FY23, which has led to a lower return on capital employed, falling from 31% in FY18 to 23-24% in FY23.

The brokerage expects a capex of Rs 400 crore for PLIs and expansions in the current fiscal, and Rs 200 crore per annum in FY25-26.

However, if Dixon increases its capital expenditure, it could result in RoCEs lower than Jefferies estimates of 35% in FY25-26.