Dixon Technologies Ltd.'s shares were down 13% in trade on Tuesday, despite the company posting a robust third-quarter results. One of the key reasons for the sharp fall is being attributed to the management announcing its entry into the semiconductor component space, with investments in display fabrication facility, which would require large capital expenditure. Market capitalisation of the firm eroded Rs 14,500 crore on Tuesday.
Dixon Technologies Ltd.'s shares were down 13% in trade on Tuesday, despite the company posting a robust third-quarter results. One of the key reasons for the sharp fall is being attributed to the management announcing its entry into the semiconductor component space, with investments in display fabrication facility, which would require large capital expenditure. Market capitalisation of the firm eroded Rs 14,500 crore on Tuesday.
Here are the key aspects of the new venture, its potential strain on financials and what brokerages are making of this move to help you decide if you should buy into this dip.
Semiconductor Components Foray
In its Q3 earnings conference call, Dixon indicated plans to enter the display fabrication segment, reversing its earlier focus on the non-semiconductor components space. Dixon's management highlighted this opportunity would require roughly $3 billion in capex or Rs 25,000 crore. Currently, with all central and state government schemes, about 70–75% of this capex will get subsidised.
The management told NDTV Profit that it was in talks with a global fabrication partner to set up a joint venture for the same. They said the partner would provide the technology and pitch in with some share of the capex.
Despite this clarification, the company’s share of capex will be roughly Rs 4,000-5,000 crore. This is 4-5 times the company’s current annual capex of Rs 800 crore.
Is The Fall Warranted?
The foray into semiconductor components will increase Dixon’s addressable market in the long term, but it will put pressure on financials in the next two-three years. A fall in return ratios is also anticipated. Return on capital employed for the company came in at 42% at the end of the third quarter and the company stated the new semiconductor business might have lower return ratios. But the positive aspect is that the payback period is short. With the asset turn of this business, the management expects revenues of roughly $1.7-$2 billion.
India is an importer for its semiconductor needs and the development augurs well for the country’s electronic component needs. Taking this factor into consideration, another listed EMS player, Kaynes Technology Ltd., is also in the process of setting up a facility for the same.
Other Key Watchlists And Brokerage Views
Margin support from non-semiconductor components is expected to impact financials positively from FY27. The company’s entry into laptop manufacturing currently forms less than 1% of total revenue, but this segment has higher margins than traditional mobile manufacturing. Dixon has already signed agreements to manufacture laptops for the top four of the five players in India. These include HP, Asus, Lenovo and Acer.
A new joint venture with Vivo promises a boost. Nuvama's view is this partnership will further consolidate Dixon’s No. 1 position in Android outsourcing. They have a ‘hold’ rating on the stock with a target price of Rs 18,790 per share.
Kotak Institutional Equities said Dixon has large captive mobile, television and laptop volumes that could benefit from its vertical integration. The long gestation period required to set up a display and asset-heavy nature of this investment could imply a very different RoCE structure from its current EMS vertical. Dixon's ability to maintain investments in its fabrication facility after the incentive period remains a key factor to watch out for.
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