One of India's biggest manufacturing service companies, Dixon Technologies, has been enjoying a stellar run over the past six months. From an all-time low of Rs.1,560 in August 2019, the stock gained more than 200% to hit an all-time high of Rs.4,895 in February 2020 and now trades at Rs.3,850. Besides winning manufacturing contracts from consumer electronic biggies such as Xiaomi, Samsung and Reliance Jio, robust earnings growth in Q3FY20 has powered this runaway rally. Driven by consumer electronics and lighting, the company’s Q3FY20 revenue grew 25% year-on-year, while net profit jumped 49% for the same period due to the new tax regime under which the tax rate for the company reduced from 35% to 26%. The company is also increasing its annual capacity from 3.6 million to 4.8 million units by May 2021.
As the stock continued its rally, promoters and top management officials are taking money off the table. Promoter and chairman Sunil Vachani sold shares worth Rs.797 million on February 20, reducing his stake from 36.27% to 34.67%. Another promoter, Geeta Vaswani also sold shares worth Rs.9.4 million in February along with key management personnel, who disposed shares amounting to Rs.55 million. The selling has been concerted with mutual funds being first off the block.
Post its run-up since August, mutual funds have reduced their stake from 22.06% to 20.27% between September and December. SBI Mutual Fund and Nippon India have cut their stake from 9.42% and 7.80% to 8.93% and 6.89%, respectively. But foreign investors have increased their stake from 7.67% to 10.85% over the same period, with Schroder International buying 1.03%. The largest foreign investors in the stock — Goldman Sachs India and Taiyo Great India Fund — have marginally reduced their stake by 0.14% and 0.24% and now hold 2.32% & 2.23%, respectively.
Post the Q3FY20 performance, analysts are extrapolating additional upside. Analysts at Axis Securities state, “Dixon is expanding capacities across segments based on strong order book from existing and new customers. Higher capacity utilisation, new customer additions and increased product offerings are expected to drive revenue and profit growth going forward.” Along with their lofty target price of Rs.5,116, they have slipped in a caveat, “Given the sharp run-up in the price of the stock in the recent past, we would advise to buy in a staggered manner.”
Analysts at Nirmal Bang Institutional Equities also harbour a similar view. They have upgraded their revenue estimate by 16-18% over FY20-22E, but have revised their stance from Buy to Accumulate post the recent rally and are raising their target price to Rs.4,505. With the stock trading at 32.5x estimated FY21 P/E, they state, “Robust growth prospects, healthy return ratios, lean working capital cycle and high fixed-asset turnover will support Dixon’s valuation.”