After ~5 qtrs of y-o-y dip in margins, Dixon re-gained healthy OPM in Q4 at 4% ( 60bps q-o-q; 20bps y-o-y), due to timely price hikes in ODM. Apr22 saw price hikes of ~2% in Washers and 1-2% in Lighting. Mgmt expects FY23 OPM at 4.0-4.2%, though JEFe is lower at 3.9%. Post Rs 4-bn capex in FY22, Dixon plans further Rs 3.4-bn in FY23, higher vs. JEFe. We cut FY24-25 EPS by 5-6%. But, as the new capex ramps up, we expect RoCE, RoE to rise ~2x over FY22-25. Buy with PT of Rs 5,300.

Trend reversal in OPM: Dixon’s Q4FY22 consolidated sales were at Rs 29.5 bn ( 40% y-o-y). While Mobile Phones and Home Appliances posted notable y-o-y growth, Consumer Electronics (LED TVs) and Lighting witnessed subdued traction. Key highlight of Q4FY22 was improvement in EBITDA margin, to 4% ( 20bps y-o-y; 60bps q-o-q); OPM improved y-o-y after

~5 qtrs. Further price hikes in Apr’22 could support EBITDA in Q1FY23 as well. Q4 PAT posted growth of 42% y-o-y to Rs 632 mn.

Stellar Mobile sales: 274% growth in Q4FY22 sales; OPM at 3.5% ( 100bps y-o-y; 50bps q-o-q). Dixon has achieved threshold in PLI (both revenue and sales) in Y1 and is now eligible for incentives as per criteria. Volumes for Motorola (anchor) is ramping well and now at 0.4mn units /month. Dixon has added a new customer, Itel, in feature phones segment – expected annual volume at 1mn units. We expect Mobile sales to grow at 38?GR over FY22-25e.

Robust guidance, capex: Dixon has received cumulative 5 PLI approvals till now, and is also adding new verticals and customers. Mgmt is expecting topline growth of 55-60% y-o-y in FY23; this is in line with our estimates. Key sales contributors would be LED TV and Mobile segments. However, JEFe is lower on EBITDA margin at 3.9% in FY23 vs. mgmt guidance of 4.0-4.2%, as we believe the current inflationary pressures warrant caution.

Capex is front-ended in view of future growth prospects. Company expects to incur Rs 3.4 bn in FY23e towards various PLIs and expansions – this is higher than our earlier estimates. As the new capex ramps up, we foresee return ratios (RoCE and RoE) almost doubling over FY22-25e, also noting that the OEM segments (LED TVs, and Mobiles) require lesser capital employed vs. ODM.

Outlook; Buy: Primarily factoring in higher capex outlay (rise in depreciation and interest expense as well), we cut FY24-25e EPS by 5-6%, whereas FY23 EPS cut is at 8%. However, we retain margin assumption, improving from 3.9% in FY23 to 4.4% by FY25e. We stay bullish on the indigenisation opportunity in India, wherein Dixon could be a key beneficiary, given its expansive product slate and 5 PLIs received.

We estimate FY22-25E sales /PAT CAGR at 42% / 60% , aided by ramp-up in PLI sales. Retain Buy with revised PT of Rs 5,300. Target PE at 50x, at ~10% premium to historical average multiple.