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Marquee customer additions in mobility to drive utilization
* Dixon has acquired an additional 50% stake in Padget Electronics Pvt. Ltd., the JV for mobile manufacturing in which Dixon already owns 50%. After the transaction, Padget has become a wholly owned subsidiary of the company.
* Dixon valued Rs270mn as the consideration for the stake, valuing Padget at 2.6x FY19 EBITDA. The net cash payout stood at Rs110mn. The deal should lead to incremental revenues of Rs3.4bn/3.7bn for Dixon’s in FY20/FY21E, with EBITDA of Rs84mn/92mn.
* Gionee and Karbonn are the key customers of Padget. We continue to believe that marquee customer additions will drive revenue sustainability for Dixon. Note that we have now incorporated 100% of Padget Electronics into our estimates.
* Expected moderation in Q4FY19 results and underlying weak mobile business have led to a 7% EBITDA cut in FY19E and restricted upgrade for FY20/21E despite consolidation of Padget. Maintain Buy with a revised TP of 2,718 (15x FY21E EV/EBITDA).
Key contours of the deal
* Dixon has acquired the balance 50% stake in Padget Electronics Pvt. Ltd. for a consideration of Rs270mn, valuing it at Rs540mn. Padget has a cash balance of Rs160mn as on March 31, 2019, so the net cash outflow for Dixon stands at Rs110mn.
* Padget Electronics is primarily engaged in the manufacturing of mobile phones and other allied activities pertaining to home appliances, electric appliances, industrial appliances, and digital equipment.
* Padget’s key customers include Gionee, Panasonic, Karbonn, and Tambo (feature phones). Gionee and Karbonn contributed ~300,000 and ~35,000 units, respectively, in volume terms in FY19.
* Dixon management is targeting revenues of ~Rs6.5bn, with EBITDA of Rs180mn for FY20E, translating into an EBITDA margin of ~3%. 9MFY19 EBITDA margin for the mobile business stood at 2%, with revenues standing at Rs2,880mn.
Outlook and valuations
For Dixon, continuing customer additions and a strong order book should drive strong revenue growth in TV, Washing Machine, and Security segments. Lighting and Consumer Electronics segments should see sustained margins and strong EBITDA growth in FY20E. Sustained growth in Lighting can be achieved with export orders. Customer additions (among the large brands) in the Mobile business should provide sustained revenue visibility over the medium term. We maintain our positive view, backed by strong EBITDA growth along with healthy return ratios. Key risks: slowdown in Consumer durables and Electricals segments and the loss of business from key customers.
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