International brokerage Morgan Stanley has downgraded EMS player Dixon Technologies Ltd amid concerns on rising competition and earnings slowdown.
The brokerage slashed its outlook on Dixon Technologies to 'underweight', but bumped up its target price to Rs 11,563 per share. The downgrade reflects concerns around rising competition in Dixon’s core electronics manufacturing services (EMS) business, particularly after the expiry of the current incentive schemes.
Morgan Stanley also highlighted an expected slowdown in earnings growth between FY27 and FY30. While Dixon’s move into component manufacturing is seen as a positive strategic shift, Morgan Stanley cautioned that this area could prove more difficult to scale than its traditional EMS operations.
Shares of the firm were trading lower at Rs 14,701, down 1.8 percent on the NSE.
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In terms of earnings outlook, the firm expects a 46 percent slowdown in core EMS earnings growth over FY25–27, and a further 18 percent drop between FY27–30. Growth in the components segment remains highly dependent on successful technology tie-ups, regulatory approvals, and effective cost management.
As for Dixon’s foray into display fabrication, Morgan Stanley noted it is a deep cyclical business that demands significant capital investment and research and development spending.
This rating downgrade comes a few days after Japan-based brokerage Nomura reiterated its bullish call on the firm. "We believe the mobile EMS industry is likely to be divided between Dixon, DBG
Technology, Bhagwati, BYD, UTL Neolync, Tata Electronics, with Dixon commanding the largest share," said the brokerage.
Given the domestic outsourcing opportunity of ~100mn units, Dixon expects to cater to only half of the industry by FY27E, providing sufficient scope to grow as well. Given the sizeable domestic industry and rising export opportunity, there may be scope for a few more EMS players as well. Also, brands prefer multiple EMS partners as a derisking strategy to diversify the risk.
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