Jefferies downgrades Dixon Tech on stretched valuation. Check out target price

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Following a 55 percent surge over the past two months, Dixon Technologies' valuation has reached an estimated FY24 price-to-earnings (PE) ratio of approximately 59x, which is around 30 percent higher than its historical average.

Foreign broking firm Jefferies has downgraded Dixon Tech to 'hold' from 'buy'. Jefferies' target price on the stock is Rs 4,550, which indicates a 5 percent upside from the current market price.

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Dixon is a B2B contract manufacturer. Order book of EMS (electronic manufacturing services) players is largely influenced by sales budgeting by branded companies, noted Jefferies.

In this context, the present weakness in domestic demand warrants caution as most of Dixon's end-user categories are discretionary, like mobiles, LED TVs and appliances.

"Also, global smartphone offtake has been weak since last year. Over FY23-26, we forecast Dixon's sales CAGR at 29 percent, pivoted by mobile sales at 27 percent CAGR," Jefferies said.

Valuations a pain point

After the sharp rally, Dixon now trades higher than branded B2C companies such as Crompton Greaves Consumer Electricals, Vanguard, Polycab, Whirlpool.

Taiwanese EMS peers such as Hon Hai, Wistron and Pegatron trade at 13x-29x forward earnings. "While we acknowledge that their business models and target markets may be different, even so, Dixon is trading at a sharp premium to these players," Jefferies said.

While original design manufacturing or ODM is where the higher margins lie, three-fourth of Dixon's sales mix is OEM (original equipment manufacturing). "OEM business is prescriptive with lower operating margin at 3.5-4 percent," said Jefferies.

Though the firm is bullish on India's indigenization opportunity, the present softness in demand and high valuations has prompted it to trim Dixon's FY24-26 earnings estimate by 2-4 percent.

At 9:45am, the stock was quoting at Rs 4,267 on the NSE, lower by 2 percent from previous close.