Priyanka Tiwari
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Kotak Institutional Equities has revised the rating for Dixon Technologies Ltd from ‘Sell’ to ‘Reduce’ and now expects the share price to reach Rs 14,770, citing aggressive, yet risky grab in display fabrication as the rational.
Dixon has a plan to build India’s first $ 2.7 billion display fab that will manufactuer screens for mobile phones, televisions, and other electronic devices that cover 20-25% of India’s demand. However, the project is contingent upon obtaining a 75% capex subsidy under ISM 2.0 on the condition of meeting the terms of the central and state governments where 50 percent is funded by the central government and 25 percent by state governments.
According to Kotak, the facility will take four years to reach a steady-state in which it will provide a 19% RoCE on the subsidy. For atom pay back their expenditure, sustain government aid and a guaranteed domestic market is vital for Dixon’s display business as which is highly challenging.
According to Kotak, ISM subsidy will enable vertical integration across multiple product segments which makes then actor benign the ISM subsidy support. The overall global display market productivity growth is slow with advancement in technology and high competitive pressure from Chinese competitors, which underlines the essential nature of government support, subsidies, and trade protection for success in the domestic market.
Kotak estimates Mr. Dixon’s Display Fab Business of Rs. 1540 per share considering a 74% equity for Dixon, 26% for his technology partner, a three year ramp up period, 0.7 asset turn, 20% stable-state EBITDA margin, and a terminal growth rate of 1.5%. This increases Mr. Dixon’s valuation to Rs. 14,770 per share from Rs. 13,230. However, the project is exposed to significant risk due to delays in the implementation of ISM 2.0, lower-than-expected subsidy allocation, and challenges in securing a robust technology partner.
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