Dixon Technologies shares plunge 14% after Q3 results; what's going wrong with the stock?

Shares of Dixon Technologies plunged as much as 14% in intraday trade on Tuesday after brokerages raised valuation concerns following the company’s third-quarter earnings report.

The electronics manufacturing services company’s stock opened at ₹17,400, down from its previous closing price of ₹17,554.45 on the BSE. Within an hour, it declined by 11.56% to hit a low of ₹15,521.75.

This drop comes despite the homegrown contract manufacturer reporting a 124% year-on-year jump in net profit to ₹217 crore for the quarter ended December, compared with ₹97 crore in the same period last year. Revenue surged 117% to ₹10,461 crore, up from ₹4,820 crore in the corresponding quarter of the previous fiscal year.

Foreign brokerage Jefferies maintains an “underperform” rating on the Noida-based company, with a target stock price of ₹12,600, implying a potential downside of 19%. Similarly, Goldman Sachs has a "sell" rating and has set a price target of ₹10,240. “We believe the earnings upgrade cycle may have paused for now. Coupled with current valuation levels and moderated growth, this may lead to underperformance,” Goldman Sachs noted.

Domestic brokerage Yes Securities also downgraded the stock to "sell" with a revised price target of ₹15,138 citing that risk-reward is not favourable. "We downgrade the stock to SELL as CMP (current market price) captures most of the positives and will wait for correction to enter the stock," the brokerage says in a note.

The revenues from Dixon’s mobile and EMS (electronics manufacturing services) business soared 190% to ₹9,305 crore, contributing nearly 90% to the company’s overall revenue. Dixon manufactures mobile phones for several brands, including Xiaomi, Oppo, and Motorola.

During its earnings call, Dixon's management outlined plans to establish a display fabrication business with a $3 billion investment. The company expects a significant portion of this expenditure to be subsidised under the India Semiconductor Mission (ISM) 2.0 initiative.

“We are in active discussions with a global technology partner to set up a world-class display fab, a critical component for mobiles, IT hardware, and consumer electronics. This move aims to localise production, enhance supply chain control, and achieve cost efficiencies,” said Atul Lall, Managing Director of Dixon Technologies, during the earnings call.

Dixon, a key player in India’s electronics sector, began its journey in 1993 from a small rented factory in Noida. Its first significant order came from Lucky Goldstar, now known as LG.

In a significant development, Dixon Technologies’ subsidiary, Padget Electronics, signed an agreement last year to manufacture HP laptops, desktops, and all-in-one PCs in Tamil Nadu. The first HP laptop from this facility is expected to be shipped by February 2025. Padget Electronics is also setting up a new 300,000-square-foot facility in Oragadam, Tamil Nadu, which will create around 1,500 jobs. Once fully operational, the plant is projected to produce 2 million units annually, contributing to India’s growing electronics manufacturing ecosystem.

The government’s Production-Linked Incentive (PLI) Scheme 2.0 for IT Hardware, introduced on May 29, 2023, offers a 5% incentive on net incremental sales over six years to eligible companies. This scheme aims to boost domestic production of laptops, tablets, PCs, and servers.