This Hypergrowth Company Could Be the Next Trillion-Dollar Stock

When it comes to hyper-growth stocks in India, a few names consistently pop up on investor's radar. One company that has grabbed headlines is Dixon Technologies. It's easy to see why.

As India's economy booms and Production Linked Incentive (PLI) schemes provide tailwinds, Dixon has emerged as a frontrunner in the Indian manufacturing story.

From its early days as a company initially focused on a single product-LED televisions-Dixon has evolved into a multifaceted powerhouse in the Indian Electronic Manufacturing Services (EMS) market. It now has the scale and expertise required to compete globally.

But what exactly makes Dixon Technologies stand out?

India's Largest Home Grown Contract Manufacturer

Dixon Technologies isn't a household name like Samsung, Panasonic, or Philips. However, there is a good chance that one of the products in your home has rolled off its assembly line.

Dixon is India's largest home-grown contract manufacturer, manufacturing LED TVs, lighting products, semi-automatic washing machines, mobile phones and now IT hardware.

While these products carry big-name brands, Dixon is the engine behind their production.

Contract manufacturing is when a company-like Samsung or Motorola-outsources its manufacturing to a third-party company like Dixon.

But why don't these brands make it themselves? For the simple reason that big brands want to focus on innovation, marketing and customer experience while Dixon takes care of the nitty-gritty of production.

OEM and ODM Models: The Two Sides of Dixon's Business

Dixon operates on two different models: the OEM (Original Equipment Manufacturer) model and the ODM (Original Design Manufacturer) model.

Most people are familiar with the OEM model, where Dixon simply executes the manufacturing based on a client's design and specifications. This is Dixon's bread and butter, and it's how they operate for most of their contracts.

But there's also the ODM model. Here Dixon designs the product itself, choosing the materials and sometimes even tweaking the specifications to make the product better or cheaper to manufacture. The ODM model allows Dixon to earn better margins because the company adds more value to the product.

For instance, Dixon manufactures all of its washing machines and lighting products under the ODM model, meaning it takes full control of design and development.

However, this segment (home appliances) contributes just 7% to the company's total revenue (FY24), as most of its contracts still come through the OEM model.

While the ODM model might seem more attractive from a margin standpoint, the reality is that most companies prefer to keep the design process in-house, which keeps Dixon largely focused on execution rather than innovation.

The PLI Advantage: A Government-Backed Boost

One of the most significant developments in Dixon's story has been its participation in India's Production Linked Incentive (PLI) scheme. The PLI scheme, launched in 2020, incentivizes domestic manufacturers to scale up and compete on a global stage.

For Dixon, this initiative has been a game-changer, especially in the mobile phone manufacturing sector. Before the PLI scheme, Dixon's share of revenue from mobile phone production was a modest 12% in FY20.

By capitalising on the incentives provided by the scheme, the company's revenue from this segment (mobile and electronic manufacturing segment) skyrocketed to 40% in FY23 and 62% in FY24. Big-name clients like Samsung, Motorola, VU, Nokia and more recently, Xiaomi, have flocked to Dixon for their manufacturing needs.

With the second edition of the PLI scheme announced in May 2023, Dixon is now setting its sights on IT hardware manufacturing.

While this segment contributes very little to the revenue pie at present, the company has ambitious plans to expand this figure. By leveraging the new incentives, Dixon aims to generate a staggering Rs 480 billion (bn)[1] in revenue alone from this segment over the next 5-6 years.

Dixon's success in the mobile phone sector is a strong indicator of its potential to replicate the same growth trajectory in IT hardware. The company has already secured partnerships with Acer and has finalised collaboration with Lenovo to manufacture notebooks and tablets. Additionally, it is targeting to start production for two new global brands in FY25.

Skyrocketing Valuations

There's no denying that Dixon's numbers are impressive. Over the past five years, its revenue has surged fourfold, rising from Rs 44,053 million (m) in FY20 to Rs 177,134 m in FY24. At the same time, net profit has grown threefold, increasing from Rs 1,205 m in FY20 to Rs 3,749 m in FY24.

Dixon Technologies Financial Snapshot (2020-24)

	2019-2020	2020-2021	2021-2022	2022-2023	2023-2024
Revenue Growth (%)	47.33%	46.41%	65.91%	13.99%	45.22%
Operating Margin (%)	5.29%	4.54%	3.62%	4.28%	4.10%
Net Profit Margin (%)	2.74%	2.47%	1.78%	2.09%	2.12%
Return on Capital Employed(%)	34.20%	32.83%	25.90%	27.98%	34.65%
Return on Equity (%)	26.41%	25.25%	22.20%	22.63%	25.47%

Source: Equitymaster

This explosive growth is reflected in Dixon's share price, which has appreciated by more than 2,000% over the same period, resulting in a PE ratio of 169 times.

While Dixon's growth potential remains strong, the critical question for investors is whether there's still room for long-term returns at the current price.

Although we can't predict the future with certainty, the numbers tell a promising story.

The Road Ahead...

In the first quarter of FY25, Dixon has already generated Rs 65,800 m in revenue. Dixon's order book remains strong across all business segments.

While the TV business under its consumer electronics division has seen a decline in volumes, the newly commissioned refrigerator capacity-which began operations in 2023-has taken up the slack, now operating at 80-85% capacity and showing strong growth potential.

The company is also expanding its automatic washing machine client base, bringing on new customers such as Panasonic, Lloyd, Voltbeko, Godrej, and Reliance.

In addition to this, it has its eyes set on becoming a major player in smartphone manufacturing. It currently produces over 15 million smartphones and 38 million feature phones annually. The company is aiming to ramp up this figure significantly over the next few years.

Dixon has already bagged major contracts from Motorola and Nokia.

But the road ahead is not without challenges. Feature phones, which currently make up a large chunk of Dixon's production capacity, are on the decline, and the company will need to adapt quickly to the growing demand for smartphones.

Moreover, such staggering valuations come with risks. Dixon's high PE ratio means the stock is priced for perfection, leaving it vulnerable to any slowdown in growth or external disruptions.

A Fragile Business Model?

While Dixon's growth story is incredibly compelling, it's important to recognise that contract manufacturing isn't a glamorous business. The margins are razor-thin, especially in the OEM model, where Dixon is executing someone else's vision. OEM margins typically range between 3-4%, which means Dixon has to rely on high volumes to make significant profits.

Moreover, Dixon is heavily dependent on a small portfolio of clients. While these strong relationships are an asset, they also pose a significant risk. If even one of these relationships were to sour, Dixon could face a massive hit to its revenue.

Additionally, Dixon's fortunes are closely tied to the success of its clients. So on the off chance, if companies like Samsung or Motorola face tough times, Dixon's revenue would take a hit as well. It's a fine balance, and maintaining strong relationships with these key clients will be essential for the company's sustained growth.

In Conclusion

Dixon Technologies has positioned itself as a leader in India's contract manufacturing space, and the company's growth story is hard to ignore. Its success in capitalising on government incentives, coupled with strong client relationships, makes it a formidable player in the electronics manufacturing industry.

However, the lofty valuations and the inherent risks of contract manufacturing-like thin margins and heavy client dependency-should give investors pause.

While Dixon undoubtedly has massive potential, striking the right balance between optimism and caution will be crucial for those looking to invest in this hyper-growth stock.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...