It will be interesting to see how the growth versus valuation story continues to pan out for Dixon.
The results yesterday were good (albeit with compressed margins) and the management has guided for further revenue growth and things look rosy long term.
I though disinvested a long term position basis the following parameters:-
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For a 4-5 percent net margin business with high labour costs, every basis point is critical to future growth parameters and PAT calculations. In my understanding, I anticipate future headwinds to the margins aspect of the business - from compressing margins on thier main business (TVs) to high commodity prices impacting raw material cost. Even if this is transferred to the brands partly, would anticipate impact on Dixon.
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What price are we prepared to pay for growth - Even if they continue to grow at scorching pace and meet their internal targets of 3x revenue in 3-4 years - the stock would be valued at a PE >40 at the current price after all this growth in 3 years with a significant addressable market tapped.
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I anticipate chip shortages to affect their phones business which is amongst the fastest growers
There are other concerns like COVID impact on plants, low net margin, drastically lower PEs of global peers like Foxconn, but those have clear counter points in terms of growth, Short term issues, pent up demand etc.
Finally, it would only be fair to not state possible positives for a business performing very well
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A management walking the talk - consistently delivering growth on numbers
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Opportunity size still large in domestic markets with electronic manufacturing
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Contracts with top new brands being signed regularly
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Beneficiary of Make in India and PLI focus
All that said, as an investor, I always don’t question current price, but what is left for me to make in the investment at current price versus what’s my risk if things go wrong?
My analysis here pointed me to a much higher risk than reward, especially with the small cap and midcap index at where it is.
Have taken similar calls on this and a couple of other midcaps I own this week on stocks which worked very well for me over the last few years.
Discl : Was invested, but exited stock this week. This is not a buy/sell recommendation. I have seen several instances in the past where growth stories have continued and confounded all valuation parameters, so this could be the case here too.