Red-hot Dixon stock has risks too

livemint.com:

Dixon Technologies (India) Ltd investors are sitting on handsome gains. The stock has delivered almost 150% in the last one year, and nearly 30% in the last one month. Dixon is engaged in electronic manufacturing services (EMS), and the prospects for the sector are bright thanks to the government’s initiatives to boost manufacturing through various production-linked incentives (PLI) schemes.

But there is a problem—the stock’s expensive valuation multiple, which could act as a deterrent to fetch meaningfully higher returns from hereon, especially if earnings growth fails to meet the Street's elevated expectations. A recent analysis by Kotak Institutional Equities seeks to illustrate this issue. There are 104 companies trading at one-year forward price-to-earnings (P/E) multiple of greater than 50 times and nine companies with greater than 100 times P/E, according to Kotak.

One such company, with a P/E of 100, is Dixon. The company has low debt and there is no significant debt repayment, so P/E is a better valuation metric than EV/Ebitda. The point that needs to be highlighted here is that the company’s P/E of 100 is after factoring in almost 90% growth in Bloomberg consensus EPS estimates for FY25.

Coming to the financials, the company has grown its sales at a CAGR of 40% during FY20 to FY24, with net profit growth of a little over 30%. CAGR is short for compounded annual growth rate. The lower CAGR in net profit as compared to the sales is because the Ebitda margin in FY20 was 5.07%, which came down to 3.94% in FY24.