Kotak Institutional Equities recently published its analysis on the potential impact of the government's Mobile Phone Manufacturing Scheme (MPMS) on key electronics manufacturers Dixon Technologies (India) Ltd and Amber Enterprises India Ltd. While the brokerage maintained its earnings estimates and fair values for both companies, it highlighted specific dynamics that will determine their long-term gains from the scheme.
Understanding the MPMS Framework
The MPMS operates under a two-track framework designed to bolster India's mobile manufacturing ecosystem. Target Segment 1 (TS1) focuses on scaling production and increasing localization, setting an ambitious 15 percent moving baseline revenue target for participants. Target Segment 2 (TS2), on the other hand, aims to nurture and promote the growth of indigenous Indian smartphone brands.
Kotak's report indicates that sustaining growth beyond the scheme's hurdles through domestic demand alone is becoming increasingly difficult. The Indian smartphone market saw modest volume growth of approximately 1.8 percent and value growth of 14 percent compounded annually between 2022-2025, largely driven by premiumization rather than a significant increase in unit sales.
The Critical Role of Exports
A central finding of Kotak's analysis is the paramount importance of export growth for brands seeking to maximize incentive payouts under MPMS. Indian mobile production has seen a robust 24 percent Compound Annual Growth Rate (CAGR) over the last five years, with export production contributing a substantial 62 percent CAGR to this expansion. Given the relatively flat domestic smartphone sales, exports are deemed crucial for companies to consistently exceed the TS1 growth benchmarks.
Dixon Technologies: Specific Upside
For Dixon Technologies, Kotak anticipates primary benefits from an increase in volumes driven by a surge in exports from its major anchor customers. Additionally, Dixon is expected to see margin improvements through backward integration efforts. While direct benefits from the MPMS itself might be limited, a scenario analysis by Kotak suggests a potential 14-22 basis points (bps) uplift in Dixon's EBITDA margin from the scheme.
Further upside for Dixon could materialize if its joint ventures with companies like Vivo and Longcheer (which produces for OPPO and Realme), or its partnership with Compal (for Pixel devices), experience a sharp increase in production volumes.
Amber Enterprises & Future Prospects
Regarding Amber Enterprises, Kotak does not foresee any immediate impact from the MPMS, noting that OPPO volumes are still in their ramp-up phase. The brokerage believes that while Target Segment 2 of the MPMS could offer additional volumes to players such as Dixon and Amber, their significant contribution to overall sales and EBITDA would depend heavily on the strong ramp-up and success of these Indian brands, a development that may still be several years away.