SYMPHONY LIMITED : COMMANDING BEST FUNDAMENTALS !!!

Scrip Code: 517385 / SYMPHONY

CMP:  Rs. 841.00; Accumulate at every dips.

Short Tem Target: Rs. 883.00; Medium to Long Term Target: Rs. 925.00; STOP LOSS – Rs. 773.75; Market Cap: Rs. 2,941.69 Cr; 52 Week High/Low: Rs. 878.40 / Rs. 263.15.

Total Shares: 3,49,78,500 shares; Promoters : 2,62,33,870 shares –75.00 %; Total Public holding : 87,44,630 shares –25.00 %; Book Value: Rs. 53.48; Face Value: Rs. 2.00; EPS: Rs. 26.31; Dividend: 325.00 %; P/E: 31.96 times; Ind. P/E: 28.06; EV/EBITDA: 30.62.

Total Debt: ZERO Cr; Enterprise Value: Rs. 2,935.80 Cr.

SYMPHONY LIMITED: Symphony Limited was founded in 1988 and is headquartered in Ahmedabad, India. The company was formerly known as Sanskrut Comfort Systems Pvt Ltd and changed to Symphony Comfort Systems Ltd in 1995 and it again changed its name to Symphony Limited in 2010. The company came out with an IPO on February 1994 with a premium of Rs. 35 per share and announced splits of its face value from Rs. 10 to Rs. 2 per share in February 2012. The company engages in manufacturing of consumer durables under the brand name “Symphony”. Symphony Limited manufactures and sells consumer durable products in India. The company offers domestic, commercial, and industrial air coolers. It provides desert, tower, room, and personal coolers for residences, shops, showrooms, and offices and various industrial coolers for factories, offices, schools, malls, assembly halls, warehouses, and metro stations. The company also exports its products to approximately 60 countries. Its products are already being sold in U.S.A, Europe, Middle East, Africa, and South–East Asia & shortly will be available in many other countries. It offers its products through a network of distributors and dealers. Symphony coolers have plastic bodies unlike conventional metallic air coolers manufactured by the unorganised sector, are UV Cooling pads which combine cooling effects with elegant looks. The company has wide range of products which includes Evaporative Air Coolers, Air Conditioners and Water Heaters. The company offers products under Evaporative Air Coolers are Desert Coolers, Room Coolers and Personal Coolers. The products offered in Air Conditioners are Window Air Conditioners and Split Air Conditioners. The product offered under Water heaters is only Sauna Heaters. Symphony Limited subsidiaries include Symphony Air Coolers Inc, USA. Symphony Limited is locally compared with Bajaj Electricals Ltd, Havells India Ltd, Khaitan India Ltd and globally compared with Daikin Industries Ltd of Japan, Gree Electric Appliances Inc of China, Lennox International Inc. of USA, Tabreed alias National Central Cooling Company PJSC of UAE, Aaon Inc. of USA, Johnson Controls Inc. of Wisconsin USA, Denso Corporation of Japan, Ingersoll-Rand Plc of Ireland, Dover Corporation of Illinois, Mitsubishi Electric of Japan.

Investment Rationale:

Symphony Limited has established itself as a world leader in evaporative air coolers. Symphony is globally popular because of the sensitivity to good design which is a universal phenomenon. In its history of more than two decades, Symphony has gone through various stages of development. The company was a pioneer in introducing cooler as a lifestyle product for the first time in India and launched plastic body coolers compared to the then available metal coolers and was a market leader in the air cooling market in the early 1990s when its fortunes took a dramatic turn due to the aggressive launch of new products between mid ’90s and early 2000. During this period, the company launched various consumer durable products including air conditioners, geysers, fans and washing machines. Although the company did well in coolers but it failed to successfully establish itself in any other product and this led to huge losses and as a result, it had to file a reference with BIFR in 2002 and was declared as a sick industrial unit. But backed by the confidence in its air cooler range, the management restructured the organization and turned the company from a Sick Unit into a fantastically financially sound company with Zero debt in 2007 and in 2009 BIFR de-registered Symphony from the provisions of SICA. From then on, Symphony has no looking back. Symphony’s products are designed to give very high air delivery at very low power consumption. This has been achieved by a combination of several design parameters using latest engineering and computerized techniques and further analysed and tested at a very high–tech state of the art validation centre which is one of its kind in the world. Symphony is very high on Innovation, it has Intellectual property comprising 8 patents, 49 designs, 108 trademarks and 7 copyrights. India’s air cooler market is growing at 20 % p.a. with the organised segment growing faster at 25 %, given low penetration levels of 5 % for the air cooler segment and a consumer shift away from the unorganised market. Symphony Limited is a clear leader in the air cooler market with 50 % share in the organised segment and which is 30 % of the Rs 2,000 Cr air cooler market (organised + unorganised). Kenstar and Bajaj Electricals are the second and third largest players, with 30 % and 15 % value market share respectively. Symphony’s market share in value has improved from 40 % to 50 % over the past five years, with a volume share of 40 % in the organised segment. The company is ideally positioned to tap into the growing market opportunity, backed by a wide product range, strong brand equity and hence premium pricing power, an extensive distribution network, product innovation and a sharper focus on the industrial cooling market. In India, the demand for air coolers is high, especially among mid-income consumers, given the lower cost of ownership vis-à-vis air conditioners (AC) – an AC costs anywhere between Rs. 23,000 and Rs. 35,000 whereas branded air coolers cost between Rs. 4,500 and Rs. 17,000. Another key factor that often clinches the buying decision is that air coolers consume 90 % less electricity than ACs. If a 1.5t AC were operated through the month without a break, it would consume 9 times more electricity than an air-cooler of similar tonnage; the cost differential alone would make it possible for the air-cooler to be ‘paid back’ in just months. The result of this cost positioning is that the air cooler market has grown faster than the AC market in FY13. India’s industrial cooler market is estimated at Rs 2,000 Cr+ and Symphony has, over the last couple of years, trained its focused on this business, especially targeting factories, office spaces, malls and hotels. Company’s initiatives to build its presence include strengthening its leadership team, widening its distribution network from 15 in previous year to present 44 dealers and collaborating with 10 large opinion-driving HVAC consultants, and focusing on brand building in media. As a result, installations in the industrial cooler business increased from 56 in FY12 to 109 in FY13. Symphony has installed cooling solutions in verticals such as paints, logistics, moulding and foods. Its key clients include Asian Paints, DHL, Dixon Technologies, Swaminarayan Temple, ISKCON Temple and Marico, among others. The company has also received orders from the Indian Railways to install air coolers in the waiting rooms at Kota (Rajasthan) and Godhra (Gujarat) railway stations. The industrial coolers business does not account for a meaningful portion of Symphony revenues at present; however, given the huge market potential which is largely untapped, it is expected that the low single-digit market share for Symphony will be doubled over the next 4-5 years. Symphony has maintained a sound growth trajectory showing 20 % earnings CAGR over FY10-FY13 with consistent market share gains, backed by its comprehensive range of coolers in different variants and price points from Rs. 5,500 to Rs. 17,000. Apart from residential air coolers, the company also has a presence in the commercial and industrial air cooling space, with a total range of 23 plastic and 64 metal air coolers. The company’s advanced models such as Storm, Diet and HiCool are offered as a range of intelligent air coolers – this ‘i-range’ generated 25 % of company’s revenues in FY13. Notably, its strong brand equity enables Symphony Limited to garner around 10 % price premium for its products over competitors in the organised market. The company have scaled up to 16,400 dealers across India as on Jun’13, up from 14,000 in Jun’12. Urban India (cities with 1o lakh+ population) accounts for 30 % of total sales, whereas semi-urban and rural areas account for the balance. North and West India together bring in 60-65 % of sales with the balance coming from the East and South.

Outlook and Valuation:

Symphony Limited is a India’s largest selling Air Cooler Company with a market of more than 50 % in Indian cooler segment. Symphony operates through an asset light model wherein it outsources manufacturing of air coolers to about nine exclusive vendors in India and uses the cash and carry model for sales. However, the company retains the rights for product development, design and marketing function to maintain the exclusivity of products and technologies of Symphony from its vendors. The company pays on a cost plus fixed margins basis to its contract manufacturers who have a cumulative capacity of 1o lakh units. Its own Surat SEZ is used for exports and has a capacity of 200,000 units. Symphony together with its subsidiaries offers 87 models of air coolers for almost all categories of customers. Outsourcing of products to nine different vendors and not sharing intellectual rights creates a strong entry barrier for other players creating a deep Economic Moat. Also, it helps the company to concentrate on its core competence i.e. “innovation” in product development and feature evaluation. The company has maintained its return ratios i.e. RoCE at 39 % and RoE at 33 % in FY13. Symphony’s last three year’s RoCe average comes at 42 % and three year’s RoE comes at 34 % mainly due to an asset light model and almost debt-free status since 2007. This Zero Debt status provides adequate room to fund Symphony’s organic and inorganic growth opportunities whenever required. Symphony’s second strongest point is its business model. Symphony operates on a cash and carry model with almost 95 % of domestic sales coming as advance payments as per the terms with dealers and distributors with the remaining i.e. 5 % through large format stores. In the international business, about 40 % is through large format stores while 60 % is through dealers and distributors. Trade through dealers and distributors (domestic and international) happens with zero credit. This cash and carry model and higher supplier days help the company to maintain its lower working capital requirements throughout the season. On Financial side, Symphony recorded 33 % YoY growth in standalone revenue to Rs. 113.3 crore largely supported by 33.5 % YoY volume growth in Q3FY14. Domestic sales volumes increased by 25 % YoY driven by strong demand of window and diet range of coolers. Export sales volumes increased 65.5 % YoY led by good demand from South African and Latin American countries. For the industrial segment, the company has added new clients such as Havells, Pepsi, Yamaha, etc. Company’s EBITDA margin increased by 3.00 % YoY to 29.6 %. This was due to a dip in selling & marketing expenses and other expenses. An expansion in margin and lower tax outgo (onetime benefit) led to a sharp growth in PAT by 50 % YoY to Rs. 27 crore. The company has continuously recorded a stellar performance in the last 11 quarters with sharp volume growth. Historically, during FY11-13, the stock has commanded average one year forward PE multiple of 15 x with revenue, earning CAGR of 14 %, 8 %, respectively, and average RoE of 30%. With the strong performance during 9MFY14, the company could post strong revenue CAGR of 25 % and profit CAGR of 33 %, led by strong volume growth of 24 % for FY13-16E. At the current market price of Rs. 841.00, the stock is currently trading at all time high PE of 25.40 x FY15E and 21.02 x FY16E EPS respectively. The company can post Earnings per share (EPS) of Rs. 33.10 in FY15E and Rs. 40.00 in FY16E. One can buy SYMPHONY LIMITED with a target price of Rs. 925.00 for Medium to Long term investment and for the SHORT TERM PLAYERS it should be Rs. 883.00.

KEY FINANCIALS	FY13	FY14E	FY15E	FY16E
SALES (₹ Crs)	377.80	488.10	607.50	730.10
NET PROFIT (₹ Cr)	60.10	88.20	115.80	140.00
EPS (₹)	17.20	25.20	33.10	40.00
PE (x)	49.00	33.40	25.40	21.00
P/BV (x)	13.30	10.90	8.70	7.20
EV/EBITDA (x)	36.80	25.50	19.40	16.00
ROE (%)	27.10	32.70	34.40	34.00
ROCE (%)	33.70	40.60	42.90	42.30

I would buy SYMPHONY LTD for Medium to Long term for target of Rs. 925.00 and for the shorter term the target would be Rs. 883.00. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of ₹ 773.75 on every purchase. (Why Strict stop loss of 8 % ?) - Click Here

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