BHAVIKK SHAH's BLOG: SYMPHONY LTD: COOL PRODUCT, HOT STOCK !!!

Scrip Code: 517385 / SYMPHONY

CMP: Rs. 2,421.45; Market Cap: Rs. 8,469.86 Cr; 52 Week High/Low: Rs. 3,275 / Rs. 1,650.00.

Total Shares: 3,49,78,500 shares; Promoters : 2,62,33,870 shares – 75 %; Total Public holding : 87,44,630 shares – 25.00 %; Book Value: Rs. 82.96; Face Value: Rs. 2.00; EPS: Rs. 38.67; Dividend: 700.00 %; P/E: 62.61 times; Ind. P/E: 50.83; EV/EBITDA: 44.60.

Total Debt: ZERO Cr; Enterprise Value: Rs. 8,465.13 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 Established in 1988, is a world leader in evaporative air coolers, Symphony focuses on innovative design to create better and eco-friendly products for domestic and industrial customers in 60 countries across the globe. Symphony’s design-driven innovation and green engineering is a sustainable competitive advantage. Company delivers market-leading products with engineering and design innovation, improved energy conservation, distinctive styling and customer-centric design. Symphony leverages a unique and successful asset light business model for its residential coolers in India and in-house lean manufacturing for its industrial coolers in Mexico to achieve sustainable and profitable growth. Symphony is a global company committed to develop sustainable and responsible products which means leading the air-cooling industry's efforts to develop breakthrough green technologies to combat climate change. Symphony is present in key retailers like Wal-Mart, Lowes, Carrefour, Singer, Sears, Costco, Home Depot etc. Symphony provides domestic (plastic), commercial (heavy duty metal coolers) and industrial (metal cooler-machine made modular unit) air coolers across various models. Employing an environment-friendly carbon reduction product strategy, Symphony air coolers offer a superior value proposition to air conditioners. With increased global warming and environmental degradation, people around the world recognise that businesses must act responsibly and offer green products to customers. Symphony enables people across the world to capitalise on eco-friendly, energy-saving air cooling technologies as a serious alternative to harmful and inefficient air-conditioners. Symphony believes an environment-friendly approach transcends commercial considerations and a cleaner environment is the best legacy one can leave behind for future generations. Symphony’s power-saving Technology is currently the only air cooling technology in the market that complies with international standards for product energy efficiency. Air coolers represent a low-cost, energy-efficient and an environmentally-friendly alternative to air conditioners. Air coolers are simple to use and cools air through the evaporation of water. Evaporative cooling differs from typical air conditioning systems which use vapour-compression or absorption refrigeration cycles. Evaporative cooling works by employing water’s large enthalpy of vaporization. The temperature of dry air can be dropped significantly through the phase transition of liquid water to water vapor (evaporation), which can cool air using much less energy than refrigeration. In extremely dry climates, evaporative cooling of air has the added benefit of conditioning the air with more moisture for the comfort of building occupants. They also filter dust and dirt without drying the air. Unlike conventional air conditioners, evaporative coolers require fresh air and work best with open windows and doors. They are best suited for residences, showrooms, shops, offices, especially where doors are opened and closed frequently which is major advantage over conventional air conditioners. Besides, they consume significantly less electricity and produce no emissions. Symphony offers a wider range of air coolers, which find applications also where it is difficult or impossible to install and use an air conditioner. Symphony’s air coolers are easy-to install, relatively inexpensive, and can be easily maintained by a layperson. The domestic air cooler segment is largely fragmented with about 70 % to 80 % of sales accounted for by unorganised players. The branded air cooler industry is competitive in nature with the top four players accounting for more than 90 % of the branded air cooler market. Symphony is the leading player in the space followed by Kenstar (Videocon Industries Limited). Other players include Bajaj Electricals, Khaitan, Maharaja and Usha. Symphony is India’s leading evaporative air cooler manufacturer with a market share of 55 % in value terms in the organised product category. Over the years, it has been able to create a strong brand name, which has become synonymous with air coolers in India. With its focus on R&D and innovation, Symphony constantly innovates in its products to enhance design, technology and post sales services. It has launched more than one new model annually for six years. Over the years, it has established a robust distribution network comprising 750 dealers, 16,500 retail dealers and 4,500 dealers in towns. Also, Symphony has consistently invested in brand building through advertisement campaigns. It spends around 4% of its sales over the last three years and 6 % in FY16 in advertisement for strengthening brand recall. Further, the company plans to grow its network to 40,000 dealers over the medium-term for deeper penetration and a stronger presence in rural and semi-urban markets. In spite of a bleak macro environment, Symphony clocked overall volume CAGR of 13 % during FY11-15 supported by strong demand from domestic markets led by launch of new models during the same period. Company introduced six new models of ‘i’ series air coolers, the intelligent coolers with features such as empty tank alarm, full Remote function, memory restore function, dura pump technology, etc. With increase in spending in rural areas & with increasing demand from overseas countries would help to drive Symphony’s overall volume at a CAGR of 18 % during FY15-18E. 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. Symphony, together with its subsidiaries, offers 87 models of air coolers for almost all categories of customers. Outsourcing products to nine different vendors and not sharing intellectual rights creates a strong entry barrier for other players, providing an economic moat. Also, it helps Symphony 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 of 35 %, RoE at 39 %, giving last three year’s average of 39 %, 34% mainly due to an asset light model and almost debt-free status since 2006. The zero debt status provides adequate room to fund Symphony’s organic and inorganic growth opportunities whenever required. Symphony operates on a cash and carry model with almost 95 % of domestic sales on advance payment 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. The receivable days last three year’s average is 45 days on the books of the company & are only a reflection of 5 % of the domestic market and 40 % in international markets where Symphony has to provide some levy on receivables due to bulk orders. The cash & carry model and higher supplier days help the company to maintain lower working capital requirements throughout the season. The company recently acquired Mexico based Impco SDERL DE CV (Impco). Currently, Impco contributes 18 % to the consolidated topline with a major chunk of revenues which is 65 % of overall sales coming from centralised and heavy duty air coolers and the remaining 35 % of sales from room coolers. Currently, Impco serves markets like the US, India, Iraq and some of the Middle East countries. Symphony started leveraging the enduring relationships established by Impco with large format stores like Wal-Mart, Sears, Home Depot, Lowes, Famsa and Costco, among others, to widen its presence in North, South and Central America. Besides, Symphony’s acquisition has created a new opportunity in the category of heavy duty air coolers for outdoor applications and industrial coolers, a project-oriented, non-seasonal business segment. The company was the first in India’s organised sector to launch industrial air coolers and establish a presence in a number of business spaces, viz. food & beverages and religious establishments, among others. Symphony has completed 109 installations. The company has executed orders for some renowned brands namely Asian Paints, DHL, Dixon Technologies, Swaminarayan Temple, Iskcon Temple, Marico, Tractor India and Shivam Auto Tech (part of Hero Group). Symphony received its first order from Indian Railways to install air coolers in waiting rooms of Kota and Godhra railway stations. Plans to improve operational efficiency at Impco to have a capital light and asset light business model same in line with Symphony’s Indian operation. Impco can focus more on sales & marketing, business development, research & development, product innovation, etc. to improve operational performance and provide flexibility in operations. As a result, by monetising surplus assets to become even internal debt free company by paying off the parent company loans (Symphony’s) and also further improving the profitability by savings of interest, depreciation, forex fluctuation and other overheads Entry into Chinese market through acquisition Symphony acquired a 100 % stake in China-based air cooling company MKE for the consideration of a meagre Rs. 1.55 crore. During FY15, MKE recorded sales of Rs. 50 crore while it recorded loss at bottom-line of Rs. 9 to Rs. 10 Crore. The acquisition will facilitate Symphony’s access into China which is second largest air cooler market after India and other international market. The acquisition will also provide Symphony the benefit of sourcing of raw materials for its OEMs. MKE also has a strong R&D and test centre, which meets the quality standards of the US and Australia. Symphony aims to improve its sales to the level it clocked during its peak of Rs. 130 crore and turn around its business following various strategic moves. Raising demand, rural consumption increase and diversifying in emerging markets makes prospects of Symphony much bright & regular cash flow in coming future.

Outlook and Valuation:

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. Symphony’s products are designed to give very high air delivery at very low power consumption. Symphony Limited has a market share of more than 50 % in Indian cooler segment. 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). Currently, the air cooler industry is largely dominated by the unorganised segment 80 % volume market share. There can be a shift from the unbranded to branded category due to rising aspiration level provides huge potential for organised players. Hence, organized industry is likely to grow at 25 % CAGR in FY15-25E. Symphony being the market leader is expected to benefit the most from this structural shift in the long run. Symphony will record 24 % volume CAGR in FY15-25E. Further, as a policy, Symphony would keep the dividend payout at more than 50%. This would increase its return ratios, going forward. On April 12, 2016, the honourable district court, Gandhinagar, Gujarat granted a stay order in favour of Symphony against Wim Plast Ltd, which has launched "Cello" Air Cooler models in India namely "Marvel",'Wave' and 'Tower' which were smiliar to registered designs of Symphony Ltd models 'Winter', 'Sumo' and 'Diet'. Symphony pointed out to the Court that Wim Plast's 'Marvel' model is identical and copy to Symphony's 'Winter' model, Wim Plasts 'Wave' model is copy to Symphony's 'Sumo' model and another 'Tower' model is copy to Sympony's 'Diet' model. The district Court of Gandhinagar Gujarat order stated that by way of ad-interim injunction, the Cello (Wim Plast) are restrained by an order of temporary injunction from manufacturing, marketing, advertising and publishing, selling the products which is having identical and deceptively similar design as of design of Symphony's models Winter, Sumo & Diet. Symphony will continue to take recourse to every legal option available to it to stop Wim Plast and such other imitators from launching, air cooler models in India which are copy-cats of Symphony's range of air coolers. Symphony's management is clear that they will leave no stone unturned to defend its Intellectual properties and will take all necessary legal action against all individuals and/or companies that infringe upon them. Symphony reported its highest quarterly revenues of Rs. 160 Cr which was 20 % YoY growth during 2QFY16. The domestic revenues grew by 20 % YoY to Rs. 150 Cr while the exports reported 13 % YoY growth at Rs. 12.80 Cr. The focus on incremental dealer enrolments coupled with its dominant positioning in the air- cooler segment has undoubtedly helped Symphony push the primary sales to record levels. The company can report similar growth during 3QFY16. In the international business, Symphony has initiated measures to convert the IMPCO business to an asset-light model by outsourcing its manufacturing processes. It also concluded the acquisition of Munter Keruilai. The China acquistion, which is now, became 100 % wholly-owned subsidiary effective 1 Jan 2016. The EBITDA grew by 24.8 % YoY with margins improving 15.5 % YoY to 37 %. Margin expansion was led by 3.40 % YoY gains in gross margin to 53.9 %, offset by an increase in employee/other expense (as % of net sales) by 0.80 % to 1.00 % YoY to 5.8 %/11 %. Adj. PAT grew 32.5 % YoY to Rs. 47.7 Cr aided by other income growth of 78 % to Rs 7.4 Cr and a 1.95 % drop in tax rate to 28.3 %. Management maintained its mid-to-long term earnings guidance of 20-25 % CAGR. Symphony can deliver strong earnings growth at a 34 % CAGR over FY15-FY18. At the current market price of Rs. 2,421.45, the stock is trading at a PE of 59.36 x FY16E and 54.11 x FY17E respectively. The company can post Earnings per share (EPS) of Rs. 40.79 in FY16E and Rs. 44.72 in FY17E. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also.

KEY FINANCIALS	FY15	FY16E	FY17E	FY18E
SALES (₹ Crs)	545.66	586.03	641.12	818.10
NET PROFIT (₹ Cr)	164.44	198.88	218.27	261.10
EPS (₹)	33.28	40.79	44.72	74.60
PE (x)	74.97	61.18	55.79	29.30
P/BV (x)	30.08	24.18	19.42	11.50
EV/EBITDA (x)	52.37	43.10	38.92	23.20
ROE (%)	40.12	39.52	34.81	38.40
ROCE (%)	57.40	55.86	49.47	47.40

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