SPECIALITY RESTAURANTS LTD : THEIR SPECIALITY WILL WORK !!!

Scrip Code: 534425 / SPECIALITY

CMP:  Rs. 148.45; Buy at current levels.

Short Term Target: Rs. 155.80; Medium to Long Term Target: Rs. 200; STOP LOSS – Rs. 136.55; Market Cap: Rs. 697.06 Cr; 52 Week High/Low: Rs. 179.00 / Rs. 101.30.

Total Shares: 4,69,57,657 shares; Promoters : 2,84,99,962 shares –60.69 %; Total Public holding : 1,84,57,695 shares –39.30 %; Book Value: Rs. 65.89; Face Value: Rs. 10.00; EPS: Rs. 4.02; Dividend: 68.00 %; P/E: 36.92 times; Ind. P/E: 38.92; EV/EBITDA: 15.75.

Total Debt: 0.10 Cr; Enterprise Value: Rs. 689.40 Cr.

SPECIALITY RESTAURANTS LIMITED: The Company was founded in 1992 and is based in Mumbai, India. The company was formerly known as Speciality Restaurants Private Ltd and changed its named to Mainland Restaurants Pvt Ltd on May 7, 2003. The company again changed its name to Speciality Restaurants Pvt Ltd in Jan 2004, and on conversion to a public limited company, the name was again changed to Speciality Restaurants Limited on Feb 10, 2011. Speciality Restaurants Limited came out with an IPO on May 2012 offering 1,17,39,415 equity shares of Rs. 10 each for Rs. 155 per share raising Rs. 181.96 Cr. The object of offer for sale was to repay a term loan, development of new corporate restaurants, development of food plaza. Speciality Restaurants Ltd is a fine dining operator in India with 107 restaurants and 14 confectionaries. They focus on providing their guests an affordable fine dining experience with quality food and service in a modern ambience. Speciality Restaurants has established several famous brands across the nation, including Mainland China, Oh! Calcutta, Café Mezzuna, Sigree, Haka, Machaan, Mostly Kababs, Just Biryani and Sweet Bengal, Flame & Grill, Kix, Shack, and Kibbeh brands; and confectionaries under the Sweet Bengal brand. It also operates Mobifeast, an outdoor catering arm for parties. It runs 62 Food & Beverage outlets in various important cities. Mainland China alone serves more than 2 lakhs Chinese meals per month, which is a record of its sorts in the country. Their restaurants consist of different restaurant concepts and are located across India, with the majority concentrated in the western region. The four factors that contribute to the quality of the food that they offer are quality fresh ingredients, modern food preparation and storage equipment, standardised recipes prepared by trained chefs and effective quality monitoring. Speciality Restaurants Limited owns and operates restaurants and confectionaries in India, Middle East, Africa, UK, and Bangladesh. Speciality Restaurants Limited is locally compared with Jubilant Foodworks Ltd, Westlife Development Ltd, Galaxy Entertainment, Indage Restaurant, Viceroy Hotels Ltd, Kamat Hotels India Ltd, H.S. India ltd, Byke Hospitality Ltd, Country Club India Ltd, Srs Ltd and globally compared with China Bistro, Cheesecake Factory, Darden Restaurants, Buffalo Wild Wings, Neo Group Ltd of Singapore, Borneo Oil Berhad of Malaysia, Berjaya Food Bhd of Malaysia, Abu Dhabi National Hotels of UAE, New Palace International Co. Ltd of Taiwan, Misonoza Theatrical Corporation of Japan, JB Eleven Co Ltd of Japan, Burger King Worldwide Inc of USA, Dunkin’ Brands Group Inc of USA, Red Robin Gourmet Burgers Inc of USA, BJ’s Restaurants Inc of USA, DineEquity Inc of USA, Domino’s Pizza Inc of UK, Hilton Worldwide Holdings Inc of USA, Hyatt Hotels Corp of USA, IFA Hotels and Resorts of USA, New Mauritius Hotels Ltd of Mauritius, Kuwait Food Company of UAE, Naiade Resort Ltd of UAE, Carrianna Group Holdings Co of Hong Kong, Bloomberry Resorts Corp of Philippines, Millennium & Copthorne Hotel Plc of UK, InterContinental Hotel Group Plc of UK, Kouni Reisen Holding AG of Switzerland, Resturants Group Plc of UK, Sodexo S.A. of France, Spirit Pub Company of UK.

Investment Rationale: 

Speciality Restaurants, promoted by the Anjan Chatterjee and family who owns and operates chains of fine dine and multi cuisines restaurants in India and abroad. Speciality's very first restaurant was started way back in 1992 named "Only Fish". This group has two flagship brands Oh! Calcutta and Mainland China. This company is backed by multi-stage PE investor SAIF Partner and SAIF Partners has been adding to its holding over past and as of March 31, 2014 it held 16.62 % stake in Speciality Restaurants Ltd. Recently, on May 29 2014, the company approved the proposal for acquisition of 51 % stake in a bakery company named Love Sugar and Dough for Rs. 75 lakh by the way of purchase of shares from the existing shareholders and execution of share purchase and shareholder's agreement subject to the statutory approvals. Love Sugar Dough is Mumbai based company set up in 2011, it has 8 bakery stores spread across Mumbai, Pune & Surat. Speciality looks at entering Quick Service Restaurants as well as Bakery Chains. Speciality Restaurants earlier this year formed a JV in Doha, Qatar in partnership with Al-Mohannadi Group to expand its flagship brand serving oriental cuisine Mainland China overseas. In FY13, Mainland China contributed 62 % to the total sales of the Speciality followed by the Oh! Calcutta and Sigree contributing 10 % each. Speciality's Flame & Grill along with Sweet Bengal contributed 5 % each to the total sales of the company. Its Machaan contributed 3 %, Haka contributed 3 % and Others contributed 2 % to the company's total sales. With an increase in disposable income levels and the culture of dining out is fastly catching up within the middle class and the restaurant industry in India is expected to grow at 17 % annually. The growth of the India food service industry is broadly driven by consumers and food service operators. The food market in India is estimated to be at Rs. 75,000 Cr last year and could reach at about Rs. 1.37 Lakh Cr in 2015 according to a data published by an research group. This industry is highly fragmented with 15 lakh eating outlets of which a little more than 3,000 outlets forms the organised segments. However, the organised segment is rapidly growing at an annual rate of 16 %. The India’s Quick Service segment is the clear winner in the eating out market with a growth rate of 21 %. Organized segment is expected to reach about Rs. 22,000 Cr by 2017, this would be driven by the rising disposable income, nuclear family structure, increasing working population, rapid urbanization and consumerism, increased private equity interest. The market size of Indian Quick Service Restaurants is estimated at Rs. 4,675 Cr and is expected to grow at 21.5 %, the market size of Casual Dining is of Rs. 2,365 Cr and is expected to grow 11.9 %; the Indian Café’s Market size is of Rs. 1,265 Cr and is expected to grow 12.3 %; the market size of India Fine Dining is of Rs. 1,045 Cr, and is expected to grow at 12.00 %, the market size of Pubs , bars, clubs and Lounges is of Rs. 963 Cr and is expected to grow at 11.00 %. Indian's on an average eats out lesser than 2 times a month, as compared to the 40 times in Singapore. Even a small increase in this number would mean a huge market opportunity for restaurants in India. Speciality Restaurants limited posted an healthy 18.1 % YoY growth in revenues on the back of 14.8 % YoY growth from owned restaurants and 92 % increase in revenues from franchisees following the opening of new restaurants. Management is confident of opening 12-15 owned restaurants every year for the next 2 years with 60 % to 70 % of them Mainland China. The company is consolidating its Indian cuisine restaurant under its brand “Sigree Global Grill” and intends it to make the second power brand. Some of its old restaurants brands such as Machaan, Fame & Grill may be converted to Sigree Global Grill over the next 2 years while Haka is being closed down slowly. During the quarter, the company opened 5 new restaurants and closed 2. Newer formats such as ‘Mezzuna’ and ‘Hoppipola’ will continue to cater to younger audiences. Fine dining is an upcoming format in urban India which is gaining good acceptance for serving the highest quality of food and services in a soothing atmosphere. The size of this market is estimated at Rs. 1,045 crore. The average bill size in the fine dining space ranges between Rs. 650 to Rs. 3,000 per person. The industry has an OPM of close to 40%, which is higher in comparison to the 15-25 % OPM in the QSR industry. The company, still has the unutilised amount of Rs. 91.68 Cr collected from the IPO, and plans to deploy it soon. In addition to its expansion-driven growth strategy, the company’s management is focusing on increasing the share of its flagship brand, Mainland China, which has a 30 % to 35 % operating profit margin (OPM) as compared with a blended margin of close to 20 % at the consolidated level. The company is also taking initiatives through the use of technology and centralisation of processes to improve its efficiency. Consequently, the management expects to improve the blended margin by 200- 300 basis points over the next few years. Strong balance sheet with little threat of further equity dilution in the near term and with a good chunk of cash of around Rs. 91 cr gives this company a very good standing on a operational front. Speciality works on an asset-light business model, as all its properties are leased and this aids optimal utilisation of capital for efficiently managing the restaurants at various locations. Its business entails services for cash and thus the business has excellent operating cash flows. With more and more of its restaurants attaining maturity, it can be expected that Speciality’s free cash generation ability will improve substantially in the coming years. This will not only take care of the future expansion plans, but also help in rewarding the investors with good dividend pay-outs. 

Outlook and Valuation: 

Mainland China in Mumbai
www.bhavikkshah.blogspot.in

Speciality Restaurant is a reputed player with leading and established brands. With a portfolio of well established brands including core brands Mainland China, Sigree and Oh! Calcutta. Speciality Restaurants Ltd (Speciality) is a leading player in the fine dining space. Its value-for-money proposition offers a five-star quality food with fantastic ambience and services at an affordable rates and has enabled it to successfully expand its chain of restaurants to over 107 restaurants spread across 22 cities in India. In Mumbai, Mainland China are located at Kandivali, Malad, Andheri, Bandra, Tardeo, Powai, Ghatkopar, Navi Mumbai and Thane. The management aims to open around 15 restaurants annually over the next three years and is well funded to achieve the target. The company still has the unutilised amount of Rs. 91.68 Cr raised from the IPO. The Company has its own roll-out process, after finalising a particular location; the company normally enters into a lease agreement and applies for regulatory permits. On securing the same the company starts the interiors. Typically the time between entering into a lease agreement and rolling out a restaurant is around 120 days. The breakeven period for any particular restaurant at the EBITDA level ranges from six months to eight months. Location is a critical component for the success of any outlet. The company is focusing on introducing more and more combos and multi-brand formats which will reduce the operational cost (centralised kitchen) and employee cost. Also, the need for a larger space would allow the company to negotiate the lease rentals. Along with introducing more restaurants in the existing and new cities, the company is planning to optimise its logistics to streamline its supply chain, increase the inventory turnover and reduce the waste. The company is planning to enhance the supplier base which will result in economies of scale and streamline the quality assurance mechanisms. The company also intends to go for bulk buying which will help in rationalising the raw material cost. This along with a stable turn-around in the existing restaurants will help the revenues to grow at a CAGR of 31 % over FY2012-15. With an enhanced focus on improving its profitability through cost optimisation measures and the benefits of an improved scale, it is expected that the company’s OPM to grow to 21-22 % going ahead. Overall, it is expected that Speciality’s bottom line to grow at a CAGR of about 50 % over FY2012-15. However, any moderation in the turn-around ratio due to macro uncertainties and any significant increase in the operating cost remain the key risks to our earnings estimates. Consequently, it is expected that Speciality’s revenues to grow at a compounded annual growth rate (CAGR) of 31.5% over the next three years. With growing disposable incomes and rising consumer aspiration for quality foods, ambience and services in the country, the organised players in the domestic food services industry have a unique opportunity to grow at a healthy rate of 28-30 % annually over the next many years. Along with an exponential growth in the quick service restaurants (QSR; eg KFC, Domino’s and McDonald’s) within the organised segment, the fine dining (full service restaurants) are also expected register a healthy high double-digit growth rate for several years. It is expected that the operating margins for the company to expand to 17 % by FY16 on the back of strong operating leverage as more than 80 % of the cost is fixed in the business. Speciality Restaurant is confident on long term growth due to its focus on increasing same store sales growth, foray into international markets and home delivery business. The key downside risks for Speciality are longer break even time for new restaurants along with non-acceptability of new restaurant formats. Speciality Restaurant trades at lowest PE as compared to its peers namely Jubliant Food which trades at PE of 51 times, Brinker International Inc trades at 22 times, Café de Coral trades at 25 times, Darden Restaurant Inc trades at 15 times and Speciality Restaurant trades at 36 times. At the CMP of Rs. 148.45, the stock is trading at P/E of 25.59 x FY15E and 19.03 x FY16E. The company can post EPS of Rs. 5.80 for FY15E and Rs. 7.80 for FY16E. One can buy SPECIALITY RESTAURANTS LIMITED with a target price of Rs. 200.00 for Medium to Long term investment and for the SHORT TERM PLAYERS it should be Rs. 155.80.

KEY FINANCIALS	FY13	FY14	FY15E	FY16E
SALES (₹ Crs)	226.90	262.90	316.00	374.10
NET PROFIT (₹ Cr)	23.40	19.80	27.00	36.80
EPS (₹)	5.00	4.20	5.80	7.80
PE (x)	22.70	26.80	19.60	14.40
P/BV (x)	0.00	0.00	0.00	0.00
EV/EBITDA (x)	10.50	10.90	8.10	6.00
ROE (%)	11.50	6.70	8.60	10.80
ROCE (%)	11.40	6.90	8.80	11.00

I would buy SPECIALITY RESTAURANT LTD for Medium to Long term for target of Rs. 200.00 and for the shorter term the target would be Rs. 155.80. 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 ₹ 136.55 on every purchase. (Why Strict stop loss of 8 % ?) - Click Here

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RETURN ON CAPITAL

MONSANTO INDIA LTD : ACCUMULATE AT EVERY DIPS !!!

Scrip Code: 524084 / MONSANTO

CMP:  Rs. 1807.95; Buy at current levels.

Short Term Target: Rs. 1900.00; Medium to Long Term Target: Rs. 1988.00; STOP LOSS – Rs. 1662.85; Market Cap: Rs. 3,121.01 Cr; 52 Week High/Low: Rs. 2115.40 / Rs. 581.10.00.

Total Shares: 1,72,62,748 shares; Promoters : 1,24,54,044 shares –72.14 %; Total Public holding : 48,08,704 shares –27.86 %; Book Value: Rs. 236.01; Face Value: Rs. 10.00; EPS: Rs. 75.58; Dividend: 220.00 %; P/E: 23.87 times; Ind. P/E: 11.49; EV/EBITDA: 19.68.

Total Debt: ZERO Cr; Enterprise Value: Rs. 3,108.37 Cr.

MONSANTO INDIA LTD: Monsanto India Limited was founded in 1949 and is based in Mumbai, India. Monsanto India Limited operates as a subsidiary of USA based Monsanto Co. The company was previously known as Monsanto Chemicals of India Limited and later changed its name to Monsanto India Ltd in year 2000. The company came out with an IPO on February 1989 offering 3,40,500 equity shares of Rs. 10 each for Rs. 18 per share. The object of offer for sale was to reduce the equity holding in the company to 40 % or less. Monsanto India Limited engages in the production and sale of chemicals and hybrid seeds. The company operates through 100 year old brand which offers hybrid maize seeds under the Dekalb brand name acquired from Cargill in 1998; and glyphosate herbicide under the Roundup brand name. The company is also a manufacturer of Agricultural Chemicals. The Company’s segments include Seeds and Traits and Crop Protection. The Seeds and Traits segment consists of the Monsanto’s global seeds and traits business, and genetic technology platforms, including breeding, biotechnology and genomics. Monsanto India’s Dekalb is a hybrid maize seed. Dekalb has a diverse portfolio, which includes Dekalb 900M Gold, DKC 9081, Dekalb Pinnacle, Dekalb Super 900M, Dekalb Supreme, Dekalb I-lishell, Dekalb Double, Dekalb Prabal and DKC 9072. Roundup (a glyphosate-based product) is an herbicide, and the flagship brand of its Crop Protection Chemicals business. It has pioneered the chemical weed control concept in the country and is the market leader in the Rice herbicides which are marketed under the brand name MACHETE. It also markets LASSO a board spectrum herbicide and AVEDEX a herbicide used to protect wheat corp. In India, the Monsanto group operates through 3 entities i.e. (1) the listed entity Monsanto India Ltd (MIL) which is primarily involved in Maize seeds and Herbicides; (2) 50:50 JV between Mahyco and Monsanto Holdings Pvt. Ltd known as Mahyco Monsanto Biotech (MMB) which is sub-licensed to distribute Bio-Techonological cotton technology in India; and (3) Monsanto Holding. MIL’s team comprises of over 375 employees, a majority of whom are from rural backgrounds. In India the company is spread across Mumbai, Chandigarh, Eluru, Hubli, Kolkata, Coimbatore, Siliguri, Silvassa. The company’s R&D, Quality and Manufacturing Sites are: - Corn Seed Research Breeding stations at Udaipur, Bangalore and Jalandhar; A Biotechnology Research Centre at Bangalore; A Seed Processing Facility at Hyderabad; A Quality Assurance Laboratory at Hyderabad; A Chemistry Plant in Silvassa. MONSANTO INDIA Ltd is locally compared with Advanta Ltd, Camson Bio-Technologies ltd, Dhanuka Agritech Ltd, Kaveri Seeds Co Ltd, Sabero Organics Gujarat Ltd, Excel Industries Ltd, Punjab Chemicals and Crop Protection ltd, Rallis India Ltd, Insecticides India Ltd, Bayer CropScience India ltd, UPL Ltd, Bharat Rasayan Ltd, Meghmani Organics ltd and Globally compared with Monsanto Co of USA, Du Pont (E.I.) De Nemours (DD) of Delaware, FMC Corporation of Pennsylvania, Sumitomo Chemical Co Ltd of Japan, Syngenta AG of Switzerland, Vilmorin & Cie of Paris, Bayer Aktiengesellschaft of Germany, KWS SAAT AG of Germany, Sakata Seed Corporation of Japan, Yukiguni Maitake Co Ltd of Japan, Akikawa Foods & Farms Co Ltd of Japan, Hob Co Ltd of Japan, Hokuto Corporation of Japan, Kaneko Seeds Co ltd of Japan.

Investment Rationale:

Monsanto India is India’s largest selling hybrid maize seed brand company with 25 % market share. It operates through 100 year old brand called Dekalb acquired from Cargill in 1998. Over the last 2 years it has aggressively launched 7 to 8 hybrids seeds and is leading to regain of market share from players like Pioneer and DuPont which has market share of around 20 to 23 % each. Monsanto India currently derives 40 % of its revenues from products launched in last 2 years. This has not only helped Monsanto to gained market share in FY14, but also helped to reduce the age profile of its portfolio from 10 years in 2009 to 8 years in 2013. Monsanto has a very strong Rabi portfolio as compared to Kharif. The management plans to aggressively roll out newer hybrid products for Kharif, which was under the development since last 3 to 4 years and now driving margins. Over the last few years, operational efficiencies and consolidation measures has helped to reduced seed write off to less 7 % of revenues from average of 20 % for the last 3 years and reduction of sales returns by 15 % which in turn are driving growth. It is expected that the top-line to grow at 25 % CAGR and PAT at 30 % CAGR over FY14-16E. It is believed that the investment done in FY09-FY12 will start paying off for Monsanto India in terms of new product launches and market share gain. There is a huge potential and Scalability opportunity it has to offer over the long term from GM Food and RR Flex. Weeds are plants which can cause yield losses up to almost 60 % of the crop potential. Labour shortage, rising wages due to NREGA implementation and rising urbanization trends have accelerating demand for herbicides. Herbicides market in India is a very highly underpenetrated with its share in agro-chemicals standing at just 20 % as against global standards of 48 %. Glyphosate is a leading safest herbicide and accounts for 30 % of global herbicide sales and 70 % of Indian herbicide sales. Monsanto has around 60 % market share in the global US$ 540 Cr glyphosate industry and around 25 % market share in the Indian Rs. 800 Cr glyphosate industry selling products under the 'Roundup' brand. Monsanto enjoys a premium positioning in the market place with its glyphosate selling price at Rs. 340 per litre and competitors around Rs. 310-320 per litre. In FY14 cost for glyphosate has gone by 30 to 35 % leading to price increases of around 15 to 20 % to protect margins and drive growth.  In India, all companies can start the field trials for Genetically Modified food crops, once its approved by all bodies, thereby providing significant opportunities of newer growth avenues. Monsanto, Syngenta, Pioneer, Dow has been working on field trials across various crops prior to monotorium imposed by government and hence are much ahead of other competitors. MIL has been working on Roundup Ready® and Yieldgard® in- the-seed technologies to offer maize farmer's choice of superior insect protection, with convenient, flexible and effective weed management, to optimize maize yields. Currently Monsanto GM corn is currently at BRL2 stage and management has guided that it will take at-least 3 -4 years for commercial launch to happen. The initial research and trials suggest that Monsanto GM corn can increase yields by 20-40 %. This will lead to substantial re rating for the stock post its commercial launch. Monsanto's current technology of BT is likely to be replaced by RR Flex (BG 2 RR). RR flex has gone through RCGM and is awaiting final approval from GEAC. RR-Flex has trait of herbicide tolerance thereby negating chances of damage to crop due to usage of herbicide and also reducing labour cost. Monsanto India has 7 R&D Seed Breeding Stations, Corn Seed Drying & Processing Plant in Hyderabad, State-of-the-art QA Seed Testing Laboratory and AgroChem facility at Silvassa. It also has more than 300 acreages of farmer land available for breeding and around 40, 000 acres for seed production. It engages 21,000+ growers for seeds production.

Outlook and Valuation:

Monsanto India Limited is a subsidiary of Monsanto Company, USA and is the only publicly listed Monsanto entity outside USA. With a presence of more than six decades in India, Monsanto India is committed to help the Indian farmer produce more while conserving sustainably and be successful. Monsanto focuses on Maize under the brand name Dekalb, India’s largest selling hybrid maize seed brand and agricultural productivity products and India’s largest selling glyphosate herbicide. The company tries to boost crop productivity through its advance research in maize cultivation, access to a wide library of global maize germplasm, breeding technology and techniques, new high yielding hybrids seed, best in class manufacturing facilities extensive agronomic activities and on farm technology development. Monsanto India restructured its business in order to focus on seeds business in 2008. Post consolidation, the company had branded seed products, paddy hybrids and herbicides covering wide range of market segments. This consolidation also resulted in promoters share increasing in listed Monsanto India from 40 % to 72 %. Today, Monsanto had made Dekalb corn seeds and Roundup herbicide as its core business in India, in addition to the biotech traits business. Monsanto India is a now a market leader with 25 % market share with its 100 year old branded product Dekalb® which is also the India’s largest selling hybrid maize seed brand and the market share of other players like Pioneer has 22 % and DuPont having 23 %, Kaveri has market share of 14 % and Nuziveedu at 10 %. Monsanto currently has 17 to 18 hybrids and sells across in 18 major states of India. Around 90 % of the Corn is produced in 6 to 7 States namely TN, AP, Maharashtra, Gujarat, MP, UP, Rajasthan, Bihar for Rabi. Monsanto India started launching its own product line from FY08 onwards under the DeKalb brand. The revenues from herbicide business of Monsanto India now stand at 35 % which is expected to be 65 % for FY14. It is expected that the company’s topline can grow at 25 % CAGR and PAT at 30 % CAGR over FY14-16E. And the investments done in FY09-FY12 will start paying off for Monsanto India in terms of new product launches and market share gain. The company also a huge potential and scalability opportunity & it has many more to offer over the long term from GM food and RR Flex. At the current market price of Rs. 1807.95, the stock is currently trading at 17.28x FY15E and 13.45x FY16E EPS respectively. The company can post Earnings per share (EPS) of Rs. 104.60 in FY15E and Rs. 134.40 in FY16E. One can buy MONSANTO INDIA LIMITED with a target price of Rs. 1988.00 for Medium to Long term investment and for the SHORT TERM PLAYERS it should be Rs. 1900.00

KEY FINANCIALS	FY13	FY14	FY15E	FY16E
SALES (₹ Crs)	442.40	581.90	741.10	910.80
NET PROFIT (₹ Cr)	67.30	137.90	180.60	231.90
EPS (₹)	39.00	79.90	104.60	134.40
PE (x)	41.00	20.00	15.30	11.90
P/BV (x)	6.80	5.50	4.30	3.30
EV/EBITDA (x)	37.10	16.80	12.40	9.10
ROE (%)	17.00	30.40	31.70	31.70
ROCE (%)	19.10	33.80	35.30	35.30

I would buy MONSANTO INDIA LTD for Medium to Long term for target of Rs. 1988.00 and for the shorter term the target would be Rs. 1900.00. 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 ₹ 1662.85 on every purchase. (Why Strict stop loss of 8 % ?) - Click Here

READ HERE TO KNOW MORE ON LONG TERM INVESTING - CLICK HERE

VIEW THE POWER POINT PRESENTATION ON

RETURN ON CAPITAL

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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