SYMPHONY - A Comfort to hold for Long term?

(RamC) #325

(rupaniamit) #326

Sorry - had sent email yesterday. Management has always given vague answer about China market size. Below please find a screenshot:

Q2FY17 Con-call

It would be fair to assume that China market is possibly as big as India (smaller residential market but bigger and robust centralized air cooling in China), but good odds that not overall market size not bigger than India. Still we should get this number direct from horse’s mouth. Just my 2 cents.

(Aman Goklani) #327

Yes, hopefully one of us gets the chance to be on the next con-call or if someone from VP can attend the AGM, we can try and extract this information.

Even if we go with the assumption the Chinese market is another ~Rs. 2,000 crores, we are looking at an overall potential Rs.11,000 to 13,000 cr (growing) market opportunity for Symphony to pursue.

Bad quarters and years aside, the market size provides Symphony ample opportunity to keep growing even from where they are for years to come. To add to this, the company is trying their best to remove the seasonality / lumpiness from their business via - global expansion and focusing on industrial / central air cooling. This will help even out sales and profits over the next few years.

And during the period they continue to grow (with their asset light model), they will keep generating great amount of FCFs. Hope they share this back with the minority shareholders like they used to do earlier. The DDT has led to dividends being reduced quite a bit. Who knows during this period of weak sentiment for the stock - they may just announce a buyback as they do have decent cash on books (449 crs, though some it is going to get used for the acquisition - but will increase again as the co. generates good FCFs).

The only thing I believe one needs to work on here are good entry points as the stock trades at premium valuations. I have added to my holdings during the meltdown today. Will be on the lookout for any further drops - sharp or gradual.

(Tanmay Jagtap) #328

This is my first post on VP, so please bear with me for any kind of mistakes.

Some assumptions in this spreadsheet:

  • By 2035, 75% of households in the dry regions in India will start using air coolers
  • By life of cooler, I mean an avg cooler will be replaced after 4 yrs. This will give us the total sales during a particular year (total households/4)
  • Organized sector will have 80% of market volume by 2035
  • Avg. realization of symphony will grow at 5% (taking into account any pricing pressures, if they occur)
  • Markets shares of Symphony are taken on a conservative basis in 2035
  • Mr.Bakeri considers Rest of the World (RoW) revenues to be at least equal to the domestic revenues in medium to long term. I have considered RoW revenues to be 25% lower than the domestic revenues
  • Domestic EBIT margins considered 30% (currently 36.8%) & RoW margins at 20% (conservative)
  • Below I’ve given some PE ratios, which one can assume & the expected CAGR if bought at CMP

I am a newbie in investing (2 yrs) & want all the experienced members on VP to comment on this.

(Aman Goklani) #329

Thanks for sharing your work mate, really kind of you.

Not to discourage you at all - the biggest thing I’ve learnt in investing is to not project :slight_smile: at least not as far out as 2035.

Businesses go through a lot of ups and downs and just like life there are no certainties that everything will be smooth sailing. There are bound to be ups and downs - some good years rolled in with bad years.

At best these projections can be used as guideposts - no more no less. Take a look at all analyst reports on Symphony over the last few quarters, not one analyst would have predicted such a massive drop in FY19. After yesterday, everybody went back to their excel sheets and re-modelled all their projections. They may just be proved wrong again. The fact is simple - nobody can predict the future with a great deal of certainty as the variables are too many.

One should IMHO focus on the business quality (how does the company make money?), competitive advantages (moats), management quality, cash flows, overall runway for growth and valuations (again to a certain degree). Those are my 2 cents!

Sorry again, don’t mean to play down your hard work and analysis. Cheers.

(Tanmay Jagtap) #330

Thank you for sharing your insights sir.

I understand that projections are not reliable. That is the reason why I have not done YoY growth projection & the same reason why I don’t use DCF to value a business.

What I have used here is based on Charlie Munger’s “Practical Thought About Practical Thought” where he has projected the total market size for Coca-Cola. I have used the under penetration in air cooler market & then based upon rising consumption, power availability, I see the air cooler market to be of this particular size by 2035. From this market I conservatively expect Symphony to capture a 35% of the market (currently 50%). Also the EBIT margins assumed are below the historical level considering any pricing wars / changes in the market.

I request you to look again at that spreadsheet considering the above points.

Thank you.

(rupaniamit) #331

Prof Bakshi used Mr. Munger’s “Practical Thought about Practical Thought” example for his relaxo valuation example. Below is the link for everyone’s benefit:

Relaxo_Finale.pdf (159.9 KB)

[quote=“desaidhwanil, post:121, topic:426”]

Even @desaidhwanil attempted to value Symphony back in March 2014 using similar approach.

Isn’t valuation more of an art than science? I believe the real key is to truly understand the business. There is no right or wrong approach as long as we stay within our circle of competence and use conservative estimates in our valuation.

I’ll say @tmjagtap27 you are on right track. I went through your spreadsheet. To be honest, I got lost in figuring out some of the numbers as I wasn’t able to see formulas (may be because its in View Only mode). So please organize it little better so that it is easy to understand (sorry I am not great with excel spreadsheets) and share a version where I can see the formulas and cells that it is being applied to. We can discuss about this offline as I don’t want to take up precious real-estate of this Symphony post. Cheers!

(Dinesh Sairam) #332

Sorry about going a little off topic here. But as a sincere student of Valuation, I felt compelled to reply.

  1. Why not project? A stock gives you the right to procure future free cash flows. That’s precisely what we’re trying to estimate by projections. By saying ‘don’t project’, you’re essentially saying ‘don’t view a stock as an instrument that gives you the right to part ownership in all the future cash flows of the company’.

  2. Price is 100% in the past and Value is 100% in the future. So it’s obvious that we’re dealing with absolute uncertainty when it comes to projections. But that shouldn’t discourage us from trying. Any DCF Value is bound to be wrong. That’s why it’s better to be conservative in estimation and use a Margin of Safety (If you’re like me, a LOT of it).

  3. No Analyst worth his salt “remodels their excel” after a single year’s results, unless of course the results were due to a drastic change in the way the company does business. It is in the nature of businesses to perform poorly from time to time. And this is why, once again, it is well-served for Valuations to contain logically supported assumptions and a large enough Margin of Safety. Agreed that even after all this, there could me anamolies. But that’s why they’re called anamolies. Perhaps even the best investors didn’t see this huge drop coming.

  4. Agreed that one should look at the business model, competitive advantages, management quality and financial position. But a good Valuation can account for all this. Ex: If a management is smart, it would make sense to use a longer High Growth Period. If the company doesn’t have a competitive advantage, then its Terminal Year Return on Capital won’t be too far away from its Cost of Capital. And so on.

In essence, all we’re trying to do in a Valuation is to emulate the real world. Obviously, we’re going to fail to some extent. But that doesn’t mean we shouldn’t try.

(Tanmay Jagtap) #333

@rupaniamit here is the updated link. Sorry for posting it view mode only. Please give your views on this, whether there are any flaws in this

@dineshssairam The reason why I don’t use DCF is because even an error of 1% in projecting growth rate gives a large range of values. If we are projecting a growth rate, there must be some valid reasoning for those rates. Calling a 15% future growth rate conservative considering that the historical growth rate was 20% would be pointless if we do not consider as to why the company will achieve that 15% growth rate.

(Dinesh Sairam) #334

Nobody uses growth estimates without a reason. As I’ve mentioned, every set of assumption in a Valuation model should be supported by a logic grounded in reality. It’s true of any model. Take yours, for instance. Where does the “exit multiple” come from? Won’t changing it slightly alter the final Value drastically?

PS. Sorry for OT again. We can continue this in messages should you wish.

(Tanmay Jagtap) #335

Read what I have written in the first post. I have not assumed these exit multiples. Viewers can assume whatever multiples they feel are reasonable. I have just given a few exit multiples for reference. Those can be anything, not necessarily the ones which I have mentioned.

And I guess all of you would agree that an asset-light business like Symphony, with pricing power would command a P/E multiple of 15 at the very least.

(LTInvestor) #336

Two things right on top of my mind.

1A. Elasticity of income. As India becomes richer, you have to take into account less usage of air cooler vs AC. My in-laws stay in Delhi (very dry and hot) but have no air cooler. 4 ACs all over the house. So in 2035, instead of 75% of households only 40% may have air coolers as incomes rise.

1B. Rise of portable AC may kill the lower end of air cooler market. Check this link, where Walmart sells portable AC for $250. I saw one in e-zone in Mumbai recently.

  1. 5% inflation for electronics is too high. Electronics prices fall adjusting for technology rather rise.

(Rohit) #337

Yes , you are right. I have also seen many people now a days prefer to buy AC’s than coolers. Once AC was a luxury now it has become a necessity.

I don’t track this company but 1-2 years back , I saw advt of home AC’s and central cooling AC by symphony on TV. How much of their revenue is from air conditioning and what are their plans in this segment ? If they focus on this they can do well. Now a days many good companies are diversifying in different segments where they have synergies (ex. recent RO water purifier by Havells). Do symphony also have any such plans ??

(Tanmay Jagtap) #338

Agree with your first point.
As for the 5% inflation, I have assumed the avg. selling price of a cooler which includes the old models as well as new models & also the luxury end coolers

(us121) #339

Just take one input into consideration…
operating cost of Air Cooler V/s AC. There are many variables to arrive at conclusion. And hence a holistic picture may emerge only after all such inputs are considered.

(ricky76) #340

Air cooler is something known only to Indians so forget all talk of international expansion, even in India it faces danger of becoming yesterday’s technology.

Management’s plans of penetrating the Chinese market is straight out of fantasy land. No one can even dream of out manufacturing the Chinese in China.

Investors should look at the future and not get caught in past glory.

(sagar_amula) #341

This clearly implies that there is nothing wrong with Symphony and all players in the market are affected, looks like an ideal time to accumulate more as going ahead, the numbers from impco & climate technologies would also get added.

Disc : Invested and Adding more…

(MHS) #342

They brought a Chinese air cooler company couple of years back and trying to penetrate chinese market.

(sagar_amula) #343

Symphony does not have a manufacturing plant even in India they are asset light and the products are manufactured by 9 vendors. They follow the outsourcing model and get it manufactured based on their specifications & quality. In China too i think they will follow a similar model, to me it looks like they have purchased an old chinese brand, manufacturing they can get it done in china anyways via outsourcing.

(us121) #344

They have small portion of manufacturing facility in i believe two SEZs. Rest all is outsourced. Even for SEZ facilities i believe place are under lease and not under purchase.
They did same with IMCO, Maxico post purchasing it. More likely to do so as a strategy for rest of the acquisitions.