SYMPHONY - A Comfort to hold for Long term?

Good Analysis.
But still difficult to get conviction on volume growth for me personally. As a category in itself compared to ac which have introduced super cheap variants. Also rising competition within the category is problematic.

Agree with you about the concern on domestic volume growth. I do have a part mind here that it can disappoint. If this was valued at say ~12-15x forward multiples, it would really up the odds of a favorable investment decision vs today.

On 1 hand air cooler is not a regular consumable item to be bought every year, replacement cycles can be many years, for a decent chunk of Indian HHs it’s not even a relevant product given the alternative of ACs or climate/geography may not favor.

On the other hand, if we really zoom out, I do buy the management stance that there is enough runway in India still. It’s hard to believe that with rising incomes over time, growth in non metros + rural areas + shift to organized won’t permit volume growth in the medium term for the air cooler industry.

I think the nos they achieve next year 2022 given the bumpiness of last few years (this year & last year lockdown) should bring better clarity. Awaiting to revisit assumptions.

While noting the domestic volume growth concerns, one can derive some comfort on the growth front that the management is willing to deploy capital in global acqs & has a good track record here. On a 5/10 year basis, broadly ~55% of the cash flow generated has been paid out via dividends, ~10% capex (outsourced vendors model) & 25-30% has gone towards acquisitions. Meaningful value accretive acqs can aid and that option continues to be there.

Given the brand recall, why Symphony is not entering the AC market? Has management talked about it anytime? Can someone throw light on this.

Very average set of results, gross margins were hit and growth was missing. High channel inventory is one of the reasons for this (and maybe competitive intensity, management has declined it so far). Here are my notes from their concall.

  • Company hasn’t passed on price increases in domestic market and also undertaken measures to take care of very high channel inventory. This has resulted in lower gross margins
  • Have invested to boost domestic large space ventilated air cooler and US export
  • IMPCO has taken a massive 30% price hike while maintaining growth momentum. Australian subsidiary hasn’t taken price hike
  • Expect 160 cr. of US sales in FY22 (vs ~95 cr. in FY21)

Disclosure: Not invested

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With scorching summer back, leading brands will take price hike with no exception being leader like Symphony. It looks like price action has already started showing it in chart from last few days. Patience is finally getting rewarded.
Disc: invested from lower levels

Rough Global industry Points:

Global hvac: 110$bn, residential 25%, commercial 30%, aftermarket/services 45%
Global evaporative cooling market 3.4$bn which is ~3% of global hvac tam. Residential 2.6$bn, commercial/industrial 0.8$bn.
estimates: 3.4$bn with 2.6$bn resi & 0.8$bn commercial. Symphony says 2.3$bn global with 1.8$bn resi & 0.5$bn commercial.
Ductless cooling is a white space, if it picks up TAM of 1.8$bn
India - USD 550mn - primarily dominated by unorganized players (75% market share with unorganized and 25% with organized players);
China - USD 470mn - primarily dominated by institutional/industrial demand - lower than India as weather is much cooler than India;
Australia - USD 120mn - split evenly between unitary and industrial coolers;
USA - USD 600mn - evenly split between unitary cooler market and industrial;
Brazil and Mexico - USD 180-200mn - mix of unitary and industrial market.
more bullish scenario: conclude that unitary coolers could see this number grow 1.6X to USD4.1bn while industrial cooling could grow to USD2.6bn - almost 3.2X - as businesses and households focus on green and clean cooling.
However, given the nature of cooling, evaporative air coolers work best in areas which are well ventilated, like open air theatres, restaurants, factories, religious places etc. Areas that are not ventilated, like closed office buildings, glass facade buildings do not work well with evaporative air coolers and hence limits their use. In industries that require very clean air or precision manufacturing/assembly like high end electronics, pharmaceuticals, precision manufacturing, air conditioners are preferred vs air coolers because the quality of air tends to be much cleaner and more treated in the air conditioning process.
continued tailwinds from energy efficiency and US resi HVAC suggest that the residential HVAC market should still grow in the 3-4% range over the next few years. Air coolers, which works better in arid weather and are much more energy efficient, may grow at a much faster pace of high single digits.
Outside of the US, there is significant growth potential as HVAC penetration rates increase in areas like India, China, and Indonesia. While 15% of the global population has HVAC, according to the IEA, developed economies like Japan and the US already enjoy A/C penetration upwards of 90%, while developing economies like India, Mexico and Brazil are below 20%. believe this dynamic underscores that rising standards of living and population growth in developing nations will help spur adoption of air coolers. Hence, expect that market size for air cooler can continue to grow at mid-teens in these countries for the next few years.
Air coolers: While there are limitations in its universal usage, it works very well in dry weather.
Indian population: 282mn HHs, applicable living in hot + dry conditions 132mn, current 31mn own air cooler, air coolers will continue to be preferred amongst the lower income group.
Air cooler works better for a population that is cost concious and faces dry weather. Power cost per hour rs Fan 0.45, Air cooler 0.69, ac 6.69
Large space ventilation air cooler market: This segment has gained a lot of traction recently (1) as many corporates focus on giving their employees an ambient temperature to work in, and (2) at the same time employ more eco-friendly ways of cooling like evaporative air cooling which does not use any refrigerants. While there are limitations to its applications as discussed earlier, in open spaces and dry weather these work really well and also help companies achieve their ESG targets on emission. currently is very fragmented and unorganized.
Few countries across the globe have mandated temperatures for workers. For example, South Korea has mandated a temperature of 24°C for its workers, New Zealand laws recommend a temperature band of 18-24°C, while the US recommends a range of 20-24°C. These trends will accelerate and help drive demand for industrial air coolers. Advantages: (1) Low electricity consumption, (2) faster payback, (3) high staff and employee morale. For factories, which contain assembly lines, heavy machinery, boilers and furnaces and generate a lot of heat, air cooling is the only viable cooling solution. Air coolers also find applications in warehouses that need to store material at controlled temperatures. In large commercial spaces and retail malls which have expansive open areas, industrial air coolers are the only workable cooling solution.

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Anyone has details about Symphony’s revenue share in residential vs commercial/industrial aircooler segment as a whole, which may give some idea about it’s future growth prospects…

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Mr. Anuj Arora, Global Chief Marketing Officer, Symphony Ltd says, As we begin our journey in the new financial year, we are confident in achieving our goals and setting new records. We as market leaders are taking the lead in category creation and providing an upgrade for our consumers. This campaign is truly aligned with our aim to resonate with our target audience by drawing synergies between a favorite Indian snack and the cost incurred for one day of cooling. The campaign is a creative expression of consumerising the product benefit and contextualizing the low running cost of air coolers. With the temperature soaring high, it is of utmost importance to keep our homes cool and breezy. We have ensured that our consumers find value for money and have an impeccable shopping experience.

Growth tone - both immediate quarter Q1 and a good year guidance of 20%+ in FY 23( considering base as FY 20), one imp highlight is high single digit market share in USA from 1% to 7%.

Invested

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FY22Q4 concall notes

  • Started manufacturing certain cooler models in Australia because of higher logistics cost from India
  • Domestic price hike in April was 2-7% with average price increase being 4%
  • Channel inventory completely normalized, some models also stocked out
  • Gross margin for domestic sales was ~47%
  • Industrial air cooler segment is growing very well
  • April 2022 sales is higher by 40% over April 2019
  • Launching exclusive D2C products (Disney and Marvel range of air coolers)
  • Sales coming from e-commerce + D2C + large organized chains is ~50% of overall sales
  • Current market share in US is 7% (which was < 1% about 2-years ago). This has been largely due to increased product portfolio of Symphony India which was not present with Climate Technologies in the past.
  • Will launch products through D2C channels in US
  • Margins: Due to transfer pricing, margins for sale in US is being split b/w Symphony India and Climate Technologies. It is better to look at consolidated data (rather than Climate Technologies). US is a very profitable business

Disclosure: Not invested

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EARNINGS PRESENTATION Q4FY22 (symphonylimited.com)

The company has returned to its normalized operations from this year, after two back to back Covid years. This could well be the turnaround year for the company.

Let us run some numbers.
Management expects Q1 FY23 topline at 40% higher from Q1 FY 20 topline, that translates to ₹ 402 crores of Revenue for Q1 FY23.
It also expects Q1 FY23 domestic margins to be higher by 4%. Lets assume consolidated company level margins are up by 2%, i.e. 21+2% = 23%.
So for Q1 FY23, we are looking at a Operating Profit = 402 crores * 23% = 90-92 crores approx. Now if we take Q4 FY22 as base, the net profit comes out to be 70 crores, with EPS of ₹10.
Conservatively, we can assume it can take full year EPS at ₹25.
With Industry PE at above 60, even if we take 50 PE for the company, we can see fair value of the share at 25*50 = ₹ 1250.
So, from CMP = 1085, we can see upside in the share price by 15%.

Long-term also, company is poised for growth with entering into new markets like USA etc.; growing in Industrial Air coolers segment, & shift from unorganized to organized in domestic market.

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company is now i think in better position as they have diversified geographically. peak season in india is around march to june where as peak season is diffrent in other country. so they may have regular growth in sales

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FY23Q1 concall notes

  • Highest ever Q1 quarter sales (13% over Q1FY20), significant increase in volume
  • Haven’t taken proportional price increase to increase volumes, despite this have maintained gross margins due to value engineering and product mix change
  • Channel inventory is normal
  • Subsidiary accounted for 43% of sales and 44% of EBITDA
  • Gross margins are slightly higher than pre-covid (Q1FY20), EBITDA and PAT margins are lower due to higher advertisement, freight, change in warranty estimates, D2C and e-commerce channel
  • US demand is very strong because of a hot summer, however due to recession and inflation concerns retailers are giving discounts which has to be absorbed by Symphony
  • No significant market share shift in India
  • Market share in Australia ~ 30-35%, Mexico ~ 35-40% whereas it is low in USA which is a huge market where company is looking to penetrate. Most USA sales happen in Q3 & Q4 of Indian fiscal year

Growth drivers:

  • Mexico & Australian markets are low growth and they already have sizeable market shares
  • USA should lead to higher growth due to increase in penetration
  • Greenfield in Brazil should also unlock a growth avenue
  • In India, domestic residential should be a growth driver. The Large Space Venti-cooling is a nascent market which Symphony is trying to create

Disclosure: Not invested

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The last question in the call was interesting/important - about growth factors (Covered nicely above).
Question is - Whats the growth prospects for the stock ? I have purchased it seeing the 10yr CAGR till 2018-19, but last 2-3 yrs its on downward or range-bound trend.

This forms a decent part of my portfolio. I am still hopeful that the company has potential, but not sure what to expect - Can we expect a 5x+ in the next 5 years ? The commentary about India domestic market has large uncovered potential (>70%), India commercial market is still to be tapped and other commentaries about USA and potentially Asia pacific expansion look good.
Are there heavy head winds? - e.g. now many other manufacturers are getting into Air coolers in India atleast for the domestic market.
I hope the Venti-cooling segment is a good potential (any idea which industries might need it?) and that symphony is able to ride on the growth of the industries/economy.

Anyone has inputs on the risks or 5yr potential, please update.

Thanks

Anand
Disclosure: Invested

Did he ask in concal for double in 5 years or 5x in 5 years?

Key factor here is domestic vol growth. Standalone sales domestic 3 year cagr for 1QFY23 was 9%. Price hikes were negligible, so largely vol growth. After very muted domestic sales in past 2 years, I would have wanted a better no, maybe 15%+ for this to be worthwhile at the multiples it trades at. The assumption that gaining mx from unorganized is not panning out so far.
4QFY22: “GST has not led to a major shift from the unorganized to the organized sector in our industry. So – and neither has the pandemic sort of had a major impact on that. What we have – remains to be seen is what does the commodity price increases and how do the commodity price increases impact the local cooler industry or the unorganized sector industry.”
Since it’s again corrected to near ~900ish, there can be upsides over the short to medium term, nevertheless given the implied growth looking at multiples vs reported growth, there are better alternatives to invest.
I think I would still wait to see what it reports fully in FY23, in the season ahead, a clear year ex volatility. Channel inventory has cleaned out, and perhaps finally FY23 can be a strong year. If nos remain subpar, would exit.
Need to take these comments made by the founder with a pinch of salt.
1QFY23: “FY23 trade partners have come back and are very excited, wouldn’t get into specifics, you mentioned 30%, 40%, we wouldn’t there get into specifics, we expect that we will end the year – we should sort of revert back to our historical sort of growth trends. the channel inventory seems to be reaching the regular pre-COVID normal level, the coming couple of quarters would be in line with our historical growth patterns, the July collections are also pointing in the same direction.”

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Two dividends totaling ₹8/ share to be paid by the company in next 1 month.