Symphony Q4 review: Correction offers valuation comfort

Symphony, one of India’s leading air cooler makers, derives 80-85 percent of its revenues from domestic sales. Opportunities in industrial and centralised air cooling, well-performing foreign subsidiaries, product innovations and steady financials make the stock attractive after the recent correction. (Also read: Beat the market heat by getting cool with Symphony)

In FY18, the company’s topline growth was helped by network expansion, product launches (in consumer and central air cooling segments) and client additions (in the international segment). The number would have been even better, but for erratic summers in most parts of India, unseasonal rains in northern states and Goods & Service Tax-related disruptions

Sales of premium products and lower promotional spends helped keep Symphony’s operating margins steady. At the consolidated level, low debt, IMPCO’s (Symphony’s Mexico-based subsidiary with a presence in US large format stores) turnaround, and halving of losses in Kerulai (Symphony’s China-based subsidiary in the premium air cooling space) helped boost net profit margins.

Firing on all cylinders

Being a fast-growing segment, the management aims to improve product visibility through greater market penetration, primarily through IMPCO. Since transactions in this category are typically business-to-business (B2B) in nature, value per transaction is generally higher than regular retail sales, which could translate into healthy topline growth.

This division contributes roughly 12 percent to Symphony’s annual turnover. It has devised numerous cooling solutions for religious, commercial and industrial clients. The company has lined up projects for prominent companies.

The management aims to introduce technologically advanced products to increase its existing market share (currently almost 50 percent of the organised air cooler market). Two air cooler brands - Diamond and Sense - launched by the company in H2 FY18, should gain momentum heading into FY19, thereby boosting sales.

By outsourcing air cooler manufacturing and pushing sales through the cash-and-carry model, Symphony has kept its operations asset light and margin positive. Coupled with negligible debt and consistently positive free cash flows, its return ratios are expected to outperform those of peers in the foreseeable future.

While Symphony’s brand positioning and innovative products give it an edge over the rest, revival in demand between September to November and towards the end of Q4 FY19 will be crucial. International subsidiaries – IMPCO and Kerulai - are turning profitable, while another synergistic acquisition is on the cards. Expansion in modern retail, low base of cooler coverage across India and other favourable trends augur well for the company.

Nevertheless, some challenges could persist near-term. The much talked about shift in market share from unorganised entities to organised ones will be gradual. Rising input costs and high promotional expenses could erode margins. Poor weather conditions (summers in northern India have not been as hot as anticipated) may dampen demand in an otherwise seasonally strong Q1.

After a weak quarterly performance, the stock fell 13.6 percent in the last 3 days. In the past year, the stock has delivered an upside of only 9 percent, suggesting that most positives have been factored in the price. At 34.4 times FY20 estimated earnings, investors can consider capitalising on the current weakness despite the elevated valuations.