Symphony Limited Company Case Study

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KEY FINANCIALS

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Market Data as on 08th August,2016

Symphony’s Major Growth And Value Drivers

Company-specific factors

Cash & carry, asset light business model with zero debt

Symphony operates through an asset light model wherein it outsources manufacturing of air coolers and uses the cash & carry model for sales. Almost 95% of domestic sales are accomplished in advance payment terms with dealers and distributors with the remaining (5%) through large format stores. In the international business, about 40% is through large format stores while 60% is through dealers and distributors. Zero debt coupled with strong operating cash flows and a highly capital efficient working cap cycle of ~29 days has allowed it to maintain strong return ratios i.e. RoCE and RoE at 43% and 36%, respectively, and pay-out ratio of ~50% over the years. The zero debt status provides adequate room to fund Symphony’s organic and inorganic growth opportunities whenever required.

Smart acquisitions and PMI practices

In FY11, SYML invested $0.65mm (INR 35mm) to acquire 100% stake in Impco, a Mexico based manufacturer of industrial air coolers. SYML restructured Impco by closing down non-profitable businesses and sourcing air coolers from SYML's facilities in India rather than China. Impco's expertise in large metal air coolers and centralized air cooling provides SYML with the capability to implement large scale industrial cooling solutions for industrial customers in India. The company has started leveraging the enduring relationships established by Impco with large format stores like Wal-Mart, Sears, Lowes, Famsa and Costco, among others, to widen its presence in North, South and Central America. On similar lines, the company acquired Chinese air cooler brand MKE to gain access to the Chinese market. SYML is, thus, evolving into a global air cooler player, with thrust on exports.

Strong brand recall

Symphony is India’s leading evaporative air cooler manufacturer with a market share of more than 50% (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. Moreover, Symphony has consistently invested in brand building through advertisement campaigns (~4% of sales over the last three years), thereby strengthening its brand recall.

Newer product launches complimented by distribution network

With its focus on R&D and innovations, Symphony constantly innovates in its products to enhance design, technology and post sales services. The company has launched more than one new model annually for the past six years. SYML's new range of products (I-series, Storm and Windows air cooler) have higher realizations and margins to the extent of 5-20%, enabling higher growth and margin accretion. Further, it has established a robust distribution network comprising ~750 dealers (152 in 2007), ~16500 retail dealers (3308 in 2007) and ~4500 towns (1430 in 2007).

100% outsourcing model results in high scalability and reduced risk

SYML outsources 100% of its domestic production. It has tied up with nine OEMs to whom it supplies moulds and dyes while deploying its own technical personnel onsite to maintain quality. SYML has monthly PO agreements with the OEMs, which gives it flexibility to manage inventory in case of a bad summer. Though the raw material is booked in the OEM account, SYML not only selects the source of procurement, but also decides quality, quantity and type of raw material. This way, it keeps a control on raw material costs. None of the vendors contribute more than 15% to SYML, thereby reducing the risk of reliance on a single source.

Symphony’s Major Industry Drivers

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Rising Temperature

With temperature rising each year in India, there has been growth in both Air cooler sales and price. In 2015 alone, Air cooler sales increased by 20-25% in western and southern India on account of one of the hottest season in last decade.

Rising Demand from Middle class Segment

One of the core drivers for rising demand is the rising disposable income in India. And this is supported by the changing habits and exposure to western lifestyles, especially the growing urban consumers. This growth has been majorly driven by the middle class segment of the Indian population which forms the largest chunk of Indian population

Price advantage

The biggest threat from the substitutes is the Air Conditioners. However, given that air conditioners are very expensive as compared to Air coolers, Air coolers hold significant advantage. Air conditioners are almost 4-5 times more expensive as compared to Air Coolers.

Government Initiatives: Growth of Industrial and Tower Coolers

Make in India campaign will result in increase in domestic manufacturing of Air coolers. With the attractive government policies to attract foreign players, leading consumer appliance companies have laid out plans to set up or expand their manufacturing bases in India. With leading players like Samsung and LG electronics already entering, the supply side of air coolers is going to boost up.

Additionally, government’s focus on safety and green manufacturing is going to drive up demand for industrial coolers that have exhaust.

Global and domestic cues and economic analysis

- The inflation in India has been under the 2-6% bracket as envisaged by the Urjit Patel Committee. This means a larger disposable income in the hands of people and would spur the consumption cycle.

- India is likely to become substantially hotter and possibly wetter due to global warming. The mean temperature in India has risen by 0.2°C every decade since 1970. By the end of the 21st century, annual mean temperatures are projected to rise by 3.5-4.3°C, with 1.7-2°C increase occurring as early as the 2030s. Night temperatures are also projected to soar by 4.5