Symphony is in the business of marketing of air coolers. It has a factory in Thol village in Gujarat, and an SEZ unit (capacity: 200,000 units) in Sachin, Gujarat. It also has manufacturing facilities in Mexico and North America. So it does manufacture, but not so much. In 2014, it probably sold more than 700,000 units. That's because it has a unique business model, which is asset-light. What it does is, it outsources its manufacturing to others (call them OEMs, and there are 9 of them), the total capacity for which is 1 m units. The key focus for the company is: research and development, product innovation, and marketing. Of course, it has to supervise those OEMs for quality and compliance. It acquired 100% stake in Impco S.de.RL.de.CV., Mexico through its wholly owned subsidiary, Sylvan Holdings Pte Ltd, Singapore. Impco is into manufacturing of industrial air cooling solutions. Symphony has a share of over 40% (volume) and 50% (price) in the organized residential air coolers market in India, and has presence in over 60 countries in Asia, America, Europe and Africa. It believes in robust product innovation, and has come out with new products each year; the company has over 23 models currently. It has a strong network of distributors, dealers, and retail chains, and has plans to double its network in the coming years.
Symphony is owned by Mr. Achal Bakeri and his family (75%); he is the Chairman and Managing Director. Rowenta Networks Pvt Ltd (2.86%) and Mathews India Fund (3.22%) are the largest shareholders after the promoter family. The institutional holding is about 8.50%. There were 34.98 m shares outstanding as of 31 March 2015.
The board:
The managers:
Key management remuneration is about 0.50% of revenues.
Let's move on to the story now.
About eight years back, the company was incurring losses in its operations, and there was no cash. In 2014, it had revenues of Rs.5.33 b, operating earnings of Rs.1.22 b, and net earnings of Rs.1 b, and yes, it also had cash of Rs.2 b. In 2004, its equity was valued by the market at as high as Rs.50 m and as low as Rs.14 m, and now it is Rs.79.57 b. Some perspective: If you had invested Rs.1 m in 2004, you would have by now, Rs.1,591 m. Isn't this crazy?
What do you call it:
About eight years back, the company was incurring losses in its operations, and there was no cash. In 2014, it had revenues of Rs.5.33 b, operating earnings of Rs.1.22 b, and net earnings of Rs.1 b, and yes, it also had cash of Rs.2 b. In 2004, its equity was valued by the market at as high as Rs.50 m and as low as Rs.14 m, and now it is Rs.79.57 b. Some perspective: If you had invested Rs.1 m in 2004, you would have by now, Rs.1,591 m. Isn't this crazy?
What do you call it:
Mr. Bakeri has called it Symphonomics: Trust your vision; Transform your handicaps into opportunities; and break all rules.
Mr. Bakeri believes that when people have resources their first cooling product buy would be air coolers, and not air conditioners. He took the fundamental call that Symphony was not a manufacturing company, but a marketing company. Symphony's business model became asset-light with most of its production being outsourced. The revenues, profits, and cash grew more than the industry average, and the market value of its equity compounded, just like that.
Revenues grew 33.81% annually in the last five years:
And operating profits, 26.93%:
Mr. Bakeri believes that when people have resources their first cooling product buy would be air coolers, and not air conditioners. He took the fundamental call that Symphony was not a manufacturing company, but a marketing company. Symphony's business model became asset-light with most of its production being outsourced. The revenues, profits, and cash grew more than the industry average, and the market value of its equity compounded, just like that.
Revenues grew 33.81% annually in the last five years:
And operating profits, 26.93%:
Symphony commands a pricing premium of about 10-12% over its competition.
Average price realization has increased from Rs.4,504 in per unit in 2010, to Rs.6,382 per unit in 2014.
Return on capital and return on equity have been very impressive. Given its asset-light business model, capital employed in the business is not large. From 2007-2014, Symphony has reinvested Rs.873.10 m in its operations, far less than its free cash flows.
There isn't any dilution in shareholding. Symphony knows it requires less cash than it generates from operations, and accordingly, it has revised its dividends payout policy to about 43%.
In 2009 and 2011, it had a significant investment in working capital; and in 2012, it had large savings from it. Symphony operates with cash-and-carry model on its retail sales (it does not give any credit), except about 30-90 days credit on the modern retail chains and e-commerce. There is no debt on its books. Free cash flows have been increasing.
Symphony's focus on marketing is evident from its spend on brand building. It spends close to 5% of its revenues on advertisements. In fact, earnings and return on capital need to be adjusted to reflect economic benefits resulting from advertisements, by capitalizing these costs.
No wonder, it's a surprise all through:
But what next? Can it sustain its growth and margins? Will it be able to withstand the competition? Will there be enough market for this so-called low-innovation, no-brainer product?
June 2011 annual report highlights the advantages over air conditioners market:
Symphony has been increasing its foothold in the foreign markets as well. Currently, about 26% of revenues come from exports. Because of the varied demographic market it serves, the company does not have concentrated quarters for revenues penetration, anymore.
Through Impco, Symphony has targeted industrial cooling solutions market both in Americas and in India. More than 300 installations have been rolled out in India already.
Symphony wants to focus on shifting fan users to air cooler users:
The air conditioner market is about 3 m units, while organized air cooler market is about half of it. The management expects that while the total market for air coolers is expected to grow at 15-20% over the next 5-6 years, the organized market is expected to outpace that. It also considers that the untapped market for central air cooling solutions is large.
According to management, central air cooling solutions segment could earn revenues of Rs.1 b over the next few years.
Return on capital and return on equity have been very impressive. Given its asset-light business model, capital employed in the business is not large. From 2007-2014, Symphony has reinvested Rs.873.10 m in its operations, far less than its free cash flows.
There isn't any dilution in shareholding. Symphony knows it requires less cash than it generates from operations, and accordingly, it has revised its dividends payout policy to about 43%.
In 2009 and 2011, it had a significant investment in working capital; and in 2012, it had large savings from it. Symphony operates with cash-and-carry model on its retail sales (it does not give any credit), except about 30-90 days credit on the modern retail chains and e-commerce. There is no debt on its books. Free cash flows have been increasing.
Symphony's focus on marketing is evident from its spend on brand building. It spends close to 5% of its revenues on advertisements. In fact, earnings and return on capital need to be adjusted to reflect economic benefits resulting from advertisements, by capitalizing these costs.
No wonder, it's a surprise all through:
But what next? Can it sustain its growth and margins? Will it be able to withstand the competition? Will there be enough market for this so-called low-innovation, no-brainer product?
Mr. Bakeri and company supply us with their perspective: The market for cooling products (not fans, but air coolers and air conditioners) is about 246 m households in India. Even if the collective air cooler industry can carve away 1% of this 246 m household segment and then share it equally across the five largest manufacturers, we assure you that would still mean respectable revenue growth for Symphony over what it reported in 2014.
The total (including unbranded) number of air coolers sold in 2014 were 6 m units, currently a Rs.20 b market. The organized branded market is 20% (1.2 m units), but has been outgrowing the unorganized market. This is likely to continue in future, especially considering the GST rollout, which brings the unorganized market in the tax net. The management reckons that declining difference between the cost structure of the organized and unorganized market will enhance the value position of the organized market in the coming years.A majority of air coolers sales are reported from Northern and Western India (60%); and Eastern (20%) and Southern (20%) markets are yet to be tapped.
June 2011 annual report highlights the advantages over air conditioners market:
Symphony has been increasing its foothold in the foreign markets as well. Currently, about 26% of revenues come from exports. Because of the varied demographic market it serves, the company does not have concentrated quarters for revenues penetration, anymore.
Through Impco, Symphony has targeted industrial cooling solutions market both in Americas and in India. More than 300 installations have been rolled out in India already.
Symphony wants to focus on shifting fan users to air cooler users:
The air conditioner market is about 3 m units, while organized air cooler market is about half of it. The management expects that while the total market for air coolers is expected to grow at 15-20% over the next 5-6 years, the organized market is expected to outpace that. It also considers that the untapped market for central air cooling solutions is large.
According to management, central air cooling solutions segment could earn revenues of Rs.1 b over the next few years.
Nevertheless, there are some bold statements made by the management. Sample this: We are economy-agnostic; when the economy does badly, we say, how does that matter? When people question our growth with, how much longer?, we smirk because they have seen nothing yet.
Today with market value of equity at Rs.79.57 b, its stock is trading at about 75 times its 2014 earnings. Sure, Symphony is about to close its year in June 2015 and report its latest annual performance. We don't have the consolidated numbers yet. Even if we accept that there is growth in the business, we are not in a position to justify that it is so much to warrant doubling of market value in less than a year.
Yet, I tried enough: With estimated revenues of Rs.22 b in the next 10 years (2024), without any significant deterioration in operating margins, Symphony would generate free cash flows to firm of Rs.16 b over the period. This compares to Rs.2.25 b of free cash flows to firm it generated over the last 8 years. Then comes the stable growth period, when we can restrict its return on capital, reinvestment, and growth to suit a mature business. I tried to come up with a discount rate that would justify the current value of Rs.2,270.90 per share; and it was 6.92%. That would be silly, I reckoned.
Then I checked the growth rate Symphony would have to achieve to give the rate of return that I would want from an equity investment; alas, the revenues in 2024 would have to be Rs.275 b. Well, I am usually very rigid in my stable period assumptions, yet, here I assumed that Symphony would be able to maintain fairly high operating margins; I would not change my growth and reinvestment estimates during the stable period, though.
I also used an earnings multiple that I thought would be reasonable (must say, I was much less conservative than usual), and what the heck, Symphony would need revenues of Rs.83.79 b in 2024, to give me my required rate of return.
Now I ask the market, for how long?
Then I checked the growth rate Symphony would have to achieve to give the rate of return that I would want from an equity investment; alas, the revenues in 2024 would have to be Rs.275 b. Well, I am usually very rigid in my stable period assumptions, yet, here I assumed that Symphony would be able to maintain fairly high operating margins; I would not change my growth and reinvestment estimates during the stable period, though.
I also used an earnings multiple that I thought would be reasonable (must say, I was much less conservative than usual), and what the heck, Symphony would need revenues of Rs.83.79 b in 2024, to give me my required rate of return.
Now I ask the market, for how long?
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