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Published on 30/08/2019 10:57:48 AM | Source: HDFC Securities Ltd

Buy Symphony Ltd For Target Rs.1,686 - HDFC Securities

Back with a bang!

Symphony’s 1Q performance was a blowout, even beat our aggressive estimates. 1Q performance has proved the naysayers wrong about the relevance of air coolers (in the era of fast growing RAC) and Symphony’s market share loss. Growth visibility for FY20E is high despite slowdown in macros owing to low channel inventory and new launches. We maintain our estimates and value Symphony at 45x Jun21 EPS, arriving at a TP of Rs 1,686. Maintain BUY.

 

HIGHLIGHTS OF THE QUARTER

* Domestic revenues grew by 128% (vs. exp. of 80%) owing to a harsh summer, market share gains and favorable base. Consumer offtake was healthy across markets and channels in India. Adjusting for soft base, domestic revenues still grew by strong 35% vs. 1QFY18. As per management, they held back ~Rs 150-200mn of potential sales to avoid any pileup of inventory in trade prior to the new season. Channel inventory is now at historical lows and dealer sentiments are positive (seen high inventory pressure over the last 2 years).

* After a gap of 2 years, co. has launched 7 SKUs and relaunched 7 SKUs in the domestic residential coolers. Trade sentiments are positive (unlike other appliances categories), hence pre-booking for new launches is robust. July off-season sales have grown at a healthy pace. We expect ~30% growth for domestic business over 2Q4QFY20.

* Standalone gross margins were down by 443bps to 50% (at par with last 3 quarters) owing to higher promotions and product mix. We expect promotions to moderate for the rest of the year. A&P spend (up 47%) was at a 5 year high, led to 15% EBITDAM (exp 21%). A&P spends are concentrated in 1Q, hence FY20 margins are expected to converge towards 30% during off-season.

* RoW sales (49% mix of consolidated) grew by 80% driven by acquisition of CT Australia. However, CT’s performance was muted owing to integration challenges post the acquisition. Co. is gearing up for launch of Symphony residential air coolers in Australia and North America via CT’s distribution network.

 

STANCE

Summer 2019 confirms our thesis that Symphony will always delivered strongly if the season has no disruption. Organised air cooler market will deliver healthy growth despite rising affluence towards RAC. Symphony’s constant focus on product innovation and superior franchise with distributors will make the company competitive. With trade inventory now at historical low levels, Symphony will enjoy off-season stocking, opportunity to launch techrich coolers and benefit from a favorable base. Besides, its international performance will improve given the various initiatives undertaken. 

 

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HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475

 

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