Published on 19/10/2020 10:30:26 AM | Source: ICICI Direct

Buy Symphony Ltd For Target Rs.960 - ICICI Direct

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Strong domestic performance amid pandemic…

Symphony’s consolidated Q1FY21 performance was mainly impacted by revenue loss for almost 40 days in domestic markets. Consolidated revenue fell ~47% YoY led by ~77% YoY fall in revenue of domestic business. However, overseas businesses were relatively less impacted and revenue fall was limited to only ~17% YoY during the pandemic. Profitability was largely impacted by a change in product mix, higher raw material prices (in Australia) due to disruption in supply and lower operating leverage. The management expects improvement in domestic performance, going forward, with ease in lockdown restrictions and inventory build-up by dealers post Q2FY21 (~60% of channel inventory has been liquidated). On the international front, business in Australia, China saw good demand recovery while Impco’s performance was impacted by Covid-19 in June 2020 after a good start in April-May 2020. The management has further guided at maintaining gross margin despite a shortfall in revenue in FY21 largely impacted by washout Q1FY21. Further, its asset light model and various other cost optimisation measures (like travel & conveyance cost, legal & professional cost, etc) would further provide cushion to its bottomline, going forward. While we revise our FY21E, FY22E earnings estimate downside by 13%, 9%, respectively, we continue to maintain our positive stance on the stock considering its strong brand patronage and robust balance sheet (cash of | ~400 crore with strong RoE/RoCE).


Less impact of pandemic on overseas business

Sharp fall in domestic revenue by 77% YoY was partly arrested by relative lower fall in oversees revenue by ~17% YoY. Hence, consolidated revenue fell ~47% YoY. While dealers managed to liquidate their inventory holding by ~60% in Q1FY21, management reiterated a demand recovery post lockdown relaxation. While we continue to expect H1FY21 to be challenging, recovery may start from H2FY21 onwards with lockdown restrictions easing. On domestic front, revenues may grow at 16% FY19-22E, driving overall 15% revenue CAGR in FY19-22E (with overseas revenue CAGR of 13%).


One-time cost drags gross margin

Consolidated gross margin was impacted by a change in product mix in the domestic business and sharp fall in gross margin of Climate Technologies’ higher cost of purchase due to disruption in supply chain owing to lockdown for some time. Further, lower operating leverage dragged overall profitability during the period, leading to losses at the EBITDA level.


Valuation & Outlook

We maintain our positive stance on the stock given 1) market leadership position, 2) strong financials to tide over rough phase of FY21, 3) market share gain from unorganised market. We expect a strong recovery in FY22E led by domestic business. We maintain our BUY rating on the stock with a revised target price of | 960.


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