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Gradual recovery in the domestic business

Symphony’s standalone and overseas business has seen a gradual recovery on a QoQ basis, however YoY recovery was still ~74% of previous year. According to company, the trade sentiments in the domestic markets were positive and company has witnessed stock out situation in some of the geographies. The inventory level is normalised with channel partners and the company expects good volume offtake from Q4FY21 onwards. On the subsidiaries front, Climate Technologies Australia performance remained impacted due to supply issues & lower operating leverage. The management expects a turnaround of Australian subsidiary from Q4FY21 supported by various initiatives (such as changing sourcing destination from China to India) taken by the management. The other two subsidiaries, GSK China and Impco Mexico performance in terms of topline remain impacted due to pandemic, however company has taken various cost optimisation measures in the subsidiaries. This would help company to improve profitability, going forward. We slightly tweaked our earnings estimates upward by ~2%, 6% for FY22E, FY23E respectively

Improvement in sales on a QoQ basis

The domestic and overseas business sales were up by 12% and 14% on a QoQ basis supported by improved demand post opening up of economy. For the 9MFY21, consolidated revenue was down by 34% YoY to | 561 crore mainly due to domestic business which were significantly impacted due to lockdown in the peak season. Management expects a strong recovery for domestic and overseas markets in Q4FY21 amid low base, refilling of channel inventory and market share gains due to supply disruptions. The unorganized players (70% of Industry size) has witnessed severe supply disruptions and hence likely to lose market share when season picks up.

Lower profitability of Australian subsidiary drags overall margin

Despite various challenges, company has maintained its standalone gross margin same as Q3FY20 level (improved by 100 bps QoQ). On a consolidated basis, the gross margin was lower by ~350 bps YoY due to ongoing supply issues in Australia. Lower volume and higher fixed costs dragged consolidated EBITDA margin down by ~800 bps YoY at 15%. According to management, the company has taken various initiatives to rationalise cost at subsidiaries level which would start showing results in the coming quarters.

Valuation & Outlook

We continue to like Symphony for its leadership position in the domestic air cooler market and its capital efficient working model. However, margin recovery and sustainability of market share in the upcoming summer season will be key variable to watch. We rollover our valuation on FY23E and change our rating from BUY to HOLD, with revised target price of | 1090 (valuing 27x FY23E EPS)

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