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MOSL: SYMPHONY - Initiating Coverage with TP of INR650, 33% upside - Strong brand, asset-light business




Motilal Oswal Securities Ltd.


24 Feb 2014





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SYMPHONY: Cool tunes Strong brand, asset-light business Consistent innovation, expanding distribution strengthening market leadership Symphony (SYML) is the largest Air Cooler company in India, with 50% value market share in the organized market. Its strong brand enables it to command 10-12% pricing premium over competitors a testimony of its strong recall. It has strong distribution network of 750 distributors, 16.4k dealers and plans to ramp up to 40k in the medium to long term thereby driving growth. 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 realization growth and margin accretion. We expect EBITDA margins to catapult 200bp over FY14-16E. SYML's asset-light business model, complimented by a working capital cycle of 27 days is highly capital efficient, leading to RoCE being greater than 40%. We initiate coverage with a Buy rating. Our target price is INR650 (15x FY16E EPS), implying an upside of 33%. Newer product launches complimented by distribution network to drive margins higher SYML has been the most innovative cooler company by being first in offering a host of new products every year. It recently introduced the new I-series models, with unique features like Dura pump technology resulting in longer pump life, Empty water tank alarm to notify when water tank is empty, System restore function (cooler will restart with same settings and function after power is restored) and a Feather-touch digital control panel. Also with a view to take on unorganized market it recently launched its range of branded window coolers comprising of 5 models in attractive beige color, out of which 3 are of plastic body and 2 of metal body. Huge untapped opportunity High and rising temperature levels are leading to greater demand for cooling solutions. With rising incomes, cooling solutions are increasingly viewed as necessities. While 54% (143m households) of Indian households live in hot and dry climatic conditions and 4% live in moderate climatic conditions, only about 8% own Air Coolers thereby providing huge opportunity for growth. Further, a large part of the cooler industry is unorganized at 80% (4m units) which makes the market potential for organized players (1m units) even larger. SYML, being the pioneer in the industry and holding a 50% market share, is best placed to capture this growth. Although Air Conditioners are preferred for better cooling, their higher prices and power consumption make them financially taxing. Considering lower cost of ownership (70% lower capital costs and 90% lower running costs) and the constrained power supply situation in India, Air Coolers are the mass market option for Indian consumers. Initiating coverage with a Buy rating We expect SYML to record 25% revenue CAGR and 30% PAT CAGR over FY14-16E. Margins are likely to improve to 24.5% in FY16E as against 22.5% in FY14E. Its market leadership coupled with strong growth prospects for the industry and healthy financial metrics (debt free; 40%+ RoCE) are reasons why we like the stock. It currently trades at 11.3x FY16E EPS. We initiate coverage with a Buy rating. Our target price is INR650 (15x FY16E EPS), implying an upside of 33%.

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