Symphony Limited

In 1987, Achal Bakeri, moved into a new house in Ahmedabad, Gujarat. Unable to air condition some parts of the house due to high ceilings and long passages, he purchased an air cooler. It worked perfectly and he was extremely satisfied with its performance. But he did not like its looks and he instantly came up with an idea of making a better air cooler. In 1988, he introduced an air cooler into the market under the brand name Symphony. He made it exactly look like a window air conditioner and sold it for Rs 4,000.

By tapping into the human bias for associations, he was able to charge double the price compared to other air coolers. But this price was dirt cheap compared to an air conditioner which costed Rs 35,000 at that time. This price difference created a contrast effect and Symphony’s air coolers were selling like hot cakes. In 1994 he took the company public and rest is history.


1. A 2500 Bagger after wiping out shareholders equity

On 30-Jun-2004 Symphony’s stock was selling for Rs 0.87. As of this writing the stock is selling for Rs 2,208.60 representing a CAGR of 110.98%. In other words the stock doubled every year for almost 11 years. But I doubt if most of us would have bought the stock on 30-Jun-2004. Why is that? The company was debt ridden and it had negative equity. Take a look at the snapshot of its balance sheet given below. Why did this happen?


After going public the company fell for the institutional imperatives and started developing other products like washing machines, water heaters, and air conditioners. There were couple of sensible reasons for venturing into other product lines (1) air cooler was a seasonal business as lots of sales happens in summer and the company wanted sales to happen throughout the year (2) to avoid single point of failure. But these ventures did not turnout as expected and the company burnt Rs 50 crores. The company learnt a hard lesson and directed all the focus on a single product; air coolers. Peter Lynch would have summarized this lesson in one word: diworsification.

2. Source of Moat

Any business that earns above average returns on invested capital (ROIC) is considered to be a great business. Let us find out if Symphony’s business is great. Given below is Symphony’s pretax ROIC. In the last six years it’s pretax ROIC averaged about 83.41%. This tells me that it has a fantastic business model. Let us find what makes the company earn such a high rate of return. In order to do that we need to analyze its components operating-asset-turnover and operating-profit-margin separately.


The company on average turns over its operating assets 3.3 times in the last six years. When will such a high asset turn over happen? When a company has a very minimal investment in fixed and working capital then such a high turn over is possible. For the year 2014, the company invested only Rs 77.86 crores in fixed assets. How is it possible to have such a minimal investment in fixed assets and still generate sales of Rs 532.69 crores? The company outsourced 100% of domestic production through tie-ups with nine OEMs. By partnering with nine OEMs for manufacturing air coolers the company remains asset light and has a low cost advantage achieved via process and scale. This is a moat. Also dividing the work among nine OEMs eliminates single point of failure. The company calls this partnership as hub-and-spoke model. All the design, research, quality control, marketing, and distribution is completely owned by the company. This business model reminds me of Nike.


Let us look at its investment in working capital. The company carries only 8% of its sales as receivables. Most of the sales done by the company happens through its traditional trade channels; dealers and distributors. It does business with them on a cash-and-carry basis. This means that the dealers and distributors will make an upfront cash payment before taking the delivery of goods. Its air coolers are selling like hot cakes which enables the company to turn its inventory very fast; around 5.5 times in 2014. Also some portion of its inventory is funded by trades payables which reduces the carrying costs.


Take a look at the profit margin of the company given below. In 2014 its gross profit margin is 54.92% which is a lot compared to its 2007 gross margin of 35.90%. Why did this happen? There are several reasons and some of them are (1) its air coolers commands 5-12% premium over competitors (2) its average realization per unit went up from Rs 4,504 to Rs 6,382 in five years (3) it was aggressively cutting costs through scale advantages, product innovation and hub-and-spoke model.


The next question is why does the customers pay premium price? There are few reasons that I can think of (1) its brand awareness (2) its focus on quality (3) broad selection of coolers. Customers paying up for a premium brand is a moat. Also the company spreads its fixed costs on advertising, marketing, and employees over larger volumes of sales which gives some operating leverage. I did a search for air coolers in and Symphony dominated the best sellers list. This tells me that the customers love Symphony’s products. Take this result with a pinch of salt as I might be under the influence of confirmation bias.


3. Tapping the International markets by acquiring IMPCO

In 2014 around 25% of Symphony’s revenue came outside of India. Take a look at the revenue split between India and Rest of the world. You should clearly see that international sales tripled in 2011 compared to 2010. Why did this happen? In 2010 Symphony acquired a Mexican air cooler company named IMPCO. This helped the company to expand its global presence and the sales tripled. This company was founded in 1939 by visionary brothers Adam, Gust, and William Goettl. What is so special about them? They patented the evaporative cooling technology based on which air coolers work. Also Achal Bakeri visited this company in 1992 to learn more about air coolers from the experts. After reading this I thought it’s a small world. At the time of acquisition IMPCO’s balance sheet was debt ridden and struggling. Remember Symphony was in the same boat early 2000? This experience helped Symphony to acquire IMPCO and clear its debt.symphony-international-sales

International sales helps the company to reduce the impact of seasonality. At least some parts of the planet will have summer and the company can sell its air coolers throughout the year. IMPCO specializes in central air cooling solutions and the opportunity for growth is huge.

Central Air Cooling Solutions business of the Company though still in nascent stage had been able to strengthen its operations. The focus was to have adequate representation and therefore the required manpower structure has been employed. Subsequently, the aim is to create a base of dealer network across the country. The dealer network is increased by more than 75% indicating the confidence now the business drives amongst the trade. Your Company has made some major breakthroughs in terms of entry into prestigious clientele covering various customer segments like auto industry, packaging, places of worship, FMCG, paint industry, logistics, sugar mills, hospitals, distilleries, railways, commercial applications etc. There were repeat orders from some customers which establish their trust in the Company and its products. – 2014; Annual Report

4. What can go wrong?

Air coolers will stay for a very long time and the technology it operates on is 85 years old. Compared to an air conditioner it has several advantages (1) consumes 0.18 units of energy per hour compared to 5.5 units (2) costs less and available in prices ranging from Rs 5,000 to Rs 18,000 (3) it is portable and can be used in open spaces (4) uses fresh air and environment friendly. Also air coolers are superior compared to a normal fan. Human nature aspires for upgrading their life style by moving to the next best thing. Hence people using fans will be purchasing air coolers. Hence I do not see the air coolers getting obsolete at least for a decade.

Most of the sales in India are done to the dealers and distributors on a cash-and-carry basis. This results in cash sales and very minimal accounts receivable is needed for operations. But in India organized retail is growing at a rapid rate. This means organized retailers like Reliance, Croma, Big Bazaar, Spencer, FlipKart, and Amazon will take the product on credit and pay only after 30 to 90 days. This will result in an increase in invested capital and decrease ROIC.

Symphony operated on negative working capital. Over 89% of its domestic sales were routed through the traditional trade channel on a cash-and-carry basis, while the balance 11% was through modern retail chains on a 30-90 day credit period. Similarly, all export sales through distributors (50-60% of total exports) were executed on a cash-and-carry basis, while sales through modern retail chains (40-50% of total exports) were on credit. This asset-light operation, zero-debt and cash–and-carry model ensured that the Company remained cash-rich, with the bulk of profits available for distribution. – 2014; Annual Report

Air cooler market in India is highly fragmented with unorganized players controlling 70% of the market in terms of value. The remaining 30% of the market is controlled by organized players. Also the total air cooler market is growing at 10-15%, while the organized segment is growing at the rate of 25%. Symphony controls 50% of the organized segment and it was able to increase the price of air cooler for the last five years. Since the overall pie is growing everyone is behaving nicely and they are not competing on prices. What if the pie stops growing for sometime and one of the competitor goes nuts and reduces the price? Will Symphony’s brand be able to command premium price? I don’t know the answer but we need to keep a close eye on average realization per unit.


5. On Valuation

For the year 2014 the company made a pre-tax operating profit of Rs 126.12 crores. Since the organized air cooler segment is growing at 25% we can expect at least an operating profit of Rs 157.65 crores (126.12 * 1.25) for the year 2015. Applying a 10% cost-of-capital we can arrive at a zero growth valuation of Rs 1,576.50 crores. As of this writing the market capitalization of the the company is Rs 7,748.44 crores. So the zero growth valuation represents 20% of current market capitalization and the remaining 80% is being paid for future growth. If you want to understand the thought process behind this take a look at this. This type of valuation gives a feel for growth expectations of the market. What I want to know is that if I pay the current price and hold the stock for 10 years what returns I will get? This method does not answer that question clearly. We need to look at it another way.

There are three sources of revenue for the company (1) domestic residential cooler market (2) international residential and industrial cooler market (3) domestic industrial cooler market. The company has a lot of room to grow in all three areas. Let us look at the growth potential for the domestic air cooler market. Symphony sold around 6.2 lakhs air cooler in 2014. This represents 10% of the total air coolers sold in India.


The next question is how many residential air coolers can be sold in India? If 30% of 164 million households with fans buys an air cooler then the total number of residential coolers than can be sold in India is around 5 crores. If Symphony can increase the unit volume by 15% every year (historical volume growth is 12%) then after ten years it would be selling around 25 lakh coolers. So there is a plenty of room for everyone to grow even after 10 years as the market size is huge.


Along with the unit volume growth there will be some price increase. Also we need to account for sales growth from international and domestic industrial markets. If we take all of these into account then expecting a 20% growth in operating profits seems reasonable. In 2014 the company made a pretax operating profit of Rs 126.12 crores. Applying a 20% growth for the next 10 years will give us an operating profit of Rs 780.90 crores in 2023. If the market pays a multiple of 20 times earnings then the company will be valued at Rs 15,618 crores. This represents a CAGR of 7.26%. As of this writing I can get 9% returns by parking my money in fixed deposits. Hence I would not buy Symphony at the current market price. As of this writing I do not own any shares of Symphony.

38 thoughts on “Symphony Limited

  1. Jana-I am a private Accredited Investor in Houston. Would you mind telling me where you are getting the 9% and in what instruments? I assume in India or in that region.


    Jon L. Ragland

    • Jon,

      In India bank fixed deposits give 9% interest. Not sure if these instruments are available for investor outside India.


    • Saket,

      Dividends are paid out of profits and hence I did not consider in my valuation.


      • Thanks Sir.
        One more query sir,
        FY 14 operating profit = 120 Cr.
        M/Cap = 7777 Cr.
        M/cap is Almost 60 times of operating profit.
        Why do you think in 2023, it will be 20 times. I mean, couldnt it be 30 times. which then will give ~11.5% CAGR.


      • Historically the highest ever p/e ratio given for the company was 18.30 in 2013. So I thought 20 was reasonable. By the way you are right on dividends. The company pays 50% of profits as dividends and it has to be accounted for in the valuation. I did not do that. At the current price I am not interested in the stock.


  2. Jana,
    As always great analysis
    Valuation is a little tricky in such high quality growth companies. I have written how we need to take sustainable earnings growth approach to buy such companies , you and readers of the blog may find it of interest the links to article are
    The idea is to revisit valuation every 6-12 months and if the market price provides opportunity the pull the gun
    Disclosure – Symphony is my largest holding

    • Thanks a lot for providing the links on valuation. I will take a look. Valuation is the part were most investors including myself struggle. The line between paying-up and over-paying is very thin.


  3. The biggest drawback of this analysis assumption of linearity. How do you know that Symphony will not re-invest the profits at much superior RoCE of 50% and generate even more profits in the next 10 yrs. This is just a lazy academic exercise to demostrate Symphony is overvalued. I know it without elaborate calculation as well.

    • Sumit,

      Thanks for you valuable comments. The fact is that I don’t know the future and my projections of 20% growth for next 10 years could be completely wrong. But this way of looking gives me a good feel for valuation. If you can do it without elaborate calculations that’s fantastic.


      • See, I am not saying this analysis is wasteful but the conclusion in the end do not represent the essence. Your analysis leaves out intangible things like good mgmt, brand value etc by giving a 20x multiple to a cyclical stock. Also, you are questioning the wisdom of the market when you say it is overvalued on the next 10 yrs’ earnings. The fact is that market is valuing it at certain parameters and we need to figure out why. I or you or anyone can not decide what will be PE or growth etc after 10 yrs. If I am a shareholder, I will keep looking for re-investments by the company and return ratios along with reasonable growth. If they remain healthy at over 40-50% I will keep holding it. You won’t believe this stock is up 10x from the price I exited after making 3x and it was looking expensive since then.

  4. Thanks for this post, Jana!

    Could you please publish a post on how to analyze the financial statements of businesses that publish both regular and consolidated (subsidiaries etc.) statements? I’m interested in knowing:

    1. If there are any subtle differences to keep in mind
    2. If both statements are to be considered, or if just the consolidated one would suffice
    3. Other nuances

    • Hi Madhu,

      I am still learning to differentiate between these two statements. Once I learn it well may be I will do a post. Here is a rule of thumb I use.

      For a company like Shriram Transport which has multiple business lines (commercial vehicles, construction equipment, and auto mall) I would study both the standalone and consolidated financial statements.

      For other companies like Ashiana its subsidiaries are not that big so I just read their consolidated statements.


      • Thanks, Jana. Will look forward to your post on this.

        On a different note, which online resources do you use for:

        1. Screening
        2. A quick glance at the financial numbers
        3. Competitive analysis using the numbers

        Or do you only use the annual reports to get the data? Perhaps this aspect warrants a post 🙂

      • Madhu,

        I extract the number’s from annual reports. It’s time consuming but I believe it’s worth the effort as you know for sure that the data is correct.

        If someone can afford a lot of money then is really worth it. I tried a demo version and it’s fantastic. Several value investors I respect use this. Maybe one day I might start using this.


  5. Jana,

    Great analysis.

    I am not sure if you use a cooler, do you? How many people do you know who use coolers?
    I am finding it increasingly hard to find people who use coolers; thus the moat doesn’t seem sustainable. Does it to you in an increasingly ‘AC’ world (middle class too)?

    • Mokthar,

      Thanks for your comments. I come from Chennai and the weather is hot and humid. Under humid conditions air coolers are not that effective. So I never used one. Most of the people I know use air conditioners.

      I worked in Hyderabad and the weather is hot and dry. A lot of people I know use air coolers there as it is very effective in dry weather.

      Another thing I noticed is that those who air conditioners switch it off in 2 hours so that they save in electricity costs. This never happens in an air coolers as it operates in less than 1/5th of electricity and water is used for cooling which is cheap.

      Also with the price advantage compared to air conditioners, there is little doubt in my mind that sales will grow in the coming years. Given that volume and sales have grown a lot in the last 5 years it’s hard to conclude that this trend won’t sustain.

      Overall I like the business but definitely not the stock price.


      • Hi Jana,

        Interesting to note that you too know very few people who use coolers(hyderabad).
        The similar responses by multiple people who I have spoken to have been the noise a cooler makes, its moist (makes your skin wet), space occupied and it is directional cooling. These are the practical difficulties of experiencing Coolers. Ofcourse Coolers win hands down over AC’s in terms of price and environment benefits but the most important decision is to keep cool without such difficulties.
        The only place probably where Coolers can continue to do well in future is the industrial segment. That is an area where the difficulties of noise, directional cooling doesnt count much and besides having AC’s on shop floors/workshops is not pragmatic.
        Important points to ponder: Sustainability? How long will coolers stay in the market (Cassettes, vcr’s, typewriters, fax machines for example)?

      • Mokhtar,

        You’re points are very valid. To be honest, I don’t know how long coolers will be sustainable. The only way to find out is to wait and watch.


  6. Jana, it was a very in depth and informative article. Thanks. Would you be able to guide me on what parameters and method will one need to use for performing similar kind of analysis on a banking stock?

  7. Very nice post. Educational.
    The segment of society that purchases air cooler and not air conditioner due to difference in price and running cost shall always exist – in fact increase. Unless prices of air conditioners and electricity come down drastically there should not be a problem of market. The challenge would be to maintain/increase market share.
    Price of symphony touched 3200 in April. Anyone who had bought at 2200 and sold at 3100+ made a killing. Just as Amitabh Bachchan said in a movie “English ij a phunny language”, so is share market :).

  8. thought provoking
    Just as 2 wheelers will never replace 4 wheelers even if all get rich same way i think cooler will stay .
    (middle /upper middle) knowing that a investment in cooler will last couple of years and it can be funded with just switching of the ac for few hours in a month.MY electricity bill is 6000/- for this month where we run 2 ac in the night.A cooler for 6000/- with low running cost sound sweet
    Symphony has projected itself as harley davidson not luna..0f poor mans acs

  9. Hi Janav

    For Working Capital, why did you consider only Inventories, Debtors and Payables and not CA – CL?


    • Amit,

      The right way to do that is to break operating and financing assets/liabilities separately and then calculate the returns on net operating assets. If I redid this post that’s how I’ll do this.

      There are other items in current assets and current liabilities which are related to financing. Also the items related to employees cancel out each other and shouldn’t matter that much.


      • Agreed. So WC = Operating Assets – Operating Liabilities? Operating Assets will be Total Assets – Financing Assets (Cash & cash related items)? Similarly, Operating Liabilities will be Total Liabilities – Financing Liabilities(Short term and long term borrowing)?

  10. Jana,

    Thanks for the wonderful analysis. From where did you get the “Total No. of Units Sold”. I checked the recent annual reports for 2014-15 and 13-14 but couldn’t find the information. I was only able to find this information till the 2010-11 annual report.


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