Symphony Limited (517385) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Symphony Limited Q2 FY '21 Results Conference Call hosted by HDFC Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Naveen Trivedi from HDFC Securities. Thank you, and over to you, sir.

Yes. Good afternoon, everyone. On behalf of HDFC Securities, I would like to welcome the management of Symphony Limited to discuss its post 2Q FY '21 results. We have with us today the senior management of Symphony Limited represented by Mr. Nrupesh Shah, Executive Director; Mr. Bhadresh Mehta, Global CFO; and Mr. Milind Kotecha, IR and Treasury. I would now hand over the call to the management for their comments. Thank you, and over to you, sir.

Yes. Thank you, Naveen ji. Good evening. I welcome all of you to Symphony's September quarter and half yearly conference call. In my opening remarks and in Q&A, there may be forward-looking statements and estimates and hence, customary disclaimer statements do apply. The worldwide outbreak of COVID-19 has impacted the sales of the company severely since it hit during peak summer months in India, during which most of the secondary sales in India takes place. And also to an extent, partly impacted in other countries where Symphony exports. Despite strong summer temperature generating very high demand for the company's products and also adequate availability of the products with the channel, the lockdown in June quarter prevented the sales from taking place. Due to this unsold channel inventory, which will, by and large, get liquidated in the ensuing summer, purchases by the channel from the company in this quarter has been impacted and likely to remain muted for the rest of the year. We, in Symphony, have initiated and taken series of initiatives and many of them are also in pipeline. They are in respect of new products and innovation, value engineering, enhancing operating efficiencies and enhancement of dealer distribution network, especially in rural and semi-urban markets. But we will witness the meaningful impact of these initiatives in FY '21, '22. Coming to specific financials of the quarter and half yearly on a stand-alone basis, the revenue from operations stood at INR 112 crore versus INR 195 crores in September '19 last quarter, registering degrowth of 42%. Gross margin, in fact, slightly improved, up from 47% to 48%, that too in such challenging environment without increasing the NRV but on account of some value engineering. The profit after tax for the quarter stood at INR 27 crores versus INR 57 crores, while for half year, it stood at INR 28 crores versus INR 83 crores of previous year. As far as capital efficacy is concerned, including capital employed in air cooler and other appliances on a stand-alone basis, it was a negative capital of INR 37 crores, while Treasury as on 30 September stands at INR 564 crores versus INR 392 crores as on March 31, but lower than previous year. As far as inventory is concerned, as on September 30, the inventory is INR 29 crores versus INR 41 crore last year. So again, despite challenging environment, we are not facing any issue at the level of company. One, on account of the business model and, secondly, the seamless supplies which we could make during September quarter from the inventory. Regarding Symphony Australia, the consolidated sales of Climate Technologies Australia during half year ended September '20 is up by 8% despite COVID-19 impact. However, its profitability took a beating on account of higher input costs as it could not import some of the components and had to procure locally and had to resort to local purchases, also increasing freight costs, mainly air freight and increased labor costs, all these 3 on account of COVID-19. Regarding IMPCO Mexico, the sales for the September quarter is slightly up. However, for half year, it is lower. Gross margin and contribution margins have improved due to various initiatives. However, IMPCO Mexico has provided for doubtful debts during the quarter amounting to INR 7.20 crores, that is about 80% of the outstanding receivables from one of its top customers who have applied for bankruptcy in Mexican court. It happens to be large organized retailers, something similar to huge organized retailer of India. And that has been reflected as an exceptional item in the financial share. About GSK China, the sales is impacted during the half year as well as September quarter. However, gross margin and contribution margin percentage have improved, again, due to various initiatives. As far as Symphony India is concerned, we are really confident to maintain last year operating margin percentage, which was about 50% despite inventory lying with the channel. Coming to domestic sales, we have taken some major initiatives in terms of enhancement of dealer and distribution network. The lockdown froze most of the secondary and tertiary sales during the season. There is heavy unsold inventory in the market of dealers as well as distributors' end. However, despite these negative sentiments, and more importantly, we managed to collect the advances from our distributors, and were able to enroll 75% of our distributor vis-à-vis our enrollment target for the period July '20 to June '21. The network was also strengthened with the enrollment of 47% of our direct dealer target. In the respect of the Movicool range, which we launched last year and is a path-breaking product and has received excellent response, we are focusing on changing the perception of our commercial cooler range from a specialized range to one that can be bought off shelf. Both the verticals, domestic retail as well as industrial cooler segment, henceforth will cross-sell the range. Our digital campaign was launched in September end to generate the needs for this segment and is receiving good response. Regarding exports to rest of the world from Symphony India, the situation is fluid with all the customers, and we are -- and customers are taking more time to decide, the expected orders in the quarter have been pushed to next quarter and possibly quantity will also be less. Our facilities got audited for supplies to major retail chains, and we, very soon, hope to receive some of the major orders. However, in December and March quarter, exports to and through IMPCO Mexico and Climate Technologies are estimated to be quite robust. About Climate Technologies, there have been some delays in the shipments meant for launch of new models. Despite delay in the shipments, despite delay in some of the supply chain issues on account of COVID at this point of time, we are reasonably confident to hit the budgeted sales numbers for the current financial year '21. About IMPCO, fixed expenses were reduced by 24% versus last year and 15% vis-à-vis plan. The outlook for Mexican GDP growth for '21 is now estimated to be 2.5% positive from a potential drop of 10%, which is likely to boost the business over there. Regarding GSK China, the exports have partially recovered in general, but appears a long way from attaining the normalcy. During September quarter, the sales was substantially impacted in domestic market as well as international sales. And R&D has sharply corrected about 8% in past one quarter, reducing the actual margins on export of the products. We launched new models, including HC range and also through e-commerce channels in China. And that may lead to good growth of HC sales in the ensuing quarters. Thank you. With this, we are open for question answer.

[Operator Instructions] The first question is from the line of Manoj Gori from Equirus Securities.

My question would be on the trade sentiment. So obviously, as you highlighted in your opening remarks and also during previous con-call, that inventory continue to remain extremely high across the channel. So if we look at currently, whatever advances that we have taken, so if you can quantify what portion would have come from the existing network? What could have come from the new network? Second, going into December quarter. When we look at the other product categories especially, have been doing extremely well. And that is an obvious thing because of the seasonality that we -- that air coolers specifically are impacted. But how are the trade sentiments? How they are approaching for the upcoming summer, whether that will pick up in fourth quarter? Like how do you see sales spending out or AR trade sentiments, at least, for the -- from the next summer point of view?

Yes. So about inventory lying with the trade. On an average 40% to 45% of the inventory is lying with the trade at the end of the season. But it is dispersed. And there are many pockets where the percentage of the inventory is high at 40%, 45% is average. There are many, many distributors where inventory is negligible or even lower. And it is disperse this 40%, 45% inventory between distributors and retail dealers. And as of now, overall sentiments are low. But as we have witnessed in the past months, summer is setting and season is approaching. Normally, it changes for positive and even in that respect also, we have planned series of initiatives without impacting the margin. And in a way, of course, this time it is on account of COVID. But otherwise, in the past, also wherever there was a bad season, that used to be trade inventory that we have always resolved that. And we are very confident to repeat the same for.

Right sir. Sir, secondly, if you look at, obviously, like rural has been doing far better. And you also highlighted like you're focusing on semi-urban and rural. So currently, what would be the mix of retail touch points, so -- both semi-urban and rural?

So rural and semi-urban contributes close to 60% of our domestic sales. And I think in your earlier question, there was another part. It was regarding sales from existing dealer distributor and sales from new enrollment. So almost 75% plus is from existing trade channel, and about 20%, 25% is from trade partners. So as I highlighted in my opening remarks, despite challenging time, more than 75% of the distributors have given the advances. And in respect of the direct dealers, we have identified and year-after-year, even from direct dealers also we are collecting the advance and almost 47% of the direct dealers have also given advances. But having said that, of course, Y-o-Y, it's very apparent there is a degrowth.

Right, right, right. I agree to that. Sir, one last thing. So like as you highlighted in your opening remarks regarding export opportunities and all. And obviously, the relatively situation is better as it was period of few months back. So should we expect like sequentially there should be some improvement and then with summer setting in during fourth quarter, we would be able to see better visibility?

No. So about exports, there are 2 parts. One, about our established traditional export channel. As of now, they are going slow and taking time in terms of crystallizing the order. And once they crystallize the order, likely order quantity which is likely to be lower. However, exports to and through IMPCO Mexico and Climate Technologies in Australia and United States seem to be quite robust in December and March quarter. So those exports will take place from Symphony India.

The next question is from the line of Renu Baid from IIFL.

Yes. My first question, just for a clarification. You mentioned 40%, 45% of the inventory is lying with the trade? Or was it 40, 45 days of the inventory is lying with the trade?

No. Renu, in our kind of the business number of days really don't make the sense. So whatever inventory was sold to the trade, preseason, out of which, about 60% has been sold by the trade, and they are sitting on the remaining 40% of inventory.

Correct. Second, you did mention in terms of our commercial package air coolers, we have done quite a few initiatives. In fact, I had also attended one of the online session. If you can help elaborate, how is this model progressing in terms of assemble of the products and reducing dependency on external consultants or contractors to our extent? And what is the kind of response that we have received from that business?

No. So I think the response is excellent. Product has been highly appreciated. And again, since last year, we have started manufacturing again through outsource business model from India. There has been also cost reduction, and that benefit has also been passed on despite maintaining the profitability margin. But in terms of actual orders or in terms of the actual sales, we are likely to see -- witness major growth in March quarter.

Okay. And for the core rural -- cooler business, if you look at the portfolio, again, last year, for December, we have seen softness. So given the current environment where the advances also have been relatively soft. Do we expect second half of the year to be at least equal to last year or actually report some growth? How is your sense regarding second half?

Sure. As of now, we have reasonable visibility for December quarter. And December quarter vis-à-vis September quarter seems to be better. But certainly, there will be double-digit growth percentage Y-o-Y. As far as March quarter is concerned, I think it's going to be an evolving quarter, one in respect of how really COVID-19 situation remains. And secondly, also in the respect of basically variety of initiatives, which we intend to take, how the trade and customers respond to that. But we are keeping the finger crossed for March quarter. And it's too early as of now.

Correct. And in terms of channel inventory, if I remember, the modern retail format was, it is sitting with significant inventory post lockdown. So when we mentioned that 60% of the inventory has moved out now. How -- on the retail scale, how has the modern retail format done? And with increasing trend towards e-com, should we expect, to that extent, sales to be favorably impacted beginning March quarter?

See as far as modern trade is concerned, normally, it is on a returnable basis. So at the end of the season, if they are less with the inventory, we take back it. So modern sales is not sitting on any inventory. And whatever was the sales return, it is net off in respective quarter. So certainly, in the March quarter, they will not have any inventory baggage. And depending upon the situation, they should be much better placed in terms of placing the orders. And also in respect of e-commerce, same thing is applicable. And over a period of time, we have firmly and substantially enhanced our presence and reached through e-commerce. And in that respect, you may recollect that even during lockdown also, we were the only company in, not only air cooler industry, but in entire consumer durable industry, whereby we had launched online to offline sales, which had really generated a phenomenal traction. But unfortunately, due to supply chain constraints, actual sales was minimal.

Got it. And yes, my last question was on the pricing side. We typically tend to fix up the prices of the like season in July, August, but this time around, since the commodity prices have headed northwards beginning second quarter. So in your view, the pricing is good enough to take care of these cost escalations and ensure the gross margins broadly at similar 50-odd-percent levels as we move towards the season? Or you think there could be certain hiccups because of the overall weak sentiment and inventory in the channel?

No, very good question. So we have already witnessed, in fact, starting June, prices of polymer and metal firming up. And in September quarter, in our operating margin percentage and input cost, it is already accounted for. And post that Y-o-Y, there is a slight improvement in operating margin percentage. So considering some of the value engineering initiatives what we have taken, they are likely to more than compensate input cost increase.

The next question is from the line of Prithvi Raj from Unifi Capital.

Sir, on the Climate Technologies. So before Symphony acquired, company was doing INR 220 crores revenue, INR 20 crores PAT. And we acquired, and we said we will sell Indian products there, and we'll use U.S. markets, et cetera. But actually Climate Technologies were then shaping up the way we expected. Last year, you were cleaning the process and all and this year, it was a COVID hit. But assuming next year, if it's a normal year, what is the revenue and the PAT target that company is expecting at Climate Technologies level?

Okay. No, so your observation is perfectly correct. So we expect that in next year, vis-à-vis is the year in which we acquired, the top line should be higher by at least 30% to 40%, if not more. That's number one. Number two, we are getting very, very encouraging response in terms of the response from the trade partners of Climate Technologies in Australia as well as in the United States towards Symphony's range of residential air coolers, including some of the marquee organizing retailers online as well as offline. And that's likely to witness enormous exports from Symphony India in the current year. Last year, it was a trial order. Current year, we should see a good response. As far as cost part is concerned, in fact, we succeeded in reducing its overhead. We succeeded in making some value engineering also -- meaningful value engineering. Unfortunately, on account of COVID-19 due to reasons that I explained in my opening remarks, it was more than offset. But next year, if it's going to be a normal year, I think we should really see the healthy performance, including gross profit margin percentage as well as PAT value.

So when we say healthy performance, can we expect that at least the preacquisition number can be done?

Yes. We are hopeful.

And second, on the commercial air coolers. You said you got a good feedback and all. So what is the -- company's internal target, say, 3 year or 5 year, how much is the revenue target that company is having on the commercial side?

Our internal target and business plan is much bigger, highly ambitious. And I think in that respect, house is also in order, whether it is in respect of the product, whether it is in respect of value engineering, whether it is in the respect of manufacturing in India itself. And also establishing -- enabling trade channel and also good team. But crystallizing or specifying any numbers will be very difficult. But I think considering a very low base and more importantly the kind of opportunity what it offers, we are highly optimistic.

But at least you would have looked at that industry size number, right? So in your guess, what can be the industry -- addressable industry size for this commercial air cooler segment?

So commercial and centralized air cooler industry size should be at least about INR 4,000 crores. But in a way, it's also about the concept saving because there is an existing centralized air conditioning market, but potential application and usage of centralized and ducted air cooler should be far beyond that. So market size-wise and opportunity-wise, of course, there is a limit. But in respect of the actual number, I think action will be louder than words. So let action and actual performance speak down the line.

Sir, finally, on this Mexico, we expect any more write-offs from that customer?

Yes. Bhadresh bhai?

Yes. So basically, the -- one of the large customers -- we had 2, basically, they are applying for bankruptcy in Mexican courts. And we have taken the effect of accounts because we are following the conservative accounting activities. So we have 18% of the total outstanding.

Bhadresh bhai, that is fine. The question is do we suspect any other receivables coming out to be doubtful? I think we don't suspect...

No, no.

All other customers and receivables are healthy, right?

As soon as we have sold them and this has happened in last -- since acquisition in last 11 years, this has happened for the first time. So we did not have any bad debt in any of the 11 years ever. And then we do believe that all other customers are healthy and all regular permits are coming through.

In other words, from all other customers, we keep on receiving regular payments. So there are no even overdues.

The next question is from the line of Jeetu Panjabi from EM Capital Advisors.

I had a bigger picture question. In this COVID environment and whatever you all have been through in the last 6 months, also the factors on the demand side, are there any structural or very significant permanent decision you put to work saying that these few things now will be changed forever in a particular way or any new strategic opportunities that you're looking at in a completely different way from what you are doing. So the point is any very, very significant decision you've taken, which you will see play out over the next year or 2 from our perspective?

Yes. So as I highlighted in my initial remarks, in terms of substantial enhancement of dealer and distribution network, lot of work has been done. And it should leave significant rising sales down the line. And especially the dealer distribution network has been placed, and we are working out in many, many towns where we wouldn't have a distributor. That's number one. Number two, of course, rural and semi-urban is offering a huge opportunity. And even in that respect also, we have taken several initiatives. And despite our cost model is quite competitive and still, we have looked at it very closely. One, in respect of the material cost and also in respect of other variable costs especially. And there also seems to be some meaningful positive impact. And fortunately, considering the kind of the business model what we follow, as you know, we are not guided to any permanent manufacturing or labor-related overheads. So not only in current year, but down the line, it's going to offer tremendous benefit. And hence, we are much more than convinced, in respect of our asset-light, capital-light and negative working capital business model that will continue.

Right. Right. That's a very fair point. One more question on this. Are you -- is there -- a feel -- you feel -- is there a need you feel from a portfolio perspective to add anything else there in your portfolio of products that you need to see over the next few years which will be significantly either a hedge to your base case or which will -- which you can leverage on very easily because of the ban on the distribution?

No, we are more than convinced that the residential air cooler segment and centralized air cooler segment and third segment is rest of the world is really offering huge runway, and there are several untapped opportunities and can really lead quite healthy profitable growth. So we will like to continue to focus on that.

Hello? Hello?

Yeah, Naveen?

Can we move on to the next question.

Yes, I guess.

Yes. The next question is from the line of Nirav Vasa from Anand Rathi.

I joined the call a bit late, so please pardon me if my question is repeated. So my question is with regards to getting advance from your channel partners. As I understand that the channel partners' financial health is not that really very strong and referring more towards your general trade partners. And we typically have proven business strategy of collecting advance before shipping. And sometimes it's done a couple of months earlier. So I wanted to check in this trying scenario, are we differentiating a bit in our approach, some liberal credit terms to be given or some arrangement for financing has been provided by our company or something like that?

Yes -- no. So as far as credit terms are concerned or getting the advances are concerned, it remains unchanged, and that's how it is continuing even in current environment. But we have taken various sale -- well, marketing-related initiatives to give adequate comfort to the trade partners and that too such as without impacting our gross profit margin percentage, which is clearly reflected even in our quarterly performance. Unfortunately, on account of competitive reasons, I won't be in a position to articulate what those specific steps are. And hence, despite stress in the trade, I think our trade partners vis-à-vis competition is reasonably comfortable, much better than them. And hence, as I said earlier, almost 75% plus existing distributors have given advances, despite many of them sitting on inventories. Having said that, of course, Y-o-Y, the advances given is lower than previous financial year. Not only that, we are successfully ramping up our dealer distribution network, especially in untapped market. And there also, we are seeing quite enthusiastic response.

We'll move on to the next question. That is from the line of Ronak Vora from AUM Advisors.

Sir, can you help me with the percentage of sales of the customer that went bankrupt in Mexico?

Sorry to interrupt Mr. Vora. Sir, there's a lot of echo from your line.

Hello?

Yes, sir?

Am I audible?

Yes, sir.

Yes. Sir, can you help me with the percentage in terms of revenue for the customer who went bankrupt in Mexico for us?

Bhadresh bhai, were they contributing -- they contributed about 10% to 12% of last year's sales?