This article provides in-depth fundamental analysis of Symphony Ltd, a leading player in air coolers market.
Symphony Ltd Research Report by Reader
Q: Dear Sir
I have got good profit in Symphony Ltd but when I mapped this stock through check list made by you then observed some serious concern as below:
Financial Analysis Checklist of Symphony Ltd:
Business & Industry Analysis Checklist of Symphony Ltd:
Management Analysis Checklist of Symphony Ltd:
Other Business Parameters of Symphony Ltd:
Valuation Analysis Checklist of Symphony Ltd:
- PE is 57.95, which is very high against your set criteria of 15 (But I also found a lot of shares with high PE giving good result. However, I seek your advice on this).
- P/B and P/S are high. Kindly advise.
I request you to advise in this as I am holding it since long however if not fit on account of PE, P/B and P/S then I can sell it immediately
Dr Vijay Malik’s Response
Thanks for writing to me! I appreciate the time & effort spent by you in preparing the checklist analysis for Symphony Ltd and sharing it with the author and the readers.
Financial Analysis of Symphony Ltd:
Symphony Ltd has been growing its sales consistently at an excellent pace of 30-40% year on year since last 10 years (FY2005-14). When we observe its profitability margins, we notice that its margins, both operating profit margin (OPM) and net profit margin (NPM), show a cyclical nature. However, despite the cyclicity, the margins have been very good even in the down years.
OPM of Symphony Ltd has been varying from 30% to 21% to 24% over the years; however, even in the lowest year of FY2013, it has shown a decent margin of 21%. Similarly, net profit margins (NPM) have witnessed variations from losses until FY2006 to 35% in FY2009 to 16% and 20% in recent years. Despite the fluctuations, Symphony Ltd, has shown respectable profitability margins at both OPM and NPM fronts.
Tax rate of Symphony Ltd has been varying a lot over the years. It has seen variation from 40% to 22%. An investor should analyse its tax payment closely and understand the reasons for its fluctuating tax payout ratios.
Operating Efficiency Analysis of Symphony Ltd:
Operating efficiency parameters of Symphony Ltd, though deteriorating until FY2012, have witnessed improvement thereafter.
Net fixed assets turnover, which declined from 19.5 in FY2010 to 5.3 in FY2012, has since improved to 7.6 in FY2014. Similarly, inventory turnover ratio, after deteriorating in FY2012 to 6, has improved to 13 in FY2014. Recently improving asset and inventory turnover indicate that Symphony Ltd has been utilizing its capital more efficiently of late and is generating higher sales from same level of assets.
An investor would notice that Symphony Ltd has not been able to convert its profits in to cash flow from operations. PAT for last 10 years (FY2005-14) is INR 361 cr. whereas the CFO over the similar period is INR 313 cr. However, if one looks into further detail then she would notice that the almost entire difference pertains of one single year (FY2011), when Symphony Ltd had a PAT of INR 51 cr. and CFO of (-2) cr. An investor should study in detail the reasons for funds getting stuck in working capital (inventory) for Symphony Ltd.
Otherwise, if an investor notices the trend of receivables days, the she would find that post deterioration from 32 to 47 in FY2012, receivables days have steadily improved to 27 in FY2014 indicating improvement in cash collection from its customers.
Margin of Safety in the Business of Symphony Ltd:
i) Self-Sustainable Growth Rate (SSGR):
Self-Sustainable Growth Rate (SSGR) of Symphony Ltd is about 60-70%. As mentioned in the article on Self-Sustainable Growth Rate, SSGR does not incorporate working capital changes. However, we can estimate whether funds are being tied up in working capital by comparing cumulative PAT with cumulative CFO for past 10 years.
Analysis of SSGR indicates that if Symphony Ltd can handle its working capital management and operating efficiency properly, then it can grow continuously at about 60-70% growth rate without creating additional debt burden on the balance sheet. Whether Symphony Ltd would be able to grow at this rate in reality would depend upon the presence of market opportunities and whether Symphony is able to capitalize upon them better than its competitors.
SSGR data indicates that the business characteristics of Symphony Ltd are good enough that it can sustain its current fast growth without getting into debt burden. It is a good sign for an investment opportunity.
These findings of SSGR get re-affirmed when an investor analyses the cash flow from operations (CFO) of Symphony Ltd with its capital expenditure (Capex) requirements over last 10 years (2005-14).
ii) Free Cash Flow Analysis of Symphony Ltd:
During 2005-14, Symphony Ltd realized total CFO of INR 313 cr. and out of it, Symphony needed to spend only INR 95 cr. into capital expenditure, thereby releasing free cash flow (FCF) of INR 218 cr. as surplus for shareholders. It is important to note that the INR 95 cr. of capex resulted in sales growing from INR 25 cr.in FY2005 to INR 533 cr. in FY2014.
This data indicates that Symphony Ltd is a good example of efficient capital utilization. Despite meeting its entire capex requirements, Symphony was able to generate FCF of INR 218 cr. out of which it distributed INR 97 cr. as dividend to shareholders and the remaining amount can be witnessed under cash & investments of INR 204 cr. available with the company at June 30, 2014.
The ability of Symphony Ltd to grow its sales with minimal capex from its CFO and generating substantial free cash flow (FCF) indicates that the company has a good advantageous business model.
The investors would agree that a company which generates good amount of free cash flow (FCF) post meeting entire capex requirement from its operating cash flow (CFO) would not need any debt or equity dilution. The same is true for Symphony Ltd; it is a debt free company with no history of equity raising over last 10 years.
Symphony Ltd has been paying regular dividend to its shareholders. Company has been increasing its dividend payout with increasing profits. It amounts to sharing the fruits of growth with shareholders. These are signs of a shareholders’ friendly management.
Share market too seems to have recognized it. The market capitalization of the Symphony Ltd has increased by INR 6,749 cr. against retained earnings of INR 264 cr. over last 10 years. Management has created a value of INR 25.57 for the shareholders from every INR 1 of earnings retained & not distributed to shareholders.
Margin of Safety in the market price of Symphony Ltd:
You have asked me to opine about whether Symphony Ltd should be held or sold from your portfolio. I would want to clarify that I do not provide buy/hold/sell recommendations on stocks. The aim of www.drvijaymalik.com is to help readers improve their stock analysis skills.
I am happy that you analysed your stock holdings by using the checklist parameters and realized that Symphony Ltd is trading at high valuations considering P/E, P/B and P/S ratios. However, whether the stock is to be held or sold is entirely your decision, which you would have to take considering relevant factors as analysed above. I would want to state that:
“There is no one path to success in stock market investing. Investors have made money in markets by following high P/E growth investing, low P/E value investing, mix of both, arbitrage, technical investing, large cap investing, mid/small cap investing, and many other such approaches. Therefore, I believe that there is no single standard path to succeed/make money in markets. The path an investor should follow is the one she is convinced with and feels comfortable with.
Readers are right when they mention that good business may not be available at low P/E ratios. An investor is free to invest in businesses with high P/E, if she is comfortable. However, I believe in investing fundamentally sound companies, which are yet to be recognized by the markets. I believe that such companies are present in the markets. Such opportunities might not be aplenty; however, I believe that an investor does not need to find dozens of good companies. My experience in markets says that one company a year is enough.
Nevertheless, there is no one path to success in markets and therefore, if an investor believes in investing high P/E companies, which are valued fairly, then she should invest in such companies without any second thoughts. Investing methods are personal choice.”
Upon reading your analysis, I realize that there are certain parameters where your calculation & interpretation needs little bit of rectification; like:
- Earnings Yield (EY): it is calculated as 1/PE ratio. EY of Symphony Ltd would be 1.6% (1/63.5).
- Dividend Yield (DY): it is calculated as current dividend per share/market price per share. Symphony Ltd has paid dividend of about INR 6.5-7 in each of last two financial years (FY2014 & FY2015). Therefore, current DY for Symphony would be 0.3% (7/2,110).
- cPAT vs. cCFO: As discussed above in the article, this comparison is expected to be conducted for cumulative PAT and CFO for past few years, preferably past 10 years.
I suggest that to understand essential aspects of stock analysis, an investor should read all the articles of the series: Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks
However, we recommend that an investor may read the following articles to assess the PE ratio to be paid for any stock, takes into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.
In the absence of any strength in the business model of the company, a low PE ratio of the company’s stock may be signs of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.
- 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
- How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
- Hidden Risk of Investing in High P/E Stocks
Overall, Symphony Ltd appears to be a company growing at a fast pace, with fluctuating but good profitability margins & improving operating efficiency. It has been managing its capital efficiently and generate good amount of free cash flow resulting in a debt free business. Symphony Ltd has a very healthy SSGR, which can ensure that it can keep on growing without needing debt to fund its growth, if it can manage its working capital efficiently.
These are my views about Symphony Ltd. However, you should do your own analysis before taking any investment related decision about Symphony Ltd.
You may use the following steps to analyse the company: “How to do Detailed Analysis of a Company“
Hope it helps!
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- The above discussion is only for educational purpose to help the readers improve their stock analysis skills. It is not a buy/sell/hold recommendation for the discussed stocks.
- I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013.
- Currently, I do not own stocks of the companies mentioned above in my portfolio.